Transcription
Translator: Majd Mustafa
Reviewer: omar idmassaoud
This is a lump of coal. It was mined a while ago in the Ruhr region of Germany, about 50 miles from where I grew up. Coal also ends up being very sophisticated. It is very dry, and it has a high carbon content in it. Both of those things mean that you can not only burn it to generate power and heat, but you can use it to make steel. Now why am I telling you this? By the end of this talk, I want to convince you that we can take a huge step forward in the great battle against climate change by spending between one and two percent more on the things that we buy. And the journey of this coal will help me do that. But… back to steel. What you need to know about the steel industry is that it is a humble, brutal process. These enormous furnaces that tear apart elements and materials and reassemble them that have already been around for millions of years, at temperatures of up to over 2000 degrees Celsius. It is a triumph of manufacturing, but it is a disaster for the climate. Over five percent of all human-made emissions currently come from the steel industry. And of all the many challenges that we face to save the climate, this one is particularly difficult to solve. Why is that? The first reason is technical. There are technologies to produce low-carbon steel. We can, for example, capture carbon dioxide and pump it back underground – that is called carbon capture and storage. Or we can switch to entirely new processes that work, for example, using low-carbon hydrogen instead of coal. But all of that is, for now, only at the pilot stage. The second reason is economic. This is likely to be expensive. And to illustrate that, let’s compare the challenge of steel to the challenge that companies in other sectors face. If you are in manufacturing, for example, most of your emissions come from the energy that you consume for things like conveyor belts, robots, motors, and so on. You can get rid of them by switching to renewable energy sources, which are no longer prohibitively expensive. In most cases, this will not cost you more than 10 euros per ton of carbon dioxide, and probably much less. Other companies have more energy-intensive processes that require a lot of heat to operate. They generate more emissions by burning fossil fuels directly, and that is more expensive to get rid of. Let’s assume now across all their operations, that it costs them on average, five times that, somewhere between 40 and 50 euros per ton of carbon dioxide. Now, if a steel company wants to go to net zero emissions, it either needs to invest heavily in upgrading all of its existing plants and in the infrastructure that transports carbon dioxide from its plants to a storage site, or it needs to shut down all of its plants and build entirely new ones that, for example, run on low-carbon hydrogen. According to industry studies, that could cost them 10 times that, somewhere in the region of 100 euros per ton of carbon dioxide, and the costs per ton of steel could increase by up to 50 percent. To make matters worse, our steel company operates in a commodity trade; it competes almost exclusively on price. And it has already poor margins: this means that decarbonizing is expensive, but its profit per ton of carbon dioxide is very low, and that puts it in an uncomfortable company for a few other sectors, the so-called club of hard-to-abate sectors, and all industries like cement, chemicals, which have equally messy industrial processes and require very high temperatures to operate, or aviation and shipping, which need to invest a lot of energy to transport very large and heavy things over longer distances. And the hard-to-abate sectors are one of the biggest dilemmas in international climate action, because discussions about decarbonization usually go like this: Well, says the activist, “Your emissions are harming the planet and threatening humanity. You need to change immediately.” And the company replies, “I know. But if I invest in low-carbon technologies, and the next guy doesn’t, we will be more expensive and go out of business. That will not help the climate. So first, I need a level playing field.” Both understandable positions, but reducing emissions is somewhat urgent, and a level playing field globally, where, for example, all countries agree on a single mutual price for carbon emissions, will probably no longer happen in my lifetime. That is where discussions usually hit a dead end, and thus my talk ends. But will it end here, I would not have called for it to be controlled, and I have already promised you that saving the planet does not have to be expensive. So let’s perhaps follow the path of our lump of coal a little further. The last time we left it, it helped make steel, which despite its climate impact, is one of the building blocks of our economies. It is in so many things, from massive structures to everyday household items like refrigerators or washing machines. We use it to build wind turbines, which we need to decarbonize the energy sector, and we use it to build our cars, which is part of the journey I would like us to follow next. Now, in today’s typical car, steel can be found in many different parts. You can assume that the average European mid-sized car that costs 30,000 euros contains about one ton of steel. To produce one ton of steel, in Europe, generates just under two tons of carbon emissions. In other countries like China, the ratio is a bit higher, so let’s round up to two. We have now learned earlier that switching to low-carbon steel can increase its costs by up to 50 percent. If history tells us anything, these costs are likely to come down in the long run, if humans really put their minds and muscles and money behind it. But for the sake of this argument, let’s stick to those costs, plus 50 percent. In the case of our average European mid-sized car, that translates to… wait… 200 euros. Wait, that cannot be right. That is not even a percentage of the final sales value. Well, let’s do the math. If you spend 30,000 euros to buy a car, what are you actually paying for? Well, first of all, the car company needs to make money. So the first 20 percent is for its margin, for marketing, the entire sales organization, overheads, and so on. The car needs to be assembled – another 20 percent goes to production. First, the car parts need to be assembled – 40 percent goes to suppliers. In this whole process, many things need to be transported from A to B and vice versa, so more goes to transport. Now only 15 percent of the car’s price is allocated to the materials in it. Things like the battery, aluminum, plastic, glass, and two percent for steel. This means that the materials that make up 90 percent of a car’s emissions footprint by the time I can buy it from the dealership make up only 15 percent of its costs. And this means that even though the car company has to pay 50 percent more for the steel in a car, that only translates to a very small increase on the final selling price. Now you might rightly argue that steel is not the only thing that causes emissions in a car. And that is true, of course. So we have calculated the other goods and processes as well. And it turns out that building a 30,000 euro car from only carbon-neutral materials would increase its price to 30,500 euros, just an extra 500 euros. That is less than a 2% increase. Buying the same car in sunset red instead of black would cost me an extra 700 euros. Alloy rims – an extra 1,000 euros. Leather seats – an extra 2,000 euros. You get the picture. So let’s imagine: the same discussion that we had earlier, but with a car manufacturer in the middle, where the activist says, “Your emissions are harming the planet and threatening humanity. You need to change immediately.” And now the car manufacturer replies, “I know. But if I invest in low-carbon materials, and the next guy doesn’t, my car will be 2% more expensive. Wait… my customers might actually pay that. And I can market all of my cars as carbon neutral. Steel producer, your steel causes too many emissions in my car. You need to change immediately.” “I can make low-carbon steel for you, but it will be more expensive.” “How much more expensive?” And now, we have a dialogue at least. Almost everything about the way we currently live currently contributes to global warming. Most of the things that we buy come with a heavy emissions package that very few of us are aware of. What I want you to understand is that we can eliminate a lot of these emissions by spending one to two percent more on the things that we buy. We have learned the cost of producing a carbon-neutral car. So what about a carbon-neutral smartphone? Three extra euros. That is 13 cents a month on a two-year plan. A pair of carbon-neutral jeans? 60 to 70 cents extra. Even building a house from carbon-neutral materials will only increase its costs by two to three percent, and even less in good locations. There are six supply chains that are responsible for almost half of all global emissions that we can directly influence through our purchasing decisions. These are things like food, construction, fashion, consumer goods, electronics, and of course, cars. And as in the car example, materials are only a small part of the final selling price in most cases. Addressing these emissions can be a huge step forward for international climate action. It will enable customer-facing companies that can benefit from marketing carbon-neutral products to address their direct emissions multipliers. And many of these emissions are in sectors like steel, which can afford the costs on their own. Some are in countries that do not yet regulate emissions strongly enough. Take the pair of shoes that I am wearing now. My willingness to spend 2 percent more on them can reduce the production emissions in China. I am now well aware that not everyone can easily afford to spend this extra 2 percent, but we have to realize that the economic consequences, let alone the human consequences, of not spending this money, will be much worse. We have to get to net zero. A fair distribution of the costs of this is one of the many challenges that we need to deal with as a society. I am also not saying that this will be easy. Understanding supply chain emissions is incredibly daunting. Dealing with suppliers to address them takes a lot of effort. What we might argue is that, for many companies, the opportunity to market a truly carbon-neutral product at just one to two percent higher price should be worth that effort. Just imagine: you are standing in a shop, you have two brands of the same product in front of you. One is carbon neutral – it costs 2 percent more. Which of these two products would you prefer to buy? Imagine you have the opportunity to work at either of these two companies. Which of these two companies would you prefer to work for? Imagine you were an investor. On which of these two companies would you bet your money? Which of these two do you think will be more successful in the long run? To solve the climate crisis, there is still a lot that we need to figure out. There are many challenges that we need to overcome. But economics does not have to be one of them. Thank you.