JPMorgan has warned that the world needs a “reality check” on the transition from fossil fuels to renewable energy, saying it could take “generations” to reach net-zero targets.
In a global energy strategy report sent to clients this week, the US bank said efforts to reduce the use of coal, oil and natural gas have been hampered by high interest rates, inflation and wars in Ukraine and the Middle East.
Christyan Malek, JPMorgan’s head of global energy strategy and lead author of the report, told the Financial Times: “While the net zero target is still some way off, we have to face the fact that the variables have changed. Interest rates are much higher. Government debt is much higher and the geopolitical environment is structurally different. This cost, which will be $3 to $4 million a year, is in a different macro environment,” he said.
Malek argued that the level of investment required would put pressure on governments to back away from more aggressive energy policies. The Scottish government, for example, on Thursday shelved its ambitious plan to cut carbon emissions by 75 per cent by 2030, admitting the target was unachievable.
JPMorgan said in its report that changing the world’s energy system is “a process that should be measured in decades or generations, not years”.
The bank added that investments in renewable energy ‘currently offer low returns’ and there is even a risk of social unrest if energy prices rise sharply.
The report comes after oil companies such as Shell and BP cut their climate targets this year and hundreds of companies including Microsoft, Unilever and JBS failed to set targets ambitious enough to be endorsed by a ‘science-based targets’ initiative set up after the UN’s COP26 climate summit in Glasgow.
Malek noted that there is no guarantee that demand for oil and gas will peak in 2030, as populations in developing countries begin to buy more cars and fly more, as predicted by the International Energy Agency.
JPMorgan estimates that the world will need 108 million barrels of oil a day in 2030, and building more wind, solar and electric vehicle capacity could add another 2 million barrels a day to that figure.
“We are at a tipping point in terms of demand. More and more of the world has access to energy, and more and more of the world wants to use that energy to improve their standard of living. If this growth continues, it will put enormous pressure on energy systems and governments.
JPMorgan is a leading financier of fossil fuel and low-carbon energy projects. The bank has signed $101 billion of fossil fuel deals and $71 billion of low-carbon deals in 2021 and 2022, according to BloombergNEF data.
Chief executive Jamie Dimon told a US congressional hearing in 2022 that the bank would continue to invest in large oil and gas projects, that pulling out of such deals would be ‘the road to hell for America’ and that ‘the world is not getting the energy transition right’.
Echoing JPMorgan, energy consultancy Wood Mackenzie said on Thursday that higher interest rates would make the transition to a net-zero global economy ‘even more difficult and costly’.
Wood Mackenzie chief economist Peter Martin said that “the rising cost of capital has profound implications for the energy and natural resources industries” and that high interest rates disproportionately affect renewable energy and nuclear power due to their high capital intensity and low returns.
Wood Mackenzie added that many companies in the oil and gas sector have low levels of debt and will be relatively unaffected by higher interest rates.
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