A surprising call from the investment community

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.