Home Technology & Digitalisation How to decarbonise the ICT sector?

How to decarbonise the ICT sector?

Policymakers have to enable change in consumer behaviour to decarbonise the ICT sector
Senior ESG Economist at Allianz
Head of Wealth, Insurance and Trend Research at Allianz SE
ESG Research Associate at Allianz

The good news is that decarbonisation prospects are better in the ICT sector. Its carbon footprint heavily depends on the electricity mix, so emissions are likely to decline steadily with the increasing share of renewable electricity and the improving energy-efficiency of appliances. Many mobile operators and other ICT industries have also set carbon-neutrality and net-zero targets that are aligned with the 1.5°C decarbonisation pathway, which will also contribute to keep electricity consumption and carbon emissions in check. The remaining emissions could be brought down by optimising the product life cycle, that is, assessing material selection, design choices, manufacturing and transportation.

However, it will take developing nations longer to reach net-zero in the ICT sector. Developing nations would lie on the far end of the timeline for the decarbonisation pathway, due to the challenges of greening a fast-growing electricity sector. Probably even beyond 2050, with a delayed net-zero transition. In contrast, the ICT sector in Europe, for instance, could achieve the same target relatively earlier, being an ambitious forerunner in the net-zero transition.

Decarbonising cryptocurrency is top of the agenda. Bitcoin mining is diverting electricity from other priorities such as the electrification of buildings, transportation and manufacturing. Moreover, even though switching to renewables has the potential to slash GHG emissions, this cannot be done quickly enough if energy demand keeps rising, which could slow the phase-out of fossil-fuel power plants. Governments are taking note: Calls for action in Europe come from the Swedish financial institution and the ECB since the yearly emissions from crypto mining could threaten targeted GHG emission-savings for many Eurozone countries. Members of parliament have asked the European Commission to present a legislative proposal to include any crypto-asset mining activities that contribute substantially to climate change in the EU taxonomy for sustainable activities by January 2025.

At the same time, to deter crypto mining from moving to locations with cheaper electricity prices and reduce energy demand, some countries have issued outright bans. China, for instance, issued a ban on all crypto transactions and mining in 2021. However, the effectiveness of this ban is debatable since it simply drove the miners underground: China is still the world’s second-largest Bitcoin miner after the US. Less drastic measures could also foster emission reductions through technological advancements. Ethereum set such an example by switching to a different consensus mechanism called proof-of-stake (PoS) in 2022. The merging of the Ethereum Mainnet with a separate PoS blockchain called Beacon Chain has slashed Ethereum’s energy demand by 99.95%.

Blockchain does have a role to play in decarbonisation and climate action. It can help build trust and ambition in climate negotiations by providing an interoperable and open-source digital infrastructure that could enable transparent measurement, reporting and tracking of Nationally Determined Contributions. Moreover, given its transparency and accessibility, blockchain can also help build a framework for a trustworthy and scalable Voluntary Carbon Market (VCM) to trade carbon credits. Participants can navigate through carbon registries on blockchains, ensuring global price and supply coordination. Digital measurement, reporting and verification tools, such as smart meters and sensors, could also help buyers gauge the effectiveness of carbon-sequestration efforts. Such markets would foster a streamlined discovery and purchase of carbon credits, reducing reliance on intermediaries, which in turn would lower transaction costs, ensuring that a larger chunk of the finances actually make it to the project developers. Digitising carbon credits would improve accessibility to conventional carbon finance markets. By allowing fractional ownership of credits, individuals and smaller organisations can also participate. Tokenisation also makes high-value credits such as tech-based carbon-dioxide removal credits, accessible to small buyers. The broader access to carbon offsetting would foster climate action.

Similarly, AI could help reduce global GHG emissions by around 1.5-4% by 2030 via productivity and efficiency gains. The biggest absolute emissions-reduction potential (or up to -2.2% in relative terms) would be realised in the energy sector from improvements such as better planned grid infrastructure. The transport sector is up next, with a promising emissions-reduction potential of up to -1.7% owing to smart navigation and automated-driving technologies. The agriculture and water sectors would benefit from an environmental conservation perspective as using AI for agricultural applications would help slash emissions while bolstering food and water security by means of optimised resource allocation and utilisation.

If AI and robotics research output is used as metrics to gauge the development of AI, the US, China and the UK come out on top (Exhibit 1). If solely the publications on AI are considered, China and the US lead the research followed by India supposing the trends from the latest comparable estimate are assumed to stay true till date.

Exhibit 1: Trends in AI and robotics research output

AI is already improved efficiency in the European industrial sector, with Germany leading the pack in terms of the number of companies that have adopted AI in operations (Exhibit 2). This has resulted in increased production quantity & quality, with reduced demand for energy and raw materials, and further translates to reduced generation of GHG emissions and industrial waste. AI is also helping to achieve better energy demand-and-supply synergy.

Exhibit 2: Enterprises in EU member states using at least one AI technology in 2021, figures in columns refer to number of enterprises in thousands

Policymakers will have to spur changes in consumer behaviour to decarbonise the ICT sector further. The majority of emissions come from user devices and it is unlikely that consumer behaviour will change drastically towards using fewer devices in the future. In fact, quite the opposite is likely. This means these changes would have to be mandated top-down through regulations or incentives.

The first part of this piece looks at how the ICT sector is a major source of greenhouse gas emissions.

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Markus Zimmer
Senior ESG Economist at Allianz

Markus Zimmer leads Climate Economics research at Allianz SE. His academic background is in Resource and Climate Economics, which he applied in policy consulting and lecturing at the Ifo Leibniz Institute at the University of Munich. He frequently provides insights to the public climate policy discussion and facilitates dialogue and cooperation between science, policymakers and the financial sector. He contributes with his expertise to the United Nations convened Net-Zero Asset Owner Alliance and the Glasgow Financial Alliance for Net-Zero.

Arne Holzhausen
Head of Wealth, Insurance and Trend Research at Allianz SE

Arne Holzhausen is head of Economic Research’s Insurance, Wealth & ESG team at Allianz SE, Munich. He is responsible for analysing and forecasting global insurance and pension markets, monitoring worldwide private assets and liabilities and assessing the impact of ESG issues on economic and capital market outcomes. He regularly writes on economic trends impacting insurance including low yields, regulation, technology and demographics. Prior to joining Allianz in 2009, Arne spent almost eight years with Dresdner Bank’s Economic Research. From 1995 to 2000, he was Assistant Professor at the Centre for East Asian Studies of the Free University of Berlin.

Anand Parmar
ESG Research Associate at Allianz

Anand Parmar is an engineer pursuing a master’s degree in Environmental Sciences, specialising in climatology, environmental economics and policy, and renewable energy. He aims to leverage this interdisciplinary background to address climate change and contribute to evidence-based environmental policy recommendations. In his role as a research associate of Group Economic Research at Allianz SE, he has contributed to several publications on decarbonisation pathways of key economic sectors, in the EU, over the past 18 months.

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