If Talk Can’t Save Us, Money Might

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How Corporations and Investors Are Pulling Ahead of Policy Makers on Tackling Climate Change


The biggest outcome of the G7 summit in Bavaria in early June was the announcement by the seven leaders to want to cut greenhouse gas emissions by 40 to 70 per cent by 2050, and to end fossil fuel pollution altogether before the end of the century. These goals are to be transformed into a corresponding treaty during the next round of UN climate negotiations in Paris (COP 21) at the end of this year, so the plan goes.


Success in Paris would mark a turning point in UN climate negotiations. In contrast to the 1997 Kyoto protocol, which was signed only by industrialized nations, all 195 member countries to the UN Framework Convention on Climate Change (UNFCCC) are to commit to the Paris accord. But the ambitious targets set by the G7 were greeted mainly with skepticism. Too often had similar commitments been made, but were never followed by political action. And also in the run-up to the COP 21, fundamental disagreements have already emerged that could still derail a treaty, as was illustrated in the first of three preparatory meetings for the conference: negotiators from all UNFCCC countries had met to prepare a negotiation text for Paris, but merely managed to shorten the initial 90-page draft by five pages, while the thorniest issues remained untouched.[i]


One of the biggest obstacles is the ongoing dispute over how much the wealthy countries are going to cut back emissions compared with less developed nations. The latter also insist on the industrial nations to spell out how precisely they intend to come up with the $100 bn a year promised to poorer countries to help them switch to green energy sources and to build the infrastructure needed to mitigate the damaging effects of climate change. Another open issue is how individual countries’ emissions pledges would be monitored in the coming decades. While many wealthy countries are in favor of a tough review process, officials from China and other countries are less supportive.[ii]


Just like during the last round of climate talks in Copenhagen, which was widely considered a colossal failure, negotiators seem to face the impossible, and they have little time on their hands. According to scientists, the minimum goal at this point should be to keep the median increase in expected global temperature at 2°C by the end of the century. However, even if governments kept their current commitments to carbon reduction, which is itself unlikely, temperatures are predicted to rise by 3.5°C.[iii]


There is one reason to be cautiously optimistic about climate change, though: big business and investors have started to care much more about the issue. Initiatives like the Carbon Tracker have propagated the concept of the “carbon bubble”.[iv] It is built on the premise that fossil fuel investors may be sitting on trillions of dollars of potentially toxic financial assets, because not all of the fuel available today could ever be burnt if dramatic climate change was to be averted. The idea is that at some point, financial markets would factor in these risks, thereby rendering fossil fuel assets “stranded”. Capital, therefore, would soon flow increasingly to green investments. The fall in oil prices since last year may be a first indication that supporters of the “carbon bubble” are on the right track.


A new study by the consultancy Mercer also suggests that fossil fuel investments are headed south because of climate change. They assumed different scenarios where global average temperatures rose between 2°C and 4°C by 2050 and analyzed the potential impact on returns in different asset classes and industry sectors. Depending on the severity of the scenario chosen, annual returns from investments in oil and coal companies were reduced by up to 4.1 and 4.9 per cent, respectively, while renewables (up to 3.5 per cent appreciation) and nuclear power (1.8 per cent) benefitted.[v]


Recent data on global energy production suggests that renewables are already catching up fast. Research by MIT professor Jessika Trancik shows how the cost of alternative energy sources has been falling over the past decades, to a point where wind energy was now as cheap as coal, and solar was predicted to break even with coal by 2020. Trancik shows how larger markets created incentives for further innovation, but she also adds that in the midterm, continued public policy support was needed to sustain that progress.[vi] To put things in perspective, though, the bulk of world energy demand still stems from fossil fuels: in 2014, only 2 per cent of global energy consumption came from renewables. Adding nuclear power and hydroelectricity, the figure still comes out to merely 14 per cent, the remaining 86 still coming from coal, gas and oil.[vii] There is, of course, another way to look at this: as fossil fuels become less competitive, massive energy demand will have to be met by renewables, which presents bountiful investment opportunities.


Big business might be a decisive factor, not just in terms of setting the direction for future investment, but also for helping policy action along. In June, the UN announced it would take up an offer from six of Europe’s largest oil and gas groups to help it fight global warming. According to Christina Figueres, the UN’s top climate official, the “very surprising” move illustrated that oil and gas executives knew how fast the world was moving towards tougher climate action and that there wasn’t much to be gained from swimming against the current.[viii] The hope now is that the corporations’ offer will be more than an empty promise and that they will work towards a system of different carbon pricing schemes that can “work with each other to have the greatest impact on decarbonizing the energy system.”[ix] By signaling that they have understood the impact climate change will likely have on their future returns, and by being willing to make binding commitments to support the development of low-carbon technologies, corporations could surely help expedite policy action in the run up to COP 21.


Since capital has already started flowing towards low-carbon technologies, and big oil and gas companies are jumping on the green bandwagon, is there anything left to do on the policy side in the fight against climate change? The answer is yes, there most certainly is. In their new book Climate Shock, Gernot Wagner and Martin Weitzman make a novel and convincing call for action: they argue that what matters more than median temperatures are the outliers, the extreme values of the probability distribution of temperature. On the path we are on now, carbon dioxide concentrations in the atmosphere would double from preindustrial levels. At these levels, global average temperatures were “likely” to go up by between 1.5 and 4.5°C (which seems pretty believable given that the world has already warmed by 0.8°C while carbon dioxide concentrations have only increased 40 per cent over preindustrial levels). If carbon concentrations more than doubled – say, to levels now predicated by the International Atomic Energy Agency, we would be looking at a “likely” range of temperatures between 2 and 6°C. According to climate science, global warming above 2°C could trigger potentially devastating events. Anything above 4.5°C, the authors of Climate Shock warn, would be “beyond the pale of most imagination,” or “a planet that none of us would recognize.”[x] In other words, we cannot be certain that nothing disastrous will happen, and that makes it imperative to act.


With an eye to the COP 21 conference, the makers of the Mercer study, too, argue that the actions chosen by the end of this year would be crucial in determining just how severe the influence of climate change will be on future asset returns. Another study puts the threat posed by climate change into the larger context of human development and claims that it could undermine all gains in human health during the past 50 years. Conversely, the report suggests that the benefits to global health that could be achieved by reducing fossil fuel usage are so large that tackling climate change presents the greatest global opportunity to improve people’s health in the 21st century.[xi]


As was illustrated by the surprisingly firm commitment by the G7 and some recent corporate initiatives to tackle the issue, both policy makers and business seem to begin to realize that the stakes are getting higher. But despite budding corporate support and some hopeful indications of a changing investment climate, timely and determined policy action will still be indispensable in the midterm to make renewables more competitive, either through creating incentives for their use (or disincentives for the use of fossil fuels) or by boosting innovation through public investments in research and development. In the end, the obstacles to collective action may turn out to be insurmountable, and we might still fail to save the planet – but at least we could hope to decrease the likelihood of disaster to occur.


[i] Associated Press, “UN Climate Talks Inch Forward, Putting Off Tough Decisions,” New York Times, June 11, 2015, accessed June 28, 2015, http://www.nytimes.com/aponline/2015/06/11/world/europe/ap-eu-un-climate...

[ii] Pilita Clark, “Long road ahead as G7 fixes on climate change targets,” Financial Times, June 8, 2015, accessed June 26, 2015, http://on.ft.com/1HXfDew

[iii] Martin Wolf, “Why climate uncertainty justifies action,” Financial Times, June 9, 2015, accessed June 28, 2015, http://on.ft.com/1GoCYJc

[iv] “Unburnable Carbon,” Carbon Tracker Initiative, accessed June 27, 2015, http://www.carbontracker.org/report/carbon-bubble/

[v] “Investing in a Time of Climate Change 2015,” Mercer, accessed June 27, 2015, http://www.mercer.com/content/dam/mercer/attachments/global/investments/...

[vi] Jessika Trancik, “Renewable energy: Back the renewables boom,” Nature 507 (2014): 300-302, accessed June 26, 2015, http://www.nature.com/news/renewable-energy-back-the-renewables-boom-1.1...

[vii] “BP Statistical Review of World Energy June 2015,” BP, accessed June 28, 2015, http://www.bp.com/en/global/corporate/about-bp/energy-economics/statisti...

[viii] Pilita Clark, “UN welcomes oil groups’ help to fight global warming,” Financial Times, June 11, 2015, accessed June 26, 2015, http://on.ft.com/1L3tJkw

[ix] Ibid.

[x] Gernot Wagner and Martin Weitzman, Climate Shock: The Economic Consequences of a Hotter Planet (Princeton: Princeton University Press, 2015), p. 18 (e-book)

[xi] The 2015 Lancet Commission on Health and Climate Change, “Health and climate change: policy responses to protect public health,” The Lancet, published June 22, 2015, accessed June 27, 2015, http://www.thelancet.com/journals/lancet/article/PIIS0140-6736(15)60854-6/fulltext

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