How climate change will change business
Emma Duncan
PolandMay 2008
Positive proof of global warming
Is climate change happening?
• Yes, but very slowly• Global temperatures up by 0.6°C in a century• Arctic temperatures up by 3°C over 20 years• Summer sea ice cover shrinking by 10% a
decade• Increase in serious hurricanes over the North
Atlantic• Thousands of species are moving northwards
—problem for polar bears
Are we sure it’s serious?
• No, we’re sure of very little• Climate is an infinitely complex mechanism
• Some feedback loops (eg, CO2 emissions from warming earth) are understood
• Some (eg, clouds) are not• IPCC estimates of temperature increase by
2100 range from 1.2°C to 5.4°C
Why are we worried?
• Possibly catastrophic outcomes• The modern age is a remarkably mild
period: historically, the climate has been more extreme
• Sea levels have varied by 100m• Greenland and Antarctic ice caps have
frozen and reformed
Should we spend money on this?
• No—future generations will be richer than we are
• Yes—risk of a catastrophe is large enough that we should start trying to avert it now
The insurance principle
• As individuals, we insure our houses to protect our property
• As nations, we pay for armies to protect our countries
• As a world, we need to invest to protect our climate
Action is being taken
• In Europe, at national level and in Brussels
• In America at state level, and soon at federal level
• In emerging markets not at all, but the pressure is on
Will it stop climate change from happening?
Certainly not, unless more countries do a great deal more
Will it affect business?
Yes
Global warming will change business
• By changing the climate
• By changing the market
• By changing regulation
The changing climate
• Good for oil and gas in the Arctic (reckoned to be the source of 20% of the world’s undiscovered energy reserves)
• Bad for investments on the Florida coastline
The changing market
• Are consumer attitudes shifting?
• Are they shifting corporate attitudes?
Consumers
• Are they ethical?
• Or are they hypocritical?
Not many carbon offsets
• Expedia: 57,000 carbon offsets over 18 months
• British Airways: fewer than 1% of passengers buy carbon offsets
Even if customers can save money by buying green, they don’t always do so
Low-energy lightbulbs:
• Save around $50 in electricity bills over their lifetime
• Invented 25 years ago
• Only just getting off the ground
What’s going to happen to attitudes?
• Maybe carbon becomes morally and socially unacceptable
• Are you racist?
• Are you homophobic?
• Do you boil the planet by buying dirty?
Corporate customers
Big change over the past four years
• 2004: executives were prepared to doubt the value of trying to mitigate climate change
• 2008: uniformly, publicly convinced of the need to take action
Why?
• Genuine concern
• Hurricane Katrina
• Responsibility beyond shareholder returns
• Politics
American corporations
• Federal emission-control system better than a state-level patchwork
• Better to be at the table than on the menu
To be at the table you need to be seen to be green
• To be seen to be green you have to do something
• Hence the move to carbon neutrality
Carbon neutrality means you don’t add to the carbon dioxide in the atmosphere. So when you emit a tonne of carbon, you have to buy a tonne of carbon offsets
As a result:• Carbon has a price• Price gets fed into tenders• Greener suppliers favoured over carbon-
intensive ones
HSBC
• World’s biggest bank
• 312,000 employees
• Committed to carbon neutrality
• Uses shadow carbon price
Will corporations continue to move in this direction?
• High-profile commitments hard to reverse
• Recession could change that
• But politicians will force them to keep getting greener
Climate change is the most difficult policy problem politicians have ever had to deal with
• Uncertain
• Transgenerational
• Global
It’s happening
• All rich countries regulate to limit power and gasoline consumption
• Regulations are being tightened
• Even Bush has proposed to cap US greenhouse gas emissions by 2025
Europe’s tools for dealing with climate change
• Product standards
• Renewables targets
• Cap and trade
Commission has used standards to squeeze carmakers
• Voluntary ones ignored
• Mandatory ones introduced
• French and Italians shrug; Germans explode
Renewables targets
• 20% renewables by 2020
• 10% biofuels by 2020
Biofuels illustrate the consequences of mixing motivations
• Environment
• Energy security
• Pandering to the farm lobby
Biofuels illustrate the consequences of governments picking technologies
• Carbon price avoids that problem: the market does the picking
How a cap-and-trade system works
• To emit carbon you need a permit
• Price is determined by number of permits issued and demand for them
• Permit price is carbon price
Generating electricity with coal...
• is cheap
• is dirty
• requires lots of permits
How it works in Europe
• Covers 5 dirty industries (electricity, paper, metals, oil, building materials)
• Monitors GHG emissions from 11,000 plants
• Firms tell national governments how many permits they think they need
• National governments tell Brussels how many permits they think they need
• Brussels tells them they are greedy and rejects the bid
• National governments sue Brussels
To keep within their limits, firms can
• Cut power consumption
• Cut carbon emissions
• Buy new permits from each other or developing countries
Market has gone from zero to $64 billion in three years
• Of which $72m is Chicago Climate Exchange
• Almost all the rest is generated by ETS
• Bizarre trade fair in Cologne
How Europe messed up
• Gave out permits free
• Gave out too many permits
Costs?
• Power prices in Europe gone up by maybe 10-15% so far
• Current package, if agreed, will push them up another 10-15%
Opportunities, for investors and others
America is going this way
• Lieberman-Warner bill
• McCain and Obama both committed
How climate change will change business
Emma Duncan
PolandMay 2008
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