Archive for January, 2012

A surprising call from the investment community

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A recent Reuters article reported from a UN session on climate risk and energy solutions:

 UNITED NATIONS, Jan 12 (Reuters) – Institutional investors with a collective $26 trillion under management opened a new front on Thursday in the fight against climate change, urging the private sector to mobilize, follow the money and find new technologies to cut greenhouse gas emissions. Putting a price on climate-warming carbon emissions, which has been instituted in parts of Europe and elsewhere with limited success, would be “nice to have” but not essential, said Kevin Parker, global head of Deutsche Asset Management.       

“It’s not going to be long before an investor looking to roll out a new energy plant has to take solar and wind and other forms of renewables very seriously,” Parker said in an interview outside a session at U.N. headquarters on climate risk and energy solutions.  “It’s coming down to following the bouncing ball of money, because it’s money that talks.”       

Inside the session, which drew more than 400 participants from banking, insurance, government, labor and institutional investing, the United Nations’ Roland Rich warned the group against “putting all our eggs in the government basket.”

“The carbon-burning economy is tomorrow’s Rust Belt,” Rich said. “Your job, it seems to me, is to invest in the Microsofts and Googles of the green economy.”           

The article continued with reports of other speakers making similar calls. It may be the case that this reflects a significant level of frustration in the investment community, driven by weak carbon prices, inaction in several major economies and uncertainty with policy implementation where action is underway. Nevertheless, to argue that an issue such as climate change can be addressed without government action is a worrying development.

It has taken a good 15+ years to build the case for a carbon price in the energy system and while there is concern as to the current state of carbon markets, particularly in the EU, it is not the time to now argue that we can do without them.  The most effective emerging technology for dealing with CO2 emissions is carbon capture and storage (CCS) and arguably (at least by me) we will not see a reduction in global emissions until it starts deploying on a large scale. We won’t even see a reduction in the rate of growth of emissions until coal use reaches a plateau and begins to decline. Recent statistics hardly give confidence that such a point in time is even remotely close. 

Neither of these will happen without the presence of a carbon price, given the current demand for energy. Coal remains abundant, reliable and cheap for large scale power generation and while solar energy certainly falls on the planet in abundance, converting it to 24/7 electricity on a large scale (either directly or via wind) is neither reliable (from a 24/7 perspective) or cheap. Even as natural gas production increases globally, without a carbon price it will struggle to back out coal to the extent that it stays in the ground (rather it will tend to displace it to other markets). CCS of course is completely dependent on carbon pricing and early CCS demonstration in the EU is already suffering because of the low carbon price in the EU ETS.

There is no question that money talks and it is also true that a step change down in the cost of wind and solar has taken place in recent years, but the rate of investment in conventional energy infrastructure still far exceeds that of renewable energy and nuclear. In its recent World Energy Outlook, the International Energy Agency (IEA) warned that emissions lock-in at a level above that which is equivalent to a 2°C temperature rise this century is imminent.

Despite the repeated warnings, emissions continue to rise rapidly with no sign of a turndown. We really do need a carbon price in the energy system! It almost feels trite to have to say this is 2012, but apparently it is still necessary to do so.

A year of weather extremes?

Through 2010 and 2011 in particular, weather extremes seemed to dominate the headlines. Extreme drought, rainfall, flood and wind all played a role in making the period one of the most expensive in terms of damage to infrastructure. In some locations there was also significant loss of life. It was also a time that saw the subject of extreme weather events rise up the climate change agenda, with numerous academic papers, blogs, seminars and campaigns focused on the issue.

Certainly as the atmosphere moves from one steady state to (presumably) another and one which is warmer and therefore has more energy, weather volatility should increase, at least during the period of transition. This is true in any control system where there is a change in set point (not exactly what is happening in the world, but analogous). The picture below is fairly typical, with large swings in response as the system adjusts to the change.

So we might well expect to see an increase in extreme weather events and many are now pointing to recent events as evidence. The problem here is that there have always been extreme events and there have also been previous periods of bunched extreme events. This may be driven by climate cycles, such as the El Nino Southern Oscillation (ENSO). A period that shows many similarities to the last two years is 1974-75 when there was a very strong La Nina event, such as the one we are currently experiencing.


In the timelines above the near back-to-back El Nino events of the 1970s and 2010s are shown in blue (also see them in the chart above the timeline in blue) and various extreme events are shown in red. Much similarity exits, although the severe droughts that have been experienced in the southern US states didn’t show up at all in the 1970s. In fact the Texas drought has been shown as exceptional by any standards.

With so much focus on extreme events and a further focus by many on an apparent plateau seen in global temperatures in recent years, are we perhaps missing some clearer signals buried in the data? One such signal, which got very little media coverage, was published by the WMO at the very end of 2011 and shows last year to be the hottest ever, for a La Nina year (which are typically cooler). In fact every La Nina year over the past 40 years has been warmer than the previous one.

Over six decades and taking just the La Nina years (chart above) there has been a temperature movement of 0.7 deg.C, or 0.12 deg.C per decade. This is somewhat less than the climate sensitivity indicated by the IPCC, but equally it may only be indicative of what is probably the bottom edge of the span of temperature change. It is nevertheless an important trend to understand and follow. Extreme weather events also deserve considerable attention, but there needs to be some increased diligence when it comes to immediately associating them all with climate change.

Two steps forward, one back

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2011 turned out to be a busy year for the development of carbon pricing. Long the cornerstone of EU climate policy, the approach continues to find favour with governments focused on the issue of managing emissions, rather than those trying to manage the shape of the entire energy mix. Since the EU system was introduced in 2005, carbon pricing has appeared in Alberta and British Columbia in Canada, in the North Eastern US states and remains under consideration in South Korea. Several other governments have raised the possibility of a carbon pricing system of some sort.

At the outset of the year there appeared to be little prospect for much movement forward, with some worrying signs that a retreat was possible. Proposition 23 may have been defeated in California, but other legal challenges had surfaced and the new Australian government was not expected to raise an issue that had only a few months earlier led to the fall of the Prime Minister.

But by year end Australia had a carbon price mechanism in place, South Africa had announced its intention to implement a carbon tax, China was apparently moving forward with a variety of pricing mechanisms and California was finalizing the details of its cap-and-trade system. In addition the inclusion of aviation in the EU-ETS had withstood numerous legal challenges and looked likely to go ahead in 2012.

While this is a positive set of developments, it can’t counter the fact that there was a major step backward during the year as well. The price weakness in the EU-ETS at the end of the year and the related difficulties facing the Clean Development Mechanism (CDM) are worrying developments. Although COP 17 in Durban saw a lifeline of sorts thrown to the Kyoto Protocol (and therefore the CDM) and a key committee of the European Parliament voted in favour of a mechanism to bolster the ETS price, both these mechanisms remain in the balance.

2011 also saw a number of US States pull out of the Western Climate Initiative and New Jersey pull out of RGGI.

2012 could well be a pivotal year for a market-based approach to managing emissions.But with the prospect of new negotiations for an international agreement, the possibility of giving new life to carbon pricing is also with us.