Climate of Change


In December this year, in Paris there will be the meeting of the 21st annual Conference of the Parties (COP21). The parties concerned are those that are signed up to the United Nations Framework Convention on Climate Change (UNFCCC). This is the convention agreed at the Earth Summit in Rio de Janeiro in 1992 aimed at stabilising greenhouse gases in the atmosphere to prevent dangerous interference with the climate system. It was the 16th session of the COP at Cancun that went further and agreed that future global warming should be limited to 2 degrees centigrade above pre industrial levels.

Given this is the 21st Conference you may think it is just another of those climate change conventions that seem to confirm things are getting worse, talk about what progress is being made with renewable energy and what urgent action needs to be taken and end in a diplomatic fudge. Given the track record it is probably right to be sceptical.

There is just a chance however that it might start to gain some traction in the mind of the public as the deadlines for action start to close in. In 1992 when the issue of climate change was still relatively new and the science hotly contested, talking about issues which may have an impact in the middle of the next century was unlikely to generate much public concern.

The situation is different now. The International Energy Authority (IEA), an autonomous agency established in 1974 to promote energy security among its 29 member countries, has written a report in advance of the COP21. It is an interesting read.

In terms of the tone of the document think of Blackadder, yes the Rowan Atkinson one. Imagine the kind of report that Captain Darling might have written to Lord Melchitt about the success to date and prospects of the strategy adopted by the British Generals in World War One. Explaining to an irascible and unwilling superior who might have you shot for dissension why the strategy adopted to date is probably not going to cut it.

As you might expect the report starts with an emphasis on the positive. It talks about the sustained level of investment in renewables at $270bn per annum. It also talks about the fact that 2014 seemed to indicate a decoupling of growth from increases in carbon emissions i.e. whilst the global economy grew by 3% CO2 emissions stayed flat.

It then goes on to say what sterling work nations around the world are doing with things called Intended Nationally Determined Contributions (INDCs). It is worth just pausing to analyse the terms in this concept. “Intended” – we will do our best but we cannot guarantee. “Nationally Determined” – we will decide if we want to participate in saving the world, not some international busy body. “Contributions” – we are not doing this on our own, if you don’t we wont.

Perhaps a bit harsh as there has been genuine progress with e.g. the European Union pledging to cut green house gas (GHG) emissions by 40% by 2030 relative to 1990 levels.

However, we now turn to the bit about walking towards machine guns. The report points out that “With INDCs submitted so far, and the planned energy policies in countries that have yet to submit, the worlds estimated carbon budget consistent with a 50% chance of keeping the rise in temperature below 2 degrees C is consumed by around 2040 – eight months later than is projected in the absence of INDCs.”

In essence if we continue as we are, even with the mitigation strategies in place that we have, in 25 years time we either stop burning fossil fuels all together (one can see the whiskers of the Oil Industry Melchitts starting to twitch at this point) or drop the 2 degrees C target and accept the risks that flow from that.

The IEA propose building on the INDC’s position to create “a “virtuous circle” of rising ambition”. This is Captain Darling speak for “What you are doing is nowhere near working and you have to get real.”

In a rather convoluted fashion they call on “political leaders of the highest level” to make clear their commitment to low carbon development. They identify four pillars to support that achievement. Captain Darling like, they set these proposals out at a level of abstraction which they hope will hide their radical implications.

1) Peak in Emissions – set the conditions that will achieve an early peak in global energy-related emissions.
2) Five Year Revision – review contributions regularly, to test the scope to lift the level of ambition.
3) Lock in the Vision – translate the established climate goal into a collective long-term emissions goal, with shorter-term commitments that are consistent with the long-term vision.
4) Track the transition – establish an effective process of tracking achievements in the energy sector.

Having got this far without being shot Captain Darling gets on a bit of a roll and proposes a “bridging strategy” to deliver a peak in energy related emissions by 2020, 5 years from now. The Bridge Scenario relies upon 5 measures:

1) Increasing energy efficiency in the industry building and transport sectors;
2) Progressive reduction of the least efficient coal-fired power plants and banning construction;
3) Increase investment in renewables from $270bn to $400bn in 2030
4)Phasing out of fossil fuel subsidies by 2030
5) reducing methane emissions in oil and gas production
These measures involve “putting a brake on growth in oil and coal use within the next 5 years…” Oops I think I hear the sound of a firing squad being drawn up.

Whilst the report is written as diplomatically as possible the underlying reality shines through. Burning fossil fuels as we are and expecting to prevent global warming is as rational as marching soldiers towards machine guns to win a war. The reality is we have to stop using fossil fuels, and quickly. Whilst the worst of the consequences are some time off the time we have to take effective action is now.

There are signs that the issue is starting to move up the agenda of politicians and policy makers. In 2014, as recorded in the FT, the then energy secretary Ed Davey “called for tougher rules to be applied to companies holding “risky” fossil fuels assets that could plunge in value because of global action to tackle climate change.” Mr Davey went on to talk about some analysts who were estimating such actions could cost the fossil fuel industry over $28trn in lost revenue over the next two decades.

Earlier this week Mark Carney warned investors that they may face “huge” climate change losses. With almost a 5th of the FTSE 100 industries being natural resources and extraction companies this is a matter of come concern. The carbon budget the world can use if it is to secure its 2 degrees C temperature increase target amounts to between one fifth and one-third of proven reserves of gas and oil.

To be clear, this suggests that somewhere between four fifths and two-thirds of the current reserves, which are giving value to extraction company balance sheets, may be “stranded” in the ground.

Some investors are already alert to this issue. The heirs to the Rockefeller fortune and Stanford University have started to sell out of oil and coal shares. It may of course be there is some ideological driver to those that divest early. However if politicians “at the highest level” start to take actions along the lines set out in the IEA report mentioned above, then serious investors, concerned only with financial returns, may start to move. If this happens it will have implications for everyone. Who’s pension does not have shares in BP? There is no easy option here and the longer the issue is left the worse the options become.

At the moment there are plenty of urgent issues to deal with: ISIS; the Russian intervention in Syria; Austerity; the slowdown of the Chinese economy; and potential crisis in developing economies. Whilst these issues demand attention our leaders cannot ignore the growing crisis that global warming might represent. The science seems to be overwhelming and certainly sufficiently clear to require the adoption of the precautionary principle given the stakes.

Mr Cameron is always telling us about the difficult choices he is willing to make. Is he going to tell the fossil fuel industry that its business model is broken, or gamble with the future of the planet. That may be a particularly difficult choice…for him

Sources:

Energy and Climate Change World Energy Outlook Special Report; FT 11 December 2014; FT 29 September 2015

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