This year, companies and governments are projected to invest $1.8 trillion in assets, infrastructure, and businesses devoted to decarbonizing the global economy. These investments, as well as the trillions of dollars already contributed since 2000 and the trillions more that will flow thanks to economic and policy support for clean technologies, have the potential to substantially change the world’s energy and climate systems.
Five energy, climate, and decarbonization trends could emerge as drivers of change over the next decade. They include markets, technologies, policies, and choices: taken as a whole, they amount to a collective decision made today on behalf of the future.
Approaching the Peak of Fossil Fuel Demand
It is likely that before the end of the decade, global demand for oil, gas, and coal will peak (see figure 1). In September, the executive director of the International Energy Agency (IEA) stated that the “age of seemingly relentless growth” in fossil fuel demand “is set to come to an end this decade.” The rapid rise of renewable technologies in power generation, and of electric vehicles (EVs) in road transport, has meant that fossil fuel growth will soon cease and consumption of oil, gas, and coal will then fall.
That does not mean consumption of oil, gas, and coal will necessarily fall rapidly, or even initially fall at all. As the IEA executive director noted, “fossil fuels have held their share of global energy supply steady at about 80 per cent for decades.” To date, renewable energy sources and EVs have merely displaced what otherwise would have been even more growth in fossil fuel consumption.
But the end of fossil fuel growth means several things. First, it requires those who monitor global changes in energy sources to disaggregate trends among fuels. China is by far the biggest determinant of global coal consumption, and so it will be essential to watch its policy, energy, and environmental decisions about coal. Oil now faces a steadily increasing demand erosion function in the form of EVs, which in 2022 displaced more than 1.5 million barrels per day of oil demand in road transport. While both fuels are currently at all-time high consumption levels, they are also likely at a plateau and remain highly sensitivity to economic and policy factors and demand displacement. Natural gas consumption, on the other hand, is not at a plateau, nor is it likely to hit a plateau this decade.
Yet if gas is the only growth function in the global hydrocarbon market, that trend will have profound implications for global fuels markets. A plateau in demand for fossil fuels will impact decisions about future capital investment in fossil fuel production. Declining demand will force high-cost producers to make their operations more efficient, invest less in new production, or both. Assets with lives measured in decades, such as deepwater oil platforms, refineries, and petrochemical facilities, may look less enticing unless owners are certain of persistently advantageous economics. Fossil fuel producers, be they private entities or state-owned enterprises, will then have to choose among competing strategies: They can prioritize growth to capture more market share as the market shrinks. They can prioritize value and return cash to their shareholders and stakeholders. Or they can prioritize costs and hope that their lower-cost position makes them the marginal supplier of choice for years to come. Not every producer will embody all of these attributes—or, potentially, any of them. High-cost producers, such as those involved in Canadian shale and deepwater offshore oil in Brazil, may find themselves priced out of the global market or returning very little funds to public and private shareholders.
The Chinese Auto Complex Rises
China has been a major vehicle manufacturer for two decades. According to the China Association of Automobile Manufacturers, in 2004 it produced more than 3 million passenger cars. In 2022, it produced more than 23 million, making it by far the world’s top auto producer. However, it is only in recent years that China has become an exporter of note.
China exported more than 2.5 million passenger cars and more than 500,000 commercial vehicles in 2022. Through July 2023, it had already exported 2.1 million passenger cars, more than in all of 2021. Exporting more vehicles than Japan or Germany, China is now the top auto exporter in the world.
Key to those exports are EVs. China exported 650,000 so-called new energy vehicles in 2022. Through July 2023, it had exported 610,000. EVs are driving growth in China’s auto business and are increasingly driving exports (see figure 2).
China’s EVs occupy different price tiers than comparative models in the United States and Europe. In 2022, China’s medium-sized EVs were priced lower than small EVs in the United States and Europe; its large cars were also priced lower than medium-sized EVs in Europe. Moreover, sales of such vehicles have healthy margins. In a recent teardown on a BYD Seal (a Chinese midsized electric sedan) performed by the Swiss investment bank UBS, analysts estimated a 16 percent gross margin and 5 percent earnings before interest and taxes (EBIT) margin, “similar to profits made on mass-market combustion engine cars globally.”
That price position does not, however, imply a differential in quality. If anything, it is a testament to rigorous cost control and manufacturing integration. China’s biggest manufacturers, like BYD, manufacture batteries along with a substantial share of other auto components. They assemble cars, design software, and are even purchasing ultra-large car carriers to transport their vehicles overseas. China’s vehicle manufacturers, and its EV makers in particular, are emerging as a fully integrated complex—much as those in the United States, Germany, Japan, and South Korea did before them.
Global auto sales peaked in 2017, but sales of EVs have continued to grow. This trend indicates that EVs are not just a growth market for the auto sector—they are the only growth driver in the global auto sector. China is already the world’s biggest EV producer and market, and it is on track to be the biggest EV exporter as well—the challenge of the decade for automakers elsewhere. China’s auto manufacturing complex is not the “factory of the world” as China was in the 1990s; it is not churning out a low-cost but low-quality products. Instead, it now makes innovative, globally competitive products aimed at the heart of a multi-trillion-dollar global market that is critical to the domestic and export economics of East Asia, Europe, and North America.
A Change in Chemistry for Batteries
The lithium-ion storage battery can be considered a general-purpose technology: pervasive, with inherent potential for technological improvement and the ability to spread throughout an economy and create productivity gains. More than that, the lithium-ion battery—owing to its unique combination of cost, scale, and specific energy density—is a category creator. It was central to the development of the compact camcorder, then the laptop computer, then the mobile phone, and finally the EV.
Lithium-ion batteries are a cocktail of chemistries, requiring multiple elements to function. Today’s dominant chemistry for vehicle batteries, including e-bikes and supercars, is lithium nickel manganese cobalt oxide (Li-ion NMC, for short). This chemistry has high energy density, but it requires metals that can be difficult or problematic to source (such as nickel and cobalt) and demonstrates an unfortunate potential for rapid thermal runaway and dangerous, sometimes deadly, fires. In the past five years, the required elements have also experienced dramatic price spikes caused by supply and demand imbalances and short squeezes.
For these reasons, new and emergent battery chemistries are important technological investments. The first recent development of note is lithium iron phosphate (LFP), which uses abundant and inexpensive iron and phosphate in place of nickel and cobalt. This chemistry has a lower cost at the expense of a lower energy density. Nevertheless, LFP is making its way into automotive batteries—particularly in China, where LFP batteries captured more than 60 percent of the new energy vehicle market in 2022. In addition, LFP has meaningful applications in grid storage, where neither weight nor space are essential considerations.
The second important development in battery technology is sodium-ion chemistry. These batteries are less energy-dense than LFP batteries and are even less reliant on critical minerals.
Sodium is the sixth-most abundant mineral on earth. In addition, these batteries have a major safety advantage over the highest-efficiency NMC batteries: they can be fully discharged without any risk of thermal runaway. These batteries could cost 50 percent less than LFP batteries. China, again, is leading the world in sodium-ion battery development and deployment in vehicles and grid applications.
Importantly, the two lower-efficiency battery chemistries have shown significant energy density improvement in the past decade (see figure 3). The economics of high efficiency at one end continue to compete with the economics of low cost at the other end. The result will be fruitful for consumers at every scale: for higher-end products, such as supercars and airplaces, it means less reliance on complex supply chains, and for lower-end products, such as low-speed vehicles and stationary storage, it means lower costs and greater safety. And that low end itself is constantly improving, which when combined with lower cost and greater energy density will create a growing market for energy storage that is less dependent on supply chain choke points.
Russia’s invasion of Ukraine in 2022 brought into sharp relief the importance of robust energy stores and resilient energy transmission and distribution grids, whether in gas stored for Europe’s winter or oil stored in the U.S. Strategic Petroleum Reserve. The coming decade of decarbonization will also highlight the importance of cheap, efficient energy storage of a more distributed nature. This energy storage will be present at the grid level to maintain power systems; in transport networks to reduce reliance on imported fossil fuels; and even at the unit level, where devices operating on stored, stable energy improve combat effectiveness.
Funding at the Sharp End
The U.S. Inflation Reduction Act has unleashed at least $380 billion and potentially as much as $1 trillion of funding for climate and energy provisions from fiscal year 2023 through 2032. The instruments to disburse that funding are becoming more established and also are well suited to funding large assets at significant scale in terms of the assets’ positive climate impact.
At the same time, it is important to be aware of the funding needs for early-stage innovation and the first-of-a-kind deployment of new technologies and assets. That capital is above the funding capabilities of very early-stage funding, such as venture capital, but generally below the maturity threshold of equity capital markets investment or standardized funding through debt capital markets. For this reason, capitalization of funds prepared to make early-stage bets on climate innovation is domestically and globally important.
Today, more than $30 billion of “dry powder”—investable capital that funds can draw upon—has been allocated to climate technology venture capital and private equity activity globally (see figure 4). That funding is a sign that the institutions that fund venture capital, including university endowments, pensions, and investment funds, all see long-term value in devoting capital to climate technology.
More than half of that funding is devoted to private equity. That allocation is constructive, because even though there can be ample funding for both the most nascent of ideas and the biggest of proven technologies, there is a funding and funding-structure gap for those technologies that need to build their first facilities. Companies that are solving today’s biggest decarbonization challenges will need to avoid the so-called Valleys of Death; by doing so, they will help ensure positive outcomes for businesses and for the climate.
The security implications of this early-stage funding are subtle but important. For decades, hardware innovations developed in the United States have required overseas (usually Asian) manufacturing capabilities to reach global scale. U.S. institutions and the U.S. government funded innovation, but manufacturing went elsewhere. At the same time, funding for risky, innovative, but systemically important energy technology investments have been hard to come by. Commercial lenders are not willing to take the risk, and startup capital does not have the depth for billion-dollar assets.
Both of these factors are changing in the United States, thanks to the bipartisan Infrastructure Investment and Jobs Act and the Inflation Reduction Act, which provide capital for manufacturing, de-risking of new technology, and deployment at national scale. The legislation presents an opportunity for the United States, but also a challenge to other countries without the fiscal breadth and depth of the U.S. government. Not every nation has as big a market, as deep a talent pool, or as rich a set of support mechanisms as the United States.
Using the Land
Inflationary spikes and commodity shortages bring cyclical scrutiny to the tension between using arable land for food crops and using it for liquid fuels. This food versus fuel debate goes back at least fifteen years, and it reemerged with Russia’s invasion of Ukraine. Such debates are often polarized, and perhaps not without cause—both people and economies must be fed, and their plight is hard to discount in terms of importance. It is therefore important to have a clear view on how food and fuel manifest themselves in terms of land use and agricultural products supplied and consumed. In the United States, one-third of the corn crop is used to meet approximately 10 percent of the nation’s road transport fuel demand (see figure 5).
Demand for fuels made from corn displaces gasoline demand. But another element, something that the U.S. transport mix did not have even into the late 2000s, also affects transportation: electrification. U.S. agriculture policy is, to a significant extent, comprised of a corn policy and a fuel policy. Each policy has its own established political constituency.
Two aspects of this problem will challenge today’s food versus fuel positions, in which a substantial portion of arable land and a quantity of food energy that could feed many millions of people are used to produce a small quantum of the U.S. energy supply. The first is electrification of road transport, which will erode demand for liquid fuels and could result in lower transport-related demand for ethanol. Alternately, it could result in an increasing share of ethanol blending into the fuel mix, insofar as possible. One challenge for policymakers and planners is that neither stakeholder group—auto battery manufacturers and farmers—has any inherent interest in the other, nor do they necessarily set strategic plans with the other in mind.
The second is the potential for much greater biofuel demand in the future, not just from the United States but from all agricultural centers. Road transport may drive some of that demand, but aviation is a much more likely driver. Aviation will be one of the hardest sectors to decarbonize. Batteries likely will energize only the shortest and lightest commercial flights, and hydrogen propulsion likely will require airframe redesigns, a steep proposition in an industry with asset lives measured in decades. One element that remains is sustainable aviation fuels, which draw upon agricultural land and supply chains for feedstocks. A recent academic estimate found that the United States would require a land area roughly the size of Wyoming to produce enough bio-jet fuel to meet the country’s projected 2040 demand of 30 billion gallons per year. This analysis used “marginal” agricultural lands as well, not just the most productive croplands. Yesterday’s food-versus-fuel debate could well expand beyond food versus fuel to land versus fuel.
Five Factors for Future Global Systems
The fossil fuel era is not over; its end, in fact, is quite far away. However, fossil fuels are nearing the end of their growth era, which has proceeded almost without interruption except for during times of war and recession since the start of the Industrial Revolution. That end of growth will be a forcing function for the world’s fossil fuel producers and an opportunity for energy consumers who are now using new zero-carbon technologies.
Nevertheless, fuels are not the only factor defining the geopolitics of energy, or geopolitics in general. The rise of the Chinese auto complex is a trade challenge and an opportunity for China’s manufacturers and global consumers. Battery innovation results in more competitive EVs (again benefiting China), but also enhanced grid operations and deployed forces everywhere. Early-stage technology investment has global benefits too, and the United States is making a concerted effort to not just develop but also deploy innovations at a significant scale domestically. Finally, agricultural and land policy is a global factor, at greatest scale in the case of United States, where corn is used for road transport fuel but competes for land—for crops, for fuels, and for energy production. Each of these factors has a geographical node today; in the coming decades, each will have global impact.
