Going is tough as world seeks climate change consensus
The news flow on the important summit of the UN Framework Convention on Climate Change (UNFCCC) COP24 has been all but drowned out amidst the Brexit drama, the OPEC meeting and political news from the US and Middle East. The summit convened in Poland in the city of Katowice, which in itself is very pertinent. Poland’s electricity grid and industry are heavily reliant on coal, which is the fossil fuel emitting the most carbon dioxide. The city of Katowice is all about coal.
If we backtrack three years, it was the COP21 summit in Paris that saw a breakthrough in global consensus and cooperation on climate change. A total of 196 countries signed on the dotted line to agree to keep man-made global warming to less than 2 degrees Celsius and commissioned a study that was released in late October. It forecast a doomsday scenario in case temperatures rise by more than 1.5 C. The world would need to achieve zero emissions sometime between 2030 and 2050 in order to achieve the 1.5 C goal.
There were rumbles when four nations, including the US, refused to agree to the conference "welcoming" the report that they had helped commission. Instead they only wanted to "take note" of it. There was consternation when the US delegation actually voted against the findings of the report. Observers are now doubtful as to whether the 200 countries can agree on a communique by Friday, when the conference ends.
This goes to show that a lot has changed since 2015. The Obama administration was deeply committed to combating climate change. China had come around too. In three consecutive five-year plans, climate and the environment figured high on the agenda. That change of heart of the Chinese leadership was based on good reasons: Pulmonary disease has become the biggest killer in the country and many of its major cities, like Shanghai and Beijing, are situated on the Pacific coast and would therefore be gravely impacted by rising sea levels.
Fast forward three years and a new US administration with a different outlook on climate change has made all the difference. Thought leadership on the topic is moving away from the US, and China is eager to pick up the mantle.
In the meantime, it is not just governments that lead on the subject; investors are becoming increasingly active. There are the activist groups that managed, for instance, to change Shell’s stance on the matter. As of 2020, the oil major will no longer just have an eye on its own carbon footprint, but also that of its customers. A Netherlands-based activist group threatens to table a similar resolution at BP’s AGM early next year.
Pension funds, insurance companies and other institutional investors increasingly demand of industry that they measure and mitigate against their carbon emissions. In August of this year, the chief executive of the world’s largest reinsurance company, Munich-Re, sent a letter to the Frankfurter Allgemeine newspaper vowing to cease doing business with companies that derive more than 30 percent of their revenues from burning coal. That was not just a watershed moment but also a double whammy. It means that, rather than just starving those companies of investments, it will also become increasingly more difficult to insure activities that emit carbon dioxide.
We will not go from where we are now to zero emissions overnight. We also need to ensure that the policy measures make sense.
The investment firm Schroders estimates that there could be roughly $23 trillion of losses a year if we are not able to keep global warming below the 1.5 C level. It is easy to see how investors, especially insurers, can reach these conclusions when looking at the damage caused by hurricanes, flooding and wildfires. The planet seems to be raging.
This being said, the AXAs, Vanguards and BlackRocks of this world still hold sizeable investments in coal.
Like with all things, a balanced approach is required. We need to take care of the planet for future generations because it is the only planet we have. Averting the costs and displacements global warming will bring about is important too. In the meantime, we need to be realistic about what costs we will incur while we strive to achieve those worthwhile goals. We will not go from where we are now to zero emissions overnight. We also need to ensure that the policy measures make sense.
Sometimes, well-intentioned policies can have an adverse effect on what they are trying to achieve. One example is Germany, which now emits more carbon dioxide than before it embarked on aggressive renewables targets and the “Energiewende.” Renewable energy is intermittent and the peaks and troughs need to be compensated with other sources of energy. Coal has become the most cost effective option to do that, which leads to the obvious consequences in carbon dioxide emissions. On the other side of the Atlantic, the US walked away from the previous administration’s climate change agenda. However, because shale gas was relatively inexpensive, the country’s carbon dioxide emissions went down.
It will not be easy for governments to calibrate their policies to have the desired effect. Investors and industry will help us get there because they have their eye on the bottom line. COP24 is important in that context because 200 governments are taking part, as are non-governmental organizations and businesses on the margins. This UNFCCC framework may not be optimal, but it is the best forum we have got.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources