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