The United Nations just issued a report card detailing the effectiveness of the world's collective efforts to reduce emissions in recent years. Judging by the name -- the Emissions Gap Report 2019 -- you can tell that the global economy didn't earn a passing grade.
The report details the real-world outcomes of policies, or the lack thereof, from the top emitters of planet-warming gases such as carbon dioxide (CO2). The latest numbers from 2018 reveal that the global economy isn't delivering on obligations under major climate change pacts, such as the Paris Agreement, which means future action will need to be more dramatic, since it will need to deliver steep reductions in a compressed time frame.
To be fair, the Emissions Gap Report 2019 noted that there are still paths to meeting the 2030 obligations for limiting global warming by the end of the century. It also noted that China and India are the two countries most responsible for blowing the planet's carbon budget. But that's not what most media outlets reported, many of which singled out the United States. Here's why investors shouldn't panic over the report.
Year-over-year numbers aren't that important
As The New York Times wrote about the report, "Net carbon emissions from the two largest polluters, the United States and China, are expanding." That's not an accurate portrayal.
The United States saw emissions increase from 2017 to 2018, but worrying over a year-to-year increase in emissions for something as complex as the world's largest economy is the equivalent of obsessing over the week-to-week movements of a stock. Those willing to ditch the short-term thinking will see concrete reasons for optimism.
Looking back, the United States has cut total annual emissions 14% from 2005 to 2017, which represents a reduction of 862 million tons of annual CO2 output -- by far the most of any country in that span. By comparison, China increased annual emissions by 4.07 billion tons of CO2 in that span -- equivalent to 77% of America's total today. China now emits nearly twice as much planet-warming gases as the United States.
Looking forward, specifically at utility-level data that don't appear in the most widely cited projections, the United States is on pace to generate at least 30% of its total electricity from onshore wind and utility-scale solar by 2030. That's up from just 10% today.
That's also likely to be a conservative estimate. The total could be as much as 40% -- and that doesn't include zero-carbon contributions from hydropower (another 6% or so), small-scale solar (one-third of the nation's total solar output today), offshore wind (up to an additional 3% by 2030 from nothing today), or nuclear (19% today).
With nearly all of the lost market share coming at the expense of coal (responsible for 1.26 billion tons of CO2 emissions in 2018, or 26% of America's total emissions), the United States is on the cusp of a massive reduction in CO2 emissions in the next decade.
Electric utilities, far from being the climate-naive corporations they're often made out to be, are leading the way.
Low-carbon strategies from sea to sea
Xcel Energy (NASDAQ:XEL) became the first American utility to commit to delivering 100% zero-carbon energy by 2050. It leaned on wind and solar for 22% of its electricity mix in 2018, although that should increase to 46% in 2027 and 60% in 2030. The company's CO2 emissions are on pace to drop 80% from 2005 to 2030.
Shareholders can expect the business to grow earnings per share (EPS) and the dividend payout 5% to 7% per year. Xcel Energy expects to maintain a payout ratio of at least 60%, which should become easier as it becomes more reliant on renewable energy generation, since wind and solar don't have refueling expenses once put into service. That makes it a top renewable energy stock for long-term investors.
NextEra Energy (NYSE:NEE) is similarly ambitious, albeit for a different reason. The company's power generation unit, NextEra Energy Resources (NEER), builds wind and solar infrastructure for utilities across the country. That gives it unparalleled insight into the market -- and it thinks an inflection point is near.
NextEra Energy projects that, on average, wind and solar energy will generate electricity at a lower cost than natural gas by 2023 -- even when energy storage is included. That's expected to lead to more than 30,000 megawatts of new wind and solar power capacity additions per year, which could allow the United States to rely on onshore wind and utility-scale solar for up to 40% of its electricity demand by 2030.
Similarly, the company's focus on low-carbon and zero-carbon power sources has been great for business. Shareholders are expecting EPS growth of 6% to 8% through 2021 (relative to 2018 levels) and dividend-per-share growth of 12% to 14% through 2020 (relative to 2017).
Don't be so gloomy about climate change
The Emissions Gap Report 2019 from the United Nations rightfully observes that the world's leading economies could be doing more to lock in emissions reductions. That's also true for the United States, which has largely abandoned any concrete climate action at the federal level. The silver lining is that the falling costs of wind and solar energy have the country on pace to meet its former pledges under the Clean Power Plan and Paris Agreement through at least 2025 (and possibly through 2030).
Throw in a wave of electric vehicles coming in the 2020s and an abundance of natural gas that can be slung across the planet as liquefied natural gas (LNG), and there are plenty of reasons for optimism when it comes to emission reduction efforts. The reality is that global climate goals come down to whether China and India can find ways to decouple economic growth and middle-class expansion from unchecked CO2 increases. But that doesn't fit neatly in a headline or play well on Twitter.