Tom Nicholls: Global warming

Climate change: bad, but not a disaster … yet By Tom Nicholls There are a few global-warming deniers still out there, but they form an increasingly marginal – and eccentric – minority. Scientific opinion overwhelmingly supports the idea that rising concentrations of greenhouse gases (GHGs) in the atmosphere is leading to a dangerous warming in the earth’s temperature. And that includes the national academies of all the Group of Eight countries. So far, so good. But the fact that the consensus is growing over the science means little unless it is accompanied by co-ordinated global action, given that the problem is not one that respects national boundaries. A great deal more needs to be done if GHGs are to be brought to levels that are manageable over the long term, but, encouragingly, there are signs that relevant action is being taken at a political and corporate level. Examples include: new tougher emissions targets under the European Union’s Emissions Trading Scheme (ETS), the breakaway of some US states from the anti-Kyoto federal position and a burst in interest in the money side of carbon schemes by some of the world’s biggest finance houses. The bad news first … The gloomiest projections for what might happen if we do nothing about climate change are about as apocalyptic as it gets: flood risk because of melting glaciers, widespread population displacement, water shortages, reduced crop yields, a rise in disease and widespread death from malnutrition and heat stress. The developing world would be hit hardest, but every country would feel the effects. The Stern report, commissioned by the UK government (compiled by Nicholas Stern, the government’s chief adviser on the economics of climate change), predicted that a staggering 20% of the world economy could be destroyed by the middle of the century if no action is taken to mitigate climate change. It warned of irreversible social and economic disruption on a scale similar to the great wars and the economic depression of the first half of the 20th century. Now the good … Bad, yes. But the good news is that it’s not a total disaster. Not yet, anyway. The same report said there is still time to bring carbon emissions – and therefore global temperatures – under control. It projected that putting the right measures in place would cost 1% of GDP: a hell of a deal if Stern has got his sums right. In effect, Stern has converted the global-warming debate into a valuable new currency – and one the US understands: money. Other people have said broadly the same thing. A report by PricewaterhouseCoopers earlier in the year came to many of the same conclusions – that, on present form, we’re heading towards catastrophe, but that there’s still time to avoid it. Similarly, International Energy Agency executive director Claude Mandil recently said that “the energy future we are facing today, based on projections of current trends, is dirty, insecure and expensive”, but that it doesn’t have to be that way. “New government policies can create an alternative energy future which is clean, clever and competitive.” In short, looked at from a negative point of view, climate change could cost the world up to $7 trillion and leave 200 million people as refugees because of drought or flood. Looked at from a positive point of view, tackling climate change is the way to safeguard economic growth in the long term. The cure So, what needs to be done? The main thing that has been lacking is co-ordinated, comprehensive international co-operation. The Kyoto Protocol was a good idea that was undermined by the non-participation of too many big carbon emitters. No global carbon-reduction scheme will work properly without the involvement of the US, which produces 25% of the world’s pollution. But Washington did not sign up. China is another conspicuous absentee. And herein lies a political impasse: the White House won’t sign up to Kyoto unless China and India do too. But even though China is expected to overtake the US as the biggest carbon emitter by 2010, Beijing justifiably wonders why it should face emissions curbs in the same way. After all, the West achieved its lofty living standards without a thought to the environment. There is always a chance that the US, which has resisted emissions caps on the grounds that it could harm the competitiveness of US companies, may change its position – possibly after the 2008 presidential election. In addition, although Washington is inflexible at the moment, the actions of individual states and many companies suggest the necessary sea change in attitude is already under way and that US global-warming movement now has unstoppable momentum. In September, California became the first US state to impose an emissions cap. Seven states in the northeast have formed the Regional Greenhouse Gas Initiative to reduce emissions through a cap-and-trade system. Green: the colour of money The investment community is also placing green bets. US investment bank Morgan Stanley plans to invest in $3 billion of carbon emissions credits, projects and other initiatives related to GHG emissions reduction over the next five years. A year ago, Goldman Sachs said it would plough $1 billion into projects that generate energy from alternative energy. UK investment banking group Climate Change Capital, which is dedicated to clean-energy and low-carbon investments, has raised a carbon fund of around $1 billion. Significantly, hedge funds are now entering the market. Emissions trading is already big business and is turnover is rising at an exponential rate. No-one, especially not Wall Street, is likely to miss out. The sky’s the limit The dawn of a low-carbon economy presents an attractive business opportunity for companies willing to embrace the technology now. It is thought that markets for low-carbon energy products could be worth at least $500 billion a year by 2050. Take China and India. Between them, they are building something like one power station a week – mostly fired by dirty coal. These need to be built so that they can be retrofitted with technology to store the carbon they produce and to burn the fuel as cleanly as possible. That, in theory, constitutes a staggeringly large market gap for companies with the right technology. The Pew Center on Global Climate Change, a non-profit organisation that promotes awareness on global-warming issues, recently published research that it says shows a growing consensus among corporate leaders that taking action on climate change is a sensible business decision. Some of the biggest energy companies have already clearly signalled that that is their belief too. Oil major BP, for example, plans to invest $8 billion over the next decade on its new low-carbon business. Last year, Richard Branson’s Virgin company pledged to invest $3 billion on renewable energy schemes and technologies over the next 10 years – all the profits from Virgin’s travel businesses over that period. The EU turns up the heat Then there is the European Union’s groundbreaking ETS. Launched in 2005, the ETS has, so far, had mixed reviews. Initially, European governments set the bar far too low for big polluters, handing out too many carbon credits to their companies and failing to provide sufficient incentives for them to cut emissions. Also, the ETS doesn’t yet cover all of the big carbon-emitting business sectors; aviation, for instance, is exempt. Yet, again, there’s reason for optimism. The EU has just made got tougher with its carbon targets in an effort to meet its commitments under the Kyoto protocol. By cutting the number of carbon credits, it hopes to force companies to become greener, push up carbon prices to a level that will encourage investment in carbon-mitigation technologies and to avoid a repeat of last spring’s carbon-market fiasco, when the excessive number of permits caused a slump in the carbon price and triggered claims that the scheme had been mismanaged. And, despite its flaws, the ETS shows that a carbon market is a feasible concept and could be expanded elsewhere. The much-maligned Kyoto process also provides valuable lessons. But the success of such schemes in the future ultimately depends on one thing: uncompromising decisions by politicians. In 2005, the G8 leaders signed a communiqué that included a political statement and an action plan covering climate change, clean energy and sustainable development. It’s a question of following that up with the incentives that will encourage the right practices.