The Cost of Cooling a Warming World

Impact Reflection

For millions of people around the globe, air conditioning is a necessity. Beyond making extreme temperatures bearable, indoor workers are more productive, kids learn better at school, and people sleep more comfortably at night.[1] As temperatures rise, air conditioning is a lifesaver in many regions of the world – although it comes with an unfortunate paradox. The use of traditional HVAC systems has a significant environmental impact, which exacerbates global warming trends, leading to air conditioning being needed in more regions, which further accelerates the problem.

Demand for air conditioning is increasing. One reason is climate change, but that’s not the only, or even the biggest, driver of demand. The primary factor is rising income globally. It’s already extremely hot in countries like India or Indonesia, and if people could afford air conditioning today, they would have it. Demand is increasing in many low-to-middle-income countries, and the International Energy Agency (IEA) estimates that the current number of air conditioning units in the world could almost triple from 2 billion to over 5.5 billion by 2050.

As demand for air conditioning booms alongside fears about the future of our climate, there is an opportunity for private sector companies and government policymakers to address this issue strategically.

Improving Our Legacy Systems

HVAC systems contribute to environmental degradation in several ways. One of the primary concerns is their energy consumption, which accounts for a significant portion of household and commercial energy use. This energy use often relies on fossil fuels, leading to greenhouse gas emissions that contribute to global warming. According to the US Department of Energy, HVAC systems can account for nearly half of a typical household’s energy consumption, underscoring their impact on both the environment and energy bills. Any solution will need to include expanding the scale of renewable energy generation, allowing legacy HVAC systems to be powered by more sustainable sources without needing to be fully replaced.  

Another critical factor is the type of refrigerants used in these systems. Refrigerants are essential to the operation of traditional HVAC systems, as they facilitate the heat exchange process that provides cooling. However, not all refrigerants are created equal when it comes to environmental impact. Historically, refrigerants like R-22, which is an HCFC, have been used widely but are now being phased out due to their high Ozone Depletion Potential (ODP). R-410A, an HFC, emerged as a replacement, offering zero ODP but still having significant Global Warming Potential (GWP). 

The HVAC industry is increasingly transitioning to refrigerants with lower GWPs, such as R-32. R-32 has a much lower GWP than R-410A, making it a more environmentally friendly option. This shift is being driven by international agreements, such as the Kigali Amendment to the Montreal Protocol, which mandates the phasedown of high-GWP refrigerants to mitigate climate change.[2]

Paths Forward: Technology & Policy

Many homeowners and building owners are opting to skip traditional HVAC systems altogether and invest in more efficient heat pump systems. Heat pumps can use up to 50% less energy, which translates directly to lower ongoing costs for homes and large buildings.[3] The International Energy Agency estimates that increased adoption of heat pumps globally has the potential to reduce global CO₂ emissions by at least 500m tons by 2030, equal to the annual CO₂ emissions of all cars in Europe today.[4] Despite these enormous efficiency benefits, the primary downside to heat pumps is the higher upfront cost when compared to a traditional air conditioning system.  

Efficient units are cheaper to run, but this doesn’t help if consumers can’t afford the higher cost upfront. Recent studies in the US and India have shown that many families can’t afford the higher cost, so they opt for a less efficient option. This is where long-term thinking from government policymakers can play a vital role by incentivizing households and businesses to prioritize efficiency by providing tax credits and other benefits when purchasing new systems or upgrading legacy systems. Policy support will be crucial to mitigating the overall impact as global demand for climate control continues to expand. 

Growing Demand Creates Opportunities

Companies providing energy efficiency solutions, which reduce both energy costs and environmental impact, are benefiting from increasing commercial demand and regulatory tailwinds. Below are two examples of companies that are included in the S&P 500 and held in funds within our ESG and Carbon Conscious portfolios that are already making an impact:  

Carrier Global – This US-based company specializes in HVAC solutions and recently acquired Viessmann, a leading European heat pump business. Carrier offers a broad array of higher efficiency and lower GWP products, including heat pumps, variable refrigerant flow systems, and software solutions. Since 2020, their high-efficiency and lower GWP refrigerant products have helped avoid more than 212 million metric tons of GHG emissions – equal to the annual energy use of nearly 27 million US homes. 

Trane Technologies – As a leading producer of energy-efficient HVAC equipment and climate-controlled transportation solutions, the team at Trane continues to innovate and has experienced profitability growth tied to powerful sustainability tailwinds. The company has set a goal to reduce one billion metric tons of greenhouse gas emissions from their customer’s carbon footprints by 2030 – which would be equal to the current annual emissions of Italy, France, and the UK combined. 

Doing Good and Doing Well

Today, air conditioning systems are clustered mostly in wealthier countries. In the United States and Japan, 9 out of 10 households have AC units. In contrast, only 1 in 10 households have air conditioning in emerging economies like India and Indonesia, and about 3 in 10 in Brazil and Mexico. Companies addressing this market need are poised to grow revenues in coming years as the mix of climate change and new regulations force millions of buildings to adopt better HVAC solutions.  

Reducing the environmental impact of HVAC systems is a crucial step toward achieving a more sustainable future as well as a significant opportunity for companies to innovate. By improving energy efficiency, transitioning to low-GWP refrigerants, adopting sustainable practices, and integrating renewable energy sources, property owners can significantly reduce their carbon footprint. These efforts not only contribute to environmental preservation but also offer practical benefits, including lower energy bills and enhanced system performance. 

As we consider the intersection of investing and stewardship, this is a sub-industry where investors have been able to do good and do well.

Brian Kozel, CFP 

About Brian Kozel, CFP®

Brian is a partner, senior advisor, and Chief Investment Officer at North Berkeley Wealth Management. Brian helps clients feel confident as they navigate their financial journey.

Read more about Brian

Resources: 

[1]  Park, R. J., Goodman, J., Hurwitz, M., & Smith, J. (2020). Heat and learning. American Economic Journal: Economic Policy. Somanathan, E., Somanathan, R., Sudarshan, A., & Tewari, M. (2021). The impact of temperature on productivity and labor supply: Evidence from Indian manufacturing. Journal of Political Economy. 

[2]  Background on HFCs and the AIM Act EPA.gov

[3]  The Complete Guide to Heat Pumps QuitCarbon 

[4]  The Future of Heat Pumps International Energy Agency 

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By |2024-09-20T13:51:03-07:00September 20th, 2024|