Decarbonising transport: investing in the energy transition

Written By: Declan O’Brien Executive Director, Energy & Transport Transition UBS Asset Management, Real Estate & Private Markets (REPM)

The decarbonising transport sector is at the start of a multi-decade transition, driven by falling energy costs, governments, and stakeholder pressure for sustainable solutions. Declan O’Brien from UBS Asset Management looks at the issues at hand.

Beyond renewables such as wind, solar and even traditional grid infrastructure, there is a world of clean energy investments that sits in non-electricity industries. The electricity and heat sectors only account for 32% of global greenhouse gas (GHG) emissions, which means there are many other sectors, explored in our research insight Future green investments, such as industrials, transportation, agriculture, and buildings that could potentially attract investments in the future to enable a full energy transition. In 2023, according to BloombergNEF, electrified transport overtook renewable energy to be the largest driver of spending at USD 634 billion, up 36% year-on-year. Renewable energy saw more modest momentum, rising 8% to USD 623 billion. The challenge for investors is how to navigate the large and diverse opportunity set across the surface, air, and marine transport sectors.

Market tailwinds behind decarbonising transport
The expected growth in the decarbonisation of transport is supported by strong converging market tailwinds: falling technology costs, stakeholder pressure for corporates to decarbonise and the carrot and stick approach of governments.

1. Falling costs of carbon alternatives in transportation
The cost of low carbon alternatives in transportation is falling, especially for battery electric vehicles (BEVs) which benefit from a ~90% reduction in the cost of a battery pack since 2010, a major component in a BEV. While the purchase price of a BEV is still higher than an internal combustion engine (ICE) equivalent for most applications, end users are increasingly aware of the benefit in terms of the total cost of ownership (TCO) over the life of BEVs¹.

2. Stakeholder pressure and government approaches
Society is putting pressure on corporates and governments to see tangible actions. Policy makers are responding with a carrot and stick approach that will drive adoption of low emission vehicles. The carrot is coming in the form of generous support frameworks such as the US Inflation Reduction Act (IRA) and the European Green Deal Industrial Plan. Increasing regulation (Figure 1) is providing the stick, making it more expensive to drive internal combustion engine (ICE) vehicles, especially in urban settings.

Figure 1: Increasing regulation supporting switch to BEVs. Share of annual sales (% LHS); Regulations count (RHS)

Source: IEA, April 2024; EV Volumes

Decarbonising paths by transport sector
The three sub-sectors responsible for the bulk of transport emissions are surface, marine and air. The decarbonisation options available for the three sectors are at different stages of maturity. In surface transportation, there are readily available decarbonisation technologies for certain applications that can substantially reduce carbon emissions in an economically viable way. In the marine and air sub-sectors, most applications are less ripe for decarbonisation at scale in a cost-effective way.

1. Surface: ~70% of transport emissions
Surface accounts for ~70% of transport emissions, within which, the passenger segment makes up ~45% while freight accounts for ~29%. The transition to zero emissions vehicles in the personal autos space is well underway with BEV reaching 11.1% of global sales in 2023. BEV sales in the commercial vehicles segment are less than 3% globally, and as of 2023, almost all of the fleet was powered by diesel powered ICE vehicles (Figure 2). However, given the tailwinds around policy support and cost benefits, we expect the mix to change rapidly.

Figure 2: Share of EV in total vehicles stock (%)

Source: IEA, April 2024

To date, decarbonisation efforts have been focused on blending fossil fuels with sustainable carbon fuels, improving engine efficiency, and switching to less polluting modes of delivery (e.g., truck to rail). Sustainable carbon fuels have been a popular lever for decarbonising as they can be blended with existing fossil fuels. However, as this solution still requires blending with fossil fuels, it is not a sustainable long-term scalable solution for surface transport.

A growing segment for commercial vehicles is bio-methane even though it is not a drop-in fuel, thus requiring investment in a new or converted drivetrain to use it. There is also a challenge around the availability of bio- and waste-carbon feedstocks needed to produce sustainable carbon fuels and the ability to scale them.

The technology is already available to decarbonise most of the surface sector today, using battery electric vehicles which are competitive with ICE vehicles across many use cases. The Department of Transportation in the US estimated that approximately 75% of commercial freight trips and the EU Transport and Environment organisation estimates 65% in Europe are <400km and these ranges can be met today by commercially available battery electric vehicle models.

2. Marine: ~11% of transport emissions
Of the ~1 billion tons of CO2 annual emissions from the marine sector, short-haul vessels make up ~13%; and the rest can be attributed to long-haul (primarily ocean going) vessels, according to studies by BCG.

Our research shows that there is no economic solution to decarbonise long-haul shipping. Research into engines running on alternative fuels, primarily methanol and ammonia, is promising but is still some way off in terms of delivering an economic and scalable solution. Our experts recently brought together key stakeholders across the value chain, including fuel producers, ship owners, engine manufacturers, and chartering companies to explore how to address these challenges.

Battery-electric propulsion is a possibility for short routes. There are a number of vessel classes that could potentially be electrified with less than a 10 MWh battery. For instance, the average route serviced by a passenger ferry in the US is only 22 nautical miles (nm), while in the EU there are approximately 700 ferries with routes less than 22 nm². Another candidate for electrification is tugboats. In port operations tugboats are a major source of local pollution and several jurisdictions (e.g., California, Rotterdam, Antwerp, Singapore, Auckland) have introduced laws requiring electrification of tugboats.

3. Aviation: ~12% of transport emissions
The air sector contributes a similar share of emissions to marine, albeit it has been growing at a faster pace. There are limited options to decarbonise airplanes. The weight and range of batteries make moving to electric power challenging while the low energy density of hydrogen creates space limitations. There are some niche electrification applications and opportunities on the ground at airports to reduce emissions.

The only way to materially decarbonise air is through sustainable aviation fuel or SAF. However, today SAF accounts for ~0.01% of aviation fuels consumed globally.

Of that small percentage, almost all is Hydrotreated Esters and Fatty Acids (HEFA). There are not enough sustainable sources to scale SAF materially in this way so SAF will need to be produced using green hydrogen at scale. The Rhodium Group has estimated the expected cost of SAF to be 3-5x the cost of jetfuel in a research paper on sustainable fuels.

Some lower hanging immediate opportunities for decarbonising the air segment are at airports by replacing ground support equipment (GSE) in airports operations with low carbon alternatives, many of which are economic today with ICE equivalents. Electric baggage tugs are mainstream: for example, Swissport aims to increase its share of electrically powered and hybrid GSE to at least 55% by 2032. Pushback tugs are also good candidates for electrification as they often have high idling and operate at a low-power output duty cycle, resulting in efficiencies for ICE vehicles.

Investor considerations for decarbonising transport
Decarbonising transport is at the start of a multi-decade transition, boosted by societal and political pressure, as well as improving economics. Our analysis shows that in countries where the grid is clean, the CO2 removed per USD invested is often higher than conventional renewables. Before investing in this diverse and emerging sector, three investor questions should be addressed within impact and risk parameters:

1. Economics – can the investment be competitive with legacy fossil-fuelled fleet?
2. Emission reduction – is there unambiguous carbon abatement vs baseline?
3. Maturity of technology – is there enough evidence that the technology is similar or better than the ICE alternative in business as usual?

Decarbonisation targets for the transport sector are ambitious and a range of solutions will be needed. Both the maritime and air sectors are difficult to decarbonise in the short term. Some immediate opportunities for decarbonising the air segment at airports are in the niche ground support equipment sector which can be replaced with low carbon alternatives, many of which are economically viable today. Surface transport is the most mature sub-sector and large parts can be decarbonised today using commercially available technology.

1. UBS Asset Management, OEM catalogue, EIA, Transport & Environment, September 2023
2. E-ferryproject.eu