By Darran Messem, Managing Director, Certification
If as expected atmospheric CO2 averages 400 parts per million (ppm) this year, for the first time in over 800,000 years, 2016 may well be regarded as a pivotal year. In the three decades since the first presentation of man-made climate change to the US Senate, the presenter of which subsequently proposed 350ppm as the ‘safe’ limit, greenhouse gas concentration has accelerated rather than declined. Monthly peak anomalies in global warming have edged close to the UN IPCC ‘best efforts’ threshold of +1.5°C above the pre-industrial average, and sustained regional temperature anomalies have extended beyond +5 °C. Northern hemisphere ice masses have declined; sea levels have risen; extreme weather events have increased in frequency.
With less than four years to go to 2020 it is timely to take stock and reappraise what needs to be done to stabilise the global climate. Reaching 400ppm crystallises a stark choice between two scenarios:
• Continued acceleration of greenhouse emissions and climate change culminating in substantial forced changes in global climate, land use, factors of production and patterns of demand, and corresponding investment in adaptation measures (in UNFCCC terms, a ‘Paris fails’ scenario).
• Managed reduction in emissions through major and rapid changes in technology in energy, transport, production and consumption through nationally determined policy initiatives attempting to hit a sweet spot between national economic competitive advantage and environmental responsibility (in UNFCCC terms, a ‘Paris succeeds’ scenario).
Three key players determine which scenario prevails: Governments, Municipal Authorities/Cities and Corporates. They have influence over the majority of emissions, determine resource allocation, and exert a profound influence over both financial prioritisation and consumer choice. Their actions in the next four years will determine whether emissions and climate change begin to slow, or whether they continue or even accelerate.
Recent climate change and implications
Having tipped 400ppm in March 2015 (Figure 1), 2016 will probably be the year when the global mean atmospheric CO2 concentration is at or above this level; the consequence of high industrial, agricultural, transport and domestic emissions, together with emissions from natural sources induced by anthropogenic change such as retreating permafrost, and potentially a reduction in the carbon-sink effect of natural systems[i].
In parallel, the atmosphere has warmed (Figure 2) and northern hemisphere ice masses have depleted to their lowest recorded extent.[i] Sea levels have risen to the highest levels mankind has ever recorded. Unprecedented extreme weather events have impacted many parts of the globe, from record summer and winter temperatures in Australasia and Europe to flash floods and winter droughts in America.
Assuming continued increases in average atmospheric concentration of +10ppm every four year, the current IPCC ‘safe’ limit of 450ppm would be reached in 2036 (without any acceleration) leaving less than twenty years to arrest, and potentially reverse a 130 year trend in emission production.[i] This is ten years less than the timeframe from inception to opening of the Thames Barrier. There is no longer an option to wait and see what happens if we are to successfully reverse this trend.
A stark choice
Looking ahead, two broad scenarios for climate change are clearly feasible.
Continued acceleration of greenhouse and related emissions culminate in substantial changes in global climate, land use, factors of production and patterns of demand, and necessitate corresponding adaptation measures. In UNFCCC terms this is a ‘Paris fails’ scenario.
The IPCC Fifth Assessment Report, published in 2013, provides an authoritative indication of the expected implications of continued acceleration and succinctly summarises these as “Surface temperature is projected to rise over the 21st century under all assessed emission scenarios. It is very likely that heat waves will occur more often and last longer, and that extreme precipitation events will become more intense and frequent in many regions. The ocean will continue to warm and acidify, and global mean sea level to rise.” [ii]
These profound changes come at a cost. The Economist Intelligence Unit estimates “Warming of 5°C could result in US$7trn in losses – more than the total market capitalisation of the London Stock Exchange - while 6°C of warming could lead to a present value loss of US$13.8trn of manageable financial assets, roughly 10% of the global total.“ [iii]
Alternatively managed reduction in emissions is achieved through unprecedented changes in energy, transport, production and consumption. In UNFCCC terms this is a ‘Paris succeeds’ scenario.
The Paris Agreement provides a coherent basis for managed reduction. The Agreement sets an ambitious long-term goal and sends a powerful signal to business that the era of unabated fossil fuels is over. Intended Nationally Determined Contributions (INDCs) form the basis of a managed reduction approach, which can be strengthened to reflect the science, and implemented through policies and programmes that make business-as-usual more difficult and costly, and low carbon alternatives easier to deploy and more affordable.
So far, the Agreement commits governments to generating plans that should collectively put the world on track to achieving the long-term objectives governments have signed up to. This bottom-up approach to the development of climate-related commitments has already seen the submission of plans from 188 governments covering 90% of the world’s emissions.
There is widespread recognition, including in the text of the actual Paris Agreement that the current INDCs do not go far enough. One widely cited study estimates that they will only keep temperature rise to 2.7°C.[iv] However, the Paris Agreement provides a critical mechanism to ratchet up the ambition to meet the long term targets every five years.
Three key players
Governments, Municipal Authorities/Cities, and Corporates are the key players. They control the levers necessary to effect a successful low-carbon transition. For Governments and Municipal Authorities, social and economic opportunity will be balanced against political risk. For Corporates, the risk to assets and economic return will need to be mitigated while both the potential return and the potential risk will need to be managed across technologies, markets and operating models, potentially opening significant commercial opportunities. For each, there are some fundamental and enormously important issues they should be addressing now if the world is going to combat climate change.
The key consideration for Governments (and Governmental bodies) is whether the rate of policy change that is required can be delivered given political and other constraints.
In a scenario of continued acceleration, the effects of climate change present a significant threat to established government approaches. To the extent that adaptation will be possible, large-scale investment in adaptation strategies will become a necessity, particularly relating to sea defences and protection against extreme weather events, but the scale required will be affordable only for wealthier nations. Even in wealthier nations, financing models will need to change to monetise adaptation benefits. To maintain global security the wealthier nations will almost certainly have to increase overseas aid budgets to support a minimum level of climate relief.
To deliver a scenario of managed reduction policy makers will need to develop policies that deliver a step change in low-carbon investment, linking economic return to environmental capital in ways never before attempted yet enabling societies to evolve and prosper. Managed reduction will require significantly increased deployment of low carbon technologies, both to reduce demand through improved energy efficiency, and produce cleaner energy, including through renewables, as well as enhanced innovation so critical technologies such as energy storage and CCS can be developed and deployed cost effectively.
The Paris Agreement made an important commitment to support action to adapt to climate impacts and develop low carbon energy systems in developing countries. The OECD estimates that US$62 billion has already been pledged by developed countries so far towards the goal governments agreed in Copenhagen in 2009 to invest US$100 billion per year by 2020. The Agreement confirmed that there will be a new goal to provide more than US$100 billion per year from 2025. Of course, the scale of overall investment needed in low carbon technology to make the sort of transition required by the long-term goals dwarfs this amount. And the text remains silent on how or through which mechanisms these funds will come. However used wisely, this level of funding will play an instrumental role in creating clean technology markets globally, leveraging far greater private sector investment, and enabling innovation to take place which reduces the cost of low carbon technology.
The Paris Agreement also defined a process to review progress versus countries plans and increase action to meet a “managed reduction” strategy. This is very important as countries both need to articulate a clear set of detailed underlying policies and actions that will deliver their INDCs, and to define the economy wide deep emission reduction pathways out to 2050 and beyond that will minimise the cost of the transition and maximise their national competitiveness in the context of this global challenge.
Governments around the world will need to develop clear plans to decarbonise their economies: setting out long-term goals, milestones and the policies to deliver these objectives. The INDCs laid out by nations in the Paris Agreement act as the starting point on this journey, but there is some way to go as these plans fall short of a successful “managed reduction” strategy for both a 1.5°C and 2°C world (Figure 3). The estimated gap versus a successful trajectory in 2030 is around 17-21GtCO2e if targeting a 2°C temperature rise and 23-27GtCO2e for a 1.5°C rise. This is significant given current global greenhouse emissions are just over 45GtCO2e.
Closing the gap requires a clearly articulated package of policies that is stable, long-term, simple and sufficient to enable the business sector and economy to invest at scale. This will include a tapestry of carbon pricing, regulation and enabling support tailored to overcome the barriers to change across the range of opportunities targeted. A coordinated international approach will be needed to create a level playing field for firms (e.g. in the context of carbon pricing), to make addressing different international markets simpler (e.g. through common product standards and labelling) and to share the cost and increase the speed of innovation in new technologies. An energy system wide approach will be required as heat/cooling, transport and electricity energy use will become increasingly integrated, with for example an increasing trend to electrification of transport. All components of the system will need to addressed, with the speed and depth of emission reductions tailored to the cost and scale of the savings opportunities available in each industrial sector.
Governments will also need to invest in clearly-researched and well-articulated domestic and foreign policy in respect to both climate change mitigation and adaptation. For free market economies seeking economic growth, creating the conditions for economic success under each scenario will likely require a strong foundation of energy efficiency, technological innovation and economic systems that reward value-creation in a broader sense that encompasses environmental value and risk-mitigation.
(2) Municipal Authorities
Local government action is widely recognised as a key enabler of the transition to a low carbon economy with Municipal Authorities holding the planning, social housing, community engagement, taxation, procurement and educational levers necessary help drive the transition to a successful and prosperous low carbon economy.A key consideration therefore for Municipal Authorities is how do services and their provision need to evolve to adapt to and mitigate against climate change.
In a scenario of continued acceleration many leading world cities are particularly vulnerable to climate change. Around 37% of the world’s population lives within 60 miles of the coast, and often within a few feet of current sea level in cities like London, Mumbai, Tokyo and New York. Increasingly severe heatwaves pose a particular challenge to urban areas, often already several degrees warmer than surrounding areas due to urban heat islands. Coastal and estuarine cities will need to build or materially improve sea defences and for many the economic cost of doing this effectively will be prohibitive; for others doing it effectively will be the source of their competitive advantage for the next 100 years.
Huge investment will be required under this scenario not just with regards building flood defences but additionally in adapting buildings for higher temperatures, managing the effects of natural disasters, building resilience to new disease vectors, and investing in disaster response infrastructure. Some cities are likely to become undesirable places to live under unmitigated climate change scenarios. Significant migration pressures are likely on regional to international scales as people move away from cities that become vulnerable to sea level rise.
Managed reduction presents Municipal Authorities with the challenge of balancing social demands with the delivery of climate mitigation and adaptation measures in the context of constrained resource. Local and city governments can lead through the implementation of resource efficiency on their own estate and through the delivery of their own services.
Many leading world cities have set climate mitigation targets in advance of national governments – good examples are Melbourne, Vancouver, London, Tokyo and Rio. The Paris agreement put heavy emphasis on the role of local governments, who will need to aggressively prioritise low carbon buildings, denser urban development, mass transit in place of private cars, and more efficient city systems such as low carbon local energy schemes and street lighting. It is clear that many Municipal Authorities will need to invest in adaptation measures on a routine basis even under an aggressive reduction scenario but the scale of investment would be only a proportion of that which would be required under a continued acceleration scenario
Municipal Authorities, like central Governments, can influence financial systems by ensuring that environmental costs and benefits are factored into local budgets and investment decisions in the form of a carbon strategy, and that level playing fields are established for the cost of capital, production and consumption. These too can embrace consistent global carbon pricing and trading, mandatory and independently-verified carbon reporting, consistent international trade regulations that provide for consistent energy and carbon efficiency, and visibility of true lifecycle carbon impacts. So too in the influence of consumer choice and demand. The true environmental impacts and costs of consumer choice – in diet, product purchase, energy use and general consumption – need to be made visible, understandable and above all actionable at the local level; unlike Governments and Corporates, Municipal Authorities are uniquely placed, both in terms of geographic location and trusted status, to drive awareness and engagement of these issues across communities.
The key consideration for corporates is whether their productive assets (both tangible and intangible) can continue to operate economically and competitively, and if not how they need to be materially reconfigured.
Under a scenario of continued acceleration, operators of assets and delivery capability have substantial value at risk. Input costs for energy (with or without a carbon price) and resources will rise, along with the cost of adaptation investment. Resources will become increasingly scarce. Environmental pressures on supply chain and productive capability will grow.
Productive assets reliant on the presence of sea water (refineries, power stations, steel plants and docks all) will need to carefully reconsider their relationship with the rising sea. Agricultural producers may be required to transform their operation to a different or more sustainable form of production to avoid their businesses withering along with their crops in changing climatic conditions, while in some areas growing seasons will be extended. For all production and service businesses maintaining wealth creation without becoming the villain of the piece will require careful consideration of business model and operating strategy to maintain competitive advantage and brand preference.
Physical supply chains are likely to suffer from scarcity and even in some cases breakdown (e.g. crop failures), risk factors and insurance premiums will rise (e.g. for extreme weather events), supply costs may rise or simply become more volatile, and energy scarcity and cost may become a key business factor. Whether or not there is strong legislation mandating action, many businesses will look to move independently and adopt leadership positions so that they are more efficient, able to profit from related cost and revenue opportunities, and are able to trade on improved reputations.
Managed reduction presents huge challenges for corporates invested in conventional carbon-intensive infrastructure, and affords genuine opportunities for innovative organisations.
Currently, leading corporates have set out longer term targets and focused on energy efficiency. A few pioneers have established innovation investment and supply chain re-engineering strategies aligned to corporate environmental targets. Many others are picking off the low hanging fruit (such as LED lighting), but many firms are doing nothing - effectively waiting to be regulated. Among leading firms good corporate governance has become associated with good environmental management, and many of the strongest companies – Marks & Spencer, Unilever, Walmart, Toyota – are at the leading edge. All of these have, at some level, understood and acted upon the long term risks and opportunities to their business around climate change and sustainability.
Managed reduction calls for greater alignment between a sustainable climate and corporate strategies, and for the extension of corporate sustainability strategy from direct operations to supply chains, and from production and delivery to in-use, end-of-use and recycling.
Science-based targets that align strategic delivery with desired climate outcomes will need to be set (and delivered) in both direct operations and through supply chains. Supply chain engagement will lead to more circular supply chains. Measurement of emissions will need to embrace both in-use and full lifecycle impacts. Transformational innovation will progress to zero-carbon and carbon-positive goods and services leveraging bio-resources and carbon-sinks. Rigorous operational efficiency will need to drive reduction in energy use, resource use, working capital and embedded emissions. The cost of capital for high-carbon operations is likely to increase, together with carbon and energy taxes, driving stronger focus on carbon efficiency and placing the spotlight on potentially redundant business models, high risk portfolios and potentially stranded assets.
Hence finance companies and asset managers will take steps to ensure that environmental costs and benefits are factored into investment decisions, and level playing fields are established for the cost of capital, production and consumption. They will need to embrace consistent global carbon pricing and trading, mandatory and independently-verified carbon reporting, consistent international trade regulations that provide for consistent energy and carbon efficiency, and visibility of true lifecycle carbon impacts.
Together corporates and finance companies exert strong influence over consumer choice and demand. The true environmental impacts and costs of consumer choice – in diet, product purchase, energy use and general consumption – need to be made visible, comprehensible and above all actionable.
Overall managed reduction is expected to help create greater opportunities than risks for business. It will help create larger markets for low carbon technologies and services, which will be a major source of future revenue and jobs. The size of the prize was underlined starkly in Paris by John Kerry, the US Secretary of State, who said this shift towards a low carbon economy was among the “greatest economic opportunities the world has ever seen.”
400ppm is a data point and a point in time, but crossing it potentially marks a pivotal year. It is uncertain whether the world will continue acceleration of greenhouse emissions and climate change or deliver a managed reduction in emissions through unprecedented changes in energy, transport, production and consumption. What is clear is a growing consensus that a managed reduction presents a more attractive future than the high risk world of continued acceleration.
Governments, Municipal Authorities/Cities, and Corporates face a medium-term planning horizon characterised by unprecedented potential complexity. To navigate that complexity it will be necessary to bring these perspectives together to allow sharing of expertise and enable clarity of policy and strategic direction.
Making the right choices, developing strategies that are both resilient and adaptive to various outcomes, and backing the right actions and technologies in the next four years will determine not just whether these organisations are successful over the next twenty years, but indeed whether they continue to exist.
[i] E.g. Galen A. McKinley, Amanda R. Fay, Taro Takahashi, Nicolas Metzl (2011), Convergence of atmospheric and North Atlantic carbon dioxide trends on multidecadal timescales. Nature Geoscience, July 10, 2011
[iv] IPCC Climate Change (2014), Synthesis Report Summary for Policymakers
[v] Economist Intelligence Unit: The cost of inaction: Recognising the value at risk from climate change, April 2016