The Path to Green Technology is Not Free

Many environmentally friendly solutions are still pricier compared to their fossil-based counterparts. However, companies that act swiftly could lead before the costs align. Most non-fossil substitutes remain more expensive than fossil-based options at present.

To achieve the goals set in the Paris Agreement, a substantial technological shift across all economic sectors is necessary. Non-fossil solutions exist to significantly reduce global emissions. Yet, many non-fossil materials, products, and processes remain costlier than fossil-based ones in the short and medium term, particularly in the industrial sector. This includes solutions like carbon-captured and stored cement production, which is still either more expensive or hasnt reached large-scale production levels. The same applies to green raw materials or logistics services required across nearly all global value chains.

For instance, green technologies aiming to decarbonize aviation: 100% bio-based HEFA (Hydrotreated Esters and Fatty Acids) fuel is estimated to raise costs per ton-kilometer by about 8% while reducing emissions by 50% to 90%. Meanwhile, fully carbon-neutral fuels like power-to-kerosene, still in a pre-industrial phase and not yet widespread, could double the rates. Other green materials and services face similar challenges.

Nevertheless, these projected additional costs are expected to decrease over time as green technology scales up. In the United States, for example, solar energy has already reached cost parity with coal and natural gas. Meanwhile, the total cost of ownership of commercial battery electric and hydrogen vehicles is expected to be cheaper than internal combustion engines in the first half of this century. In Europe, green steel could achieve cost parity as early as next year, especially due to the forecasted rapid decline in green hydrogen costs.

The timing to achieve cost parity might vary depending on geographical locations. For example, the cost parity for commercial battery electric vehicles in the US is projected to be reached by 2036. In Europe, it might be sooner, but in China and India, its expected to be slower. However, the trend remains the same: the additional costs will rapidly diminish.

Governments can expedite this cost reduction through policies supporting green technologies or imposing sanctions on fossil-based options. In the US, for instance, the Inflation Reduction Act (IRA) will lower the costs of hydrogen and many other green technologies. Meanwhile, the European Unions Emissions Trading Scheme (ETS) and the Carbon Border Adjustment Mechanism (CBAM) are raising the costs of fossil-based technologies to make green technologies more competitive.

As highlighted in the 2022 Winning the Race to Net Zero report: CEOs Guide to Climate Advantage, the impacts of these interventions are often overlooked. Climate laws have been increasingly ambitious in various countries over the past few years.

While awaiting cost parity, companies moving swiftly must find ways to cover the higher costs and transform from having "green cost premiums" to "green revenue premiums." Some companies have successfully done so. In energy, automotive, and food industries, Ørsted, Tesla, and Beyond Meat respectively have managed to gain enduring first-mover advantages by creating appealing green offerings before cost parity is achieved.

"In the journey, courage is important... You cant calculate everything down to the last digit before making a decision." - Andrea Fuder, Executive Board Member and Chief Purchasing Officer, Volvo.

Some companies absorb the costs to enter promising and rapidly growing markets. Elsewhere, they pass on the additional costs to early adopter consumers willing to pay more for green products.

Theres good reason to believe the same will happen in the green material market. The 2021 Challenges of Net Zero: Supply Chain Opportunities report indicates that significant cost weaknesses in upstream raw materials and services diminish greatly as materials move through the value chain. For example, by 2030, a mid-size car priced at €30,000 made entirely from net-zero materials should only be around €600 more expensive.

Hence, its considered that the emergence of net-zero products and green markets is a significant opportunity - and that theres a market segment willing to pay a premium for green products. This now needs to be proven across every major industry segment, at scale.