If ‘climate risk’ is the probability of climate catastrophe occurring then ‘carbon risk’ is the probability that investments in high carbon companies and assets will lose value as we transition away from fossil fuels and move towards an increasingly carbon constrained world. Sam Gill, CEO of ET Index writes.
The most famous argument is the ‘carbon bubble’ idea. This is comes down to three simple numbers. The first, is 2 degrees celcius. This is the internationally agreed ‘safe’ limit of global warming beyond which we should not go. This reason for this limit is that once surpassed, the chances of climatic feedback loops kicking in increases dramatically. For example, if the world’s oceans suddenly become net emitters of carbon instead of absorbing carbon, we are in serious trouble as things could move very quickly and we could easily be looking at temperature rises far beyond 4 or 6 degrees.
To avoid this limit we have a total ‘carbon budget’. Given we have already used up a third of the Carbon Tracker’s estimated 50 year budget within the first decade of this century, we now have approximately 565 billion tonnes of carbon dioxide equivalent (tCO2e) left. However, the amount of carbon embedded in the fossil fuel reserves of the largest 200 listed oil, gas and coal companies represents around 2,795 billion tCO2e, a number almost five times greater. Harking back to the previous post about ‘climate change risk’ this would still give us a 20% chance of not exceeding 2 degrees and potentially triggering runaway climate change. Would you get in a car that had a 1 in 5 chance of crashing? Not great odds.
As governments move to limit global warming there is a strong possibility that these assets will become stranded, leading to significant write-downs in the value of the underlying stocks holding them. Equally if investors fear that a significant write-down could occur, this could be enough to bring about a sharp drop in demand for fossil fuel company shares, and indeed carbon intensive stocks more generally, necessitating a sharp decline in price. Stampedes don’t tend to be orderly affairs. One only has to look at the decimation of coal stock prices in recent years to see how this may unfold.
But it is not just about physical carbon assets becoming stranded. There are now over 60 national and sub-national jurisdictions around the world that are putting a price on carbon. And with the world’s three most powerful economic blocs, China, the US and the EU, all committed to curbing emissions, it’s clear which way the trend is going. As regulation of carbon emissions increases, the profitability of high-carbon companies will suffer.
There are two final points to consider from the financial ‘carbon risk’ point of view.
The first is that if the next bubble brewing within the economy is a carbon one, given how widespread carbon is, what kind of global economic shock could ensure? Analysis from HSCB suggests that equity valuations of fossil fuel companies could be reduced by 40-60% in a low emissions scenario. But as we know, sectors tend not to exist in isolation from their supply chains, or indeed the wider economy, and therefore it is unlikely that such write-downs would be limited to only fossil fuel stocks.
The second point is to consider the financial implications of a 4-6+ degree world (our current trajectory). Will our global geopolitical-economic system carry on as normal without suffering any serious loses? That is extremely unlikely and it likely to negatively affect investment returns.
For the prudent investor reducing exposure to ‘carbon risk’ individually while helping reduce exposure to ‘climate change risk’ collectively is the only sensible option. The difference between these two approaches will be explored further in the next blog post.
A Good Look At How Homes Will Become More Energy Efficient Soon
Everyone always talks about ways they can save energy at home, but the tactics are old school. They’re only tweaking the way they do things at the moment. Sealing holes in your home isn’t exactly the next scientific breakthrough we’ve been waiting for.
There is some good news because technology is progressing quickly. Some tactics might not be brand new, but they’re becoming more popular. Here are a few things you should expect to see in homes all around the country within a few years.
1. The Rise Of Smart Windows
When you look at a window right now it’s just a pane of glass. In the future they’ll be controlled by microprocessors and sensors. They’ll change depending on the specific weather conditions directly outside.
If the sun disappears the shade will automatically adjust to let in more light. The exact opposite will happen when it’s sunny. These energy efficient windows will save everyone a huge amount of money.
2. A Better Way To Cool Roofs
If you wanted to cool a roof down today you would coat it with a material full of specialized pigments. This would allow roofs to deflect the sun and they’d absorb less heat in the process too.
Soon we’ll see the same thing being done, but it will be four times more effective. Roofs will never get too hot again. Anyone with a large roof is going to see a sharp decrease in their energy bills.
3. Low-E Windows Taking Over
It’s a mystery why these aren’t already extremely popular, but things are starting to change. Read low-E window replacement reviews and you’ll see everyone loves them because they’re extremely effective.
They’ll keep heat outside in summer or inside in winter. People don’t even have to buy new windows to enjoy the technology. All they’ll need is a low-E film to place over their current ones.
4. Magnets Will Cool Fridges
Refrigerators haven’t changed much in a very long time. They’re still using a vapor compression process that wastes energy while harming the environment. It won’t be long until they’ll be cooled using magnets instead.
The magnetocaloric effect is going to revolutionize cold food storage. The fluid these fridges are going to use will be water-based, which means the environment can rest easy and energy bills will drop.
5. Improving Our Current LEDs
Everyone who spent a lot of money on energy must have been very happy when LEDs became mainstream. Incandescent light bulbs belong in museums today because the new tech cut costs by up to 85 percent.
That doesn’t mean someone isn’t always trying to improve on an already great invention. The amount of lumens LEDs produce per watt isn’t great, but we’ve already found a way to increase it by 25 percent.
Maybe Homes Will Look Different Too
Do you think we’ll come up with new styles of homes that will take off? Surely it’s not out of the question. Everything inside homes seems to be changing for the better with each passing year. It’s going to continue doing so thanks to amazing inventors.
ShutterStock – Stock photo ID: 613912244
IEMA Urge Government’s Industrial Strategy Skills Overhaul To Adopt A “Long View Approach”
IEMA, in response to the launch of the Government’s Industrial Strategy Green Paper, have welcomed the focus on technical skills and education to boost “competence and capability” of tomorrow’s workforce.
Policy experts at the world’s leading professional association of Environment and Sustainability professionals has today welcomed Prime Minister Teresa May’s confirmation that an overhaul of technical education and skills will form a central part of the Plan for Britain – but warns the strategy must be one for the long term.
Martin Baxter, Chief Policy Advisor at IEMA said this morning that the approach and predicted investment in building a stronger technical skills portfolio to boost the UK’s productivity and economic resilience is positive, and presents an opportunity to drive the UK’s skills profile and commitment to sustainability outside of the EU.
Commenting on the launch of the Government’s Industrial Strategy Green Paper, Baxter said today:
“Government must use the Industrial Strategy as an opportunity to accelerate the UK’s transition to a low-carbon, resource efficient economy – one that is flexible and agile and which gives a progressive outlook for the UK’s future outside the EU.
We welcome the focus on skills and education, as it is vital that tomorrow’s workforce has the competence and capability to innovate and compete globally in high-value manufacturing and leading technology.
There is a real opportunity with the Industrial Strategy, and forthcoming 25 year Environment Plan and Carbon Emissions Reduction Plan, to set long-term economic and environmental outcomes which set the conditions to unlock investment, enhance natural capital and provide employment and export opportunities for UK business.
We will ensure that the Environment and Sustainability profession makes a positive contribution in responding to the Green Paper.”