As I wrote about in Part 1 of this blog series, three recent analyses ENERGY DARWINISM II: Why a Low Carbon Future Doesn’t Have to Cost the Earth, The cost of inaction: Recognising the value at risk from climate change and Investing in a Time of Climate Change considerably add to CIEL’s own analysis (Mis)calculated Risk and Climate Change: Are Rating Agencies Repeating Credit Crisis Mistakes. These analyses show that a low-carbon future is necessary, relatively inexpensive, and investors should act to reap the opportunities that a low-carbon future provides. This is the second blog of a three blog series in which I examine the above three propositions. In this blog, I discuss how these analyses quantify the necessity of a low-carbon future (especially as it relates to investors).
The EIU’s Cost of Inaction quantifies the expected damages in present-day losses. It finds that if global warming reaches 6°C, asset managers can expect to permanently lose US$13.8trn as a result of climate change by 2100 at a private-sector discount rate. The EIU adds that:
Governments have no excuse for inaction. The potential harm from a public-sector point of view is significantly above the private-sector average expectation should some of the more extreme outcomes be realised with present value damages of US$43trn consistent with a 6°C scenario. While the likelihood of that much warming is low, the results would be catastrophic. (emphasis added)
Citi’s report adds to the EIU analysis by discussing the relative inexpensiveness of investing in a low-carbon future and the returns on that investment. Returns on investment (ROI) measure how the investment gains relate to the investment costs. Citi finds that if we factor in the avoided losses of a low-carbon future, the ROI is high – between 3-10%. It goes on to state that in the context of current investment returns, these returns are compelling. They add:
Coupled with the fact the total spend is similar under both action and inaction, yet the potential liabilities of inaction are enormous, it is hard to argue against a path of action.
Adding to Citi’s Report, Mercer’s Investing in a Time of Climate Change looks at the different impacts and costs from climate-related risk to an investor’s portfolio. Mercer provides a systematic analysis for investors by laying out four emission and warming scenarios, corresponding to the overall increase in global temperature under each scenario: Transformation (2°C and emissions peak by 2020), Coordination (3°C and emissions peak after 2030), Fragmentation-Lower Damages (4°C or more rise and emissions peak after 2040), and Fragmentation-Higher Damages (4°C or more rise). Mercer finds that: “for a long-term investor, Fragmentation (Higher Damages) is … the worst climate scenario over the very long term, with the greatest expected economic damages and uncertainty (albeit with substantially lower mitigation costs).”
Again when we add in public sector costs to private sector costs, we find the necessity of action and how inaction on climate change is economically disastrous. EIU’s Cost of Inaction writes:
. . . at higher levels of warming the trillions of dollars in present value losses represent economic damages comparable with those seen in wars or civil conflicts. Unlike isolated events, however, climate change is global in scope and largely irreversible, presenting a permanent divergence towards a path of lower growth and diminished prosperity.
A low-carbon future is necessary to avoid these catastrophic results. Such a future demands dramatic and immediate shifts in energy investment. We need investments in clean energy now and the next major step towards a low carbon future is for world leaders to seize the opportunity to reach a binding global climate change agreement in December.
Originally posted on September 18, 2015.