The world's transition to renewable energy and low-carbon greenhouse gas emissions is accelerating. Renewable energy is recognized by more and more countries, states, companies, and other organizations—as well as by individuals—as a way to help offset climate change. Many believe excessive global warming needs to be contained to avoid significant long-term environmental damage.
Specifically, the world must dramatically reduce its output of new carbon emissions—largely the result of burning crude oil and coal—to a "neutral' level by about 2050 to keep global warming in check. The general idea of carbon neutrality is that for every unit of carbon dioxide released into the atmosphere, emissions elsewhere should be reduced that same amount. The implications of moving onto this path are staggering for the energy sector, which accounts for about two-thirds of the world's CO2 emissions. To achieve carbon neutrality by 2050, renewables (primarily solar and wind) need to grow to about 50% of the world's primary energy supply—from less than 10% today. Consequently, coal and oil consumption will decline sharply, although natural gas should prove relatively resilient.
Recently, a handful of energy producers outlined strategic multiyear plans to boost development of renewable energy and substantially reduce carbon emissions. As more companies follow suit, I expect to see a significant drop in demand for fossil fuels. Renewables stand to take massive share from coal and crude, supported by government policies and technological improvements that have brought the cost of renewable energy down sharply this past decade. In many cases, solar and wind energy are already competitive with traditional power sources. Renewables' costs should only decline further from here, whereas the costs of fossil fuels may increase as more countries introduce and increase carbon taxes.
To be clear, the energy sector's transition to cleaner and cheaper renewable energy will be a multidecade trend, but we're seeing renewed commitment across the board. Europe has long been on the leading edge of the lower-carbon movement. China is at the forefront of renewables development and electric vehicle (EV) deployment. Other major economies, including India and the US, are rapidly growing renewable energy resources and taking action to reduce fossil fuel demand, through support for EVs, for example.
I am focused on companies poised to benefit from the transition to renewable energy. Among traditional fossil fuel companies, I'm investing in companies that trade at very low free-cash-flow multiples, that return significant capital to shareholders, that have a plan to stay relevant as the transition plays out, and that maintain exposure to natural gas/liquid natural gas, which I believe will remain relevant for a long time.
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