Energy transition: the state of play as Trump seeks to withdraw from Paris accord

Hours after being inaugurated as US President for the second time, Donald Trump has signed an executive order to withdraw from the Paris climate accord. The move has massive implications for global efforts to reach net zero – efforts in which institutional investors have been playing a growing role. But what is the state of play of the global energy transition at the start of 2025?

First the good news: it has been accelerating at an unprecedented pace. Solar is expected to be the world’s largest source of electricity by 2033. Overall, according to the International Energy Agency (IEA), the decarbonisation market has doubled since 2018, now exceeding $2trn (€1.9trn) annually – twice the size of fossil fuel investments. Its latest World Energy Report shows that renewables deployment has been accelerating in recent years – deployment was 2.2 times higher in the years 2017-23, versus the previous seven-year period. 

Chris Dodwell, head of policy at Impax, argues that “this fast pace of deployment means that the pledges made at the COP28 [UN Conference of the Parties] to increase global renewables capacity by… 2030 are not too far out of reach”. The IEA’s Stated Policy Scenario envisages a 2.7 times increase. 

European government support for transition has certainly strengthened. But more importantly, Dodwell points out, “market forces [are] often a stronger driver of deployment than government ambition; there are 70 countries in which the projects in the pipeline are higher than the official pledges made by the country”. 

This point is taken up by Dan Wells, partner at Foresight Group. “Energy transition is proceeding at great pace, propelled by market forces which in turn have enabled a climate policy ‘big bang’, in particular in Europe,” he says. “Renewable energy is now the cheapest form of power globally and this is having profound implications both in terms of the radical overhaul of the energy system itself, but also in cascading consequences for other economic areas such as industry, transport, agriculture and the digital sector.” 

The past decade has also seen efficiency gains and cost reductions across renewables that Dodwell says “are truly inspiring and have enabled a surge in demand”. Solar photovoltaic costs have fallen by 90%, onshore wind by 70%, and batteries by more than 90%. “The continued growth of battery technology will be central to the decarbonisation of transportation, as well as the growth of renewables and build-out of a more flexible energy grid,” Dodwell says.  Impax has made several investments is energy storage and grid infrastructure, such as CATL and Prysmian.

Transition not fast enough

But despite this progress, fossil fuels still supply 80% of global energy demand, according to the IEA, underscoring the immense transformation still required. As Lucy Heintz, partner and head of energy infrastructure at Actis, says: “There is a long way to go before countries meet their net zero-targets. The energy transition in many respects is not progressing far, or fast enough.” 

Last year, for the first time ever, global warming rose to above the 1.5ºC target set by the Paris Agreement. Our current path puts us off-trajectory for 2050 targets, while analysis by Climate Action Tracker puts the median temperature rise by 2100 at 2.7ºC if current policies continue. As Heintz highlights: “This brings us closer to precarious tipping points, with climate models increasingly regarded as potentially under-estimating the compounding effects as weather patterns start to change.”

It certainly feels like that; 2024 was the hottest year on record, and the moisture release from consequently warmer seas is intensifying the tornado season, the hurricane season, the incidences of flooding (such as in Spain and Central Europe), and the wildfires. This last effect also exacerbates carbon emissions in a vicious spiral. Canada’s emissions from wildfires alone in 2024 put it in fourth place globally in the CO2 emissions table. 

This matters hugely for infrastructure investors looking at future policy. Aon’s 2024 Climate and Catastrophe Insights Report revealed that global natural disasters in 2023 resulted in economic losses totalling $380bn (€369bn), with infrastructure losses accounting for a significant share. Earthquakes, flooding, severe convective storms and drought were the costliest events, heavily affecting both public and private infrastructure assets. And insurance coverage was estimated at only around 30%, leaving a wide protection gap. 

As a result, Charlie Garrood, global head of infrastructure M&A and transaction solutions at Aon, points out that “understanding how resilient infrastructure assets are to potential climate scenarios prior to investing is becoming increasingly important. If an asset does not have adequate resiliency, adaptation measures can lead to additional capex spend, increased operating costs and changes to asset availability, all of which directly impact valuation.”

So while energy transition appears to be happening apace, the whole reasoning behind doing it – the prevention or at least the easing of the disastrous effects of climate change – does not appear to be working. What has gone wrong?

Is the COP process broken?

Criticism of the COP process has been growing in recent years. A senior and influential group of climate policy experts has written to the UN with their concerns, and deems the current COP system as no longer “fit for purpose”. Heintz notes: “It is reported that the last COP included over 1,700 coal, oil, and gas lobbyists and there was growing concern that, for a third time, the COP host was a petrostate.” 

Ulrik Fugmann, co-CIO and head of investment in the environmental strategies group at BNP Paribas Asset Management, admits “the feedback has been very mixed from the COP29. One real disappointment for many has been that the COP29 agenda failed to follow up on COP28’s agreement to speed up efforts to transition away from unabated fossil fuels in the power sector this decade”. He talks of “a dissatisfaction with the general pace of decision-making”. 

The recent COP was dominated by the ‘social justice’ debate, which highlighted the need for developed nations to subsidise the transition efforts of the developing world as it industrialises. Eventually, a deal was struck at $300bn of transfers, although this falls well short of the trillions demanded. Overall, Paul Drummond, climate and environment research lead at Greenwheel, graded the outcome from COP29 as a ‘D’ – “some progress, but significant room for improvement”. He gave progress on adaptation and a just transition an ‘E’ grade.

Perhaps, as Abadie argues, the COP process is flawed but essential. “The need for unanimous agreements limits bold action, but COPs provide accountability and keep global attention on climate issues. Key pledges, like tripling renewable capacity and improving energy efficiency, have emerged from these meetings. Without COP, progress could stagnate. While outcomes are often disappointing, the process remains crucial for maintaining focus on systemic change.”

Leading by example

At the last COP, developed nations certainly continued to make ambitious target commitments. For example, the UK pledged to reduce carbon emissions by 81% by 2035 compared with 1990 levels (up from 68% by 2030). But then, as one senior investor said, off the record: “This may be great for our white guilt complex, but as total UK emissions are smaller than a middling Chinese province these days it is not going to stop climate change.”

The leading-by-example argument is also set to be significantly undermined by the new US administration. Heintz is clear that it “represents a major roadblock for global climate policy and for the current COP”. Trump’s move to withdraw the US – the world’s second-largest emitter – from the Paris Agreement “potentially leaves a huge void in global climate leadership. This reduces pressure for other major economies and large emitters to ‘step up’, in particular China,” says Heintz, adding that the US delegation at COP “were effectively lame ducks”. A more optimistic take she hopes for is that “we see other countries rallying and leaning into greater global leadership, particularly considering a more multi-polar world and how much of the solar supply chain comes from China”.

In Abadie’s words, “China plays a paradoxical yet pivotal role. It is the largest coal-power producer, yet leads in systemic change.” In one year, it installs the equivalent of the entire fleet of US coal-fired power stations. Yet, as stated by the IEA, China also installs 50% of the world’s solar capacity annually, produces the most solar panels, and has the largest nuclear programme to replace coal. Additionally, it dominates electric vehicles (EVs), with one in two EVs sold globally coming from China. 

An ‘exciting’ future

And yet, you cannot get away from the fact that China emits more carbon than all the developed nations taken together – the US plus all of Europe, along with Japan, Canada and Australia. Their transition efforts are dwarfed by China’s emissions growth, as well as that of the rest of Asia. Nothing COP has negotiated has stopped that from happening. This means global warming will inevitably continue apace. 

But that can only mean more investment is required to counter it. “The energy transition is accelerating but still falls short of targets,” says Francesco Dell’Alba, associate investment director at Cambridge Associates. “We need to invest $4.6trn per annum in clean energy by 2030, yet we’re currently at about one-third of that amount. There are positives such as the growth of renewables…. and progress in electrification. However, you can only electrify about half of total energy requirements, and little has been made to reduce emissions in the other half.”

To close the gap, Dell’Alba argues that “a lot more needs to be achieved within hard-to-abate sectors that cannot be electrified, where progress has been slower”. 

He continues: “Key alternatives for those sectors such as green hydrogen and carbon capture have yet to demonstrate proof of concept, with most projects facing delays. Investments in the grid are also lagging and the share of clean-energy investments in emerging markets is too low.”

Looking further ahead, McKinsey & Company estimates that a colossal $275trn will need to be spent on physical assets between 2021 and 2050 as part of the net zero transition, with energy assets a significant part of this equation. 

This means ET investors must focus on emerging markets, in Heintz’s view: “Investing in energy infrastructure in growth markets has taken on increasing urgency – both in terms of addressing climate change as well as mitigating its effects.”

At the same time, investors should not lose sight of the pending surge in power demand that will also happen in developed markets. “As power demand continues to go up, driven by electrification, reshoring and build-out of data centres to support the development of AI [artificial intelligence], there is an increasing need for low-cost and reliable energy sources,” observes Fugmann. 

The richness of these opportunities and the scale of the private capital that they are attracting leads Foresight Group’s Wells to an optimistic conclusion on the state of the energy transition. “Even though emissions are still increasing in absolute terms…. the market forces at work are now unstoppable and are pushing us in the right direction.”

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