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Net Zero Becoming More Affordable Says Goldman Sachs

Advances in technology, finance, and shareholder engagement are significantly reducing the cost of de-carbonization.
By Michael Katz


KEY TAKEAWAYS

  • Low-cost de-carbonization technologies continue to improve, reducing the lower half of the cost curve by 20% from last year. 
  • Clean hydrogen emerges as the breakthrough technology.
  • Financial innovation and a lower cost of capital for low-carbon activities have driven one-third of renewables’ cost deflation since 2011.

Thanks to advances in technology and financial innovation, as well as increased shareholder engagement, the goal of achieving net zero carbon is becoming increasingly more affordable, according to research from Goldman Sachs.

Climate change is altering the energy industry through technological innovation and capital markets pressure, and Goldman Sachs has constructed a “carbon abatement cost curve” for conservation technologies that are currently available in industries such as power generation, industry, transport, buildings, and agriculture. In its annual “Carbonomics” report, the firm said this cost curve shows the reduction potential for manmade greenhouse gas emissions through more than 100 different applications of conservation technologies.

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Since last year alone, when it put out its inaugural “Carbonomics” report, Goldman Sachs estimates that the annual cost of 50% de-carbonization has been reduced by approximately 20% from $1.2 trillion per year to $1 trillion per year based on the latest updated 2020 cost curve. The report said that two-thirds of the cost deflation was driven by improved manufacturing efficiency through global scale, and one-third was driven by lower cost of capital.

“As we move higher on the abatement cost curve towards 70% de-carbonization, we encounter the harder-to-abate emissions in need of material technological innovation, and the cost curve takes on an exponential shape,” the report said. “This part of the cost curve has seen the greatest improvement year on year, mainly thanks to renewed policy support for clean hydrogen.”

This has resulted in an approximate 30% global annual cost reduction to $2 trillion from $2.9 trillion, according to the report, which estimates that some 35% of the de-carbonization of global manmade greenhouse gas emissions relies on access to clean power generation, with clean hydrogen being the second most scalable technology.

“Clean hydrogen addresses the tougher to de-carbonize emissions (industry, heating, heavy transport) that make up 20% of global GHG [greenhouse gas] emissions,” according to the report.

Goldman Sachs said the 2020 cost curve results in a maximum 85% de-carbonization through conservation compared with 75% de-carbonization achieved at the same cost based on the 2019 cost curve, which contributes an additional 10% of de-carbonization potential.

“The ongoing downward trajectory of the cost of capital has been a key driver of the overall affordability and competitiveness of clean energy,” said the report. “In contrast, financial conditions keep tightening for long-term hydrocarbon developments, creating higher barriers to entry, lower activity, and ultimately lower oil and gas supply in our view.”

Goldman Sachs’ research also found that shareholder engagement has been a major contributor to the declining cost of capital for low-carbon projects.

“With global GHG emissions on a persistent upward trajectory over the past decade, investors have emerged with a leading role in driving the climate change debate,” said the report, “pushing corporate managements towards incorporating climate change into their business plans and strategies.”

According to Goldman Sachs, the number of climate-related shareholder proposals has nearly doubled in nine years, while the percentage of investors voting in favor of those proposals has tripled over the same period.

“So far, 2020 has been, despite the outbreak of COVID-19, another year of strong shareholder engagement on climate change,” said the report. 

However, it added that investor pressure is not uniformly distributed across sectors and shows a clear bias toward energy producers over energy consumers. The report said that data since 2014 shows 50% of proposals target energy producers such as oil and gas companies, utilities, and coal companies, while only 30% of the proposals target the sectors that account for most of the final energy consumption.

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Home > News > Market Moves > Biden Tax Hikes Would Help Junk Bonds, Says Market Savant
Market Moves

Biden Tax Hikes Would Help Junk Bonds, Says Market Savant

Maybe not so much stocks, but high-yield is well-positioned if the Democrat wins and enacts his agenda, Northeast’s Monrad forecasts.

 

By Larry Light


There’s lot of speculation about how stocks, both in general and in specific sectors, would fare under either Joe Biden or Donald Trump. But what about junk bonds?

Let’s say Biden, the Democrat, captures the presidency, and he goes about increasing taxes on corporations and wealthy individuals. Then, argues Bruce Monrad, chairman of Northeast Investors Trust, US high-yield corporate bonds will benefit.

Reasons: The higher taxes will crimp company earnings, which will translate into lower stock performance; high-yield historically does well coming out of a recession; and junk benefits from a Federal Reserve backstop. So investors would pile into high-yield bonds.

Under Trump, whose market impact Monrad doesn’t discuss, taxes likely would not go up. Who knows what would happen to high-yield bonds?

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Biden’s plan to increase taxes—to 28% from 21% for corporations, plus a raise to 39.6% from 20% on capital gains for those making more than $1 million yearly—requires that his party takes over the Senate. It already controls the House of Representatives.

“If Biden gets his way and the top income tax rate also reverts to pre-Trump tax cut levels,” Monrad wrote, “bond income and stock appreciation would be on equal tax footing (at least for high earners) for the first time since 1990. It would also bring taxes on bond income and qualified stock dividends in alignment for the first time since 2003.”

Right now, stocks are very pricey, what Monrad called “priced for perfection.” Because the prospect of future earnings is a major driver in stock appreciation, the advent of heftier taxes should pull lofty share prices back, he predicted.

While skimpier earnings could have a negative effect on junk, it would be limited, he declared. High-yield investors care about profits only insofar as they affect a company’s ability to pay interest, Monrad reasoned. And junk circa 2020 is in relatively decent shape. The default rate for below-investment grade paper is a lot better than in the two previous recessions: 14% and 16%. At present, Moody’s Investors Service reports, the rate is 8.5%.

Meanwhile, junk’s nice interest outlays will be attractive, he said. Indeed, at the moment, these speculative bonds average a 5.7% yield, according to ICE BofA data. That’s far better than the 1.9% payout from the S&P 500.

What’s more, Monrad said, junk has outperformed stocks in the wake of past economic downturns. That happened after the dot-com bubble burst in 2000 and in the financial crisis beginning in 2007, when the gap lasted for seven years, he wrote.

Also helping is that the Fed has bolstered junk’s position, via buying exchange-traded funds (ETFs) containing high-yield bonds and by offering low-cost loans to companies in need.

Nobody likes a tax boost in their future. Even Americans of modest means, who supposedly wouldn’t get a tax raise under the Biden plan, could see their investments affected: Their 401(k)s are usually heavily in the stock market.

Thus, in Monrad’s estimation, a shift into junk investments could prove wise. Certainly, he contended, “Tax-aware equity investors might frown on such a move in the current tax environment. But one has to wonder if that will still be the case after Nov. 3.”

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