Climate Change

Introduction

"(In the 20th century) the global economy expanded 14 fold, energy use increased 16 fold, and industrial output expanded by a factor of 40. But carbon dioxide emissions also went up 13 fold, and water use rose 9 times."
(Environmental history of the 20th Century, John McNeill, 2003)

The sun's energy falls continuously on the earth. Some of this energy is reflected back into space by the earth’s atmosphere, but most of it passes through the atmosphere to warm the earth's surface. The energy from the earth’s warming is emitted as infra-red radiation, and is absorbed by water vapour, carbon dioxide, and other naturally occurring GHGs that hold heat in the atmosphere. All life depends on this natural greenhouse effect. If the GHGs did not slow down the release of the infra-red radiation back into space, the earth would be too cold to support life.

Since the industrial revolution, humans have been adding huge quantities of GHGs to those naturally in the atmosphere. As the concentration of these gases increases, they retain more heat energy. This has led to increases in average global temperature – widely known as global warming – and other major changes in the climate system. The Intergovernmental Panel on Climate Change (IPCC), a body of over 3000 leading scientists working in climate change research, stated in its 2001 report that ‘there is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities’. These changes are happening faster than any purely natural process, and the impacts are expected to be unprecedented. Higher temperatures combined with changes in rainfall and water run-off will profoundly affect both natural and human systems. Some of the changes predicted are reduced food security, loss of life due to catastrophic floods, homelessness, submerging of land due to sea-level rise, and increased deaths from diseases such as malaria. Countries with few resources will have the least capacity to adapt, and are the most vulnerable.

What human activities cause GHG emissions?

Carbon dioxide (CO2) is responsible for 70- 72% of the impact (IPPC 2001a), primarily through the burning of fossil fuels but also due to rapid deforestation. Methane (CH4) is responsible for about 20% of the GHG impact. It is released from fossil fuels (gas pipeline leaks and coal mines), from agriculture (rice and cattle farming), and industry. Nitrous oxide (N2O) is responsible for 6-7% of the GHG impact, through agricultural fertilisers, industrial processes and burning fossil fuels. The remaining trace gases come from industrial processes.

To confront this vast global problem, therefore, we have to change one of the most fundamental activities of industrial economies – the burning of fossil fuels. This means changing many aspects of our lives: transport systems, methods of generating electricity, how efficiently we use energy of all kinds, industrial and agricultural practices. Reducing the emissions of GHGs, or promoting their increased absorption by vegetation, is called mitigation.

The international community first acknowledged climate change as an important global issue in 1992, when it adopted the UNFCCC at the Rio de Janeiro Earth Summit. The Convention set targets for industrialised countries to stabilise their emissions, although these were not legally binding. Growing evidence of human influence on climate change and the possible irreversible nature of its impacts led the international community to adopt the Kyoto Protocol in 1997.

Climate change and climate change forecasts

During the recent past scientists have investigated the effect of emission of greenhouse gases on the environment.

Recent studies suggest that global warming may be more intense than previously assumed. They also support the theory that human interference with nature bears a large share of the responsibility for climate change. Most discussions about political measures related to climate change are based on reports prepared by the Intergovernmental Panel on Climate Change (IPCC), a panel of experts that was established by the United Nations more than ten years ago. The IPCC is considered the .world’s most reliable source of information on climate change and its sources (according to a statement by 17 national academies of sciences, including those of Germany, France, Italy, the UK, Australia and Canada published in Science, 17 May 2001).

Two things must be borne in mind when assessing the IPCC forecasts: First, they are moderate compared with estimates made by major re-insurers such as Munich Re and Swiss Re. Second, due to the very nature of climate change, any forecast regarding climate change can be nothing more than just that, a forecast, and is subject to considerable uncertainty. This uncertainty, of course, is related to the specific form of climate change (e.g. exact increases in temperatures and sea levels) and the effects of measures taken; the greatest uncertainty lies in predicting which measures, if any, will be taken in future. The phenomenon of climate change itself and its basic effects, however, are undisputed.

The IPCC notes that:

The global average surface temperature increased approximately 0.6°C in the 20th century. The 1990s were the warmest decade - and 1998 the warmest year – since measurements began in 1861. The increase in surface temperature in the 20th century is likely to have been greater than in any other century in over 1,000 years. They forecast that The global average surface temperature (implying regional variation) will rise 1.4-5.8°C between 1990 and 2100. The maximum and minimum temperatures will rise, the number of hot days will increase and the number of cold days and frost days is very likely to decrease over nearly all land areas.
Snow cover decreased approximately 10% since the late 1960s. Non-polar glaciers have retreated considerably and Arctic sea ice has thinned about 40% on average in the summer months over the last decade. They forecast: that the retreat of snow cover and sea ice in the Northern Hemisphere, of glaciers and ice caps will continue. In the most extreme case, the Greenland ice sheet and the ice of the western Antarctic would melt.
Global average sea level rose 10.20 cm in the last century. They forecast: Sea level will rise 9-88 cm in the 21st century.

In late 2003 the Pentagon commissioned study on the effects of Climate Change on the environment. The Pentagon report, commissioned by Andrew Marshall, predicts that "abrupt climate change could bring the planet to the edge of anarchy as countries develop a nuclear threat to defend and secure dwindling food, water and energy supplies."

Its authors -- Peter Schwartz, a CIA consultant and former head of planning at Royal Dutch/Shell Group, and Doug Randall of Global Business Network based in California -- said climate change should be considered "immediately" as a top political and military issue. Some examples given of probable scenarios in the report include:

- Britain will have winters similar to those in current-day Siberia as European temperatures drop off radically by 2020, and by 2007 violent storms will make large parts of the Netherlands uninhabitable and lead to a breach in the acqueduct system in California that supplies all water to densely populated southern California
- Europe and the United States become "virtual fortresses" trying to keep out millions of migrants whose homelands have been wiped out by rising sea levels or made unfarmable by drought and "catastrophic" shortages of potable water and energy will lead to widespread war by 2020.

The report indicates that the threat to global stability "vastly eclipses that of terrorism". The author adds that taking environmental pollution and climate change into account in political and military strategy is a new, complicated and necessary challenge for leaders.

Another study published in August of this year, published in the Proceedings of the National Academy of Scientists, focused on California because of its diverse climate, large economy, agricultural interior, and profuse pollution from industries and population centers. The researchers used computer models they said illustrate the consequences of doing nothing, or adopting "relatively aggressive" policies such as the greater use of renewable energy sources rather than fossil fuels.

The 19 scientists who prepared the report include experts from Stanford University and the University of California, Berkeley, along with consultants and members of the Union of Concerned Scientists.

"The report states that if [we] do not take action now to reduce emissions of greenhouse gases, the consequences for California after about 2050 will become significantly more harmful than if we do take action now.

Under the most optimistic computer model, periods of extreme heat would quadruple in Los Angeles by the end of the century, killing two to three times more people than in heat waves today; the Sierra Nevada snow pack would decline by 30% to 70%; and alpine forests would shrink 50% to 75%.

The most pessimistic model projects five to seven times as many heat-related deaths in Los Angeles, with six to eight times as many heat waves. Snow pack and high altitude forests would shrink up to 90%.

The scientists' temperature projections are higher than previous estimates, particularly in summer. Their predictions of an extreme decline in snow pack, alpine forests and the spread of desert areas all exceed earlier projections.

Among other predictions, the report says spring melt-off will come earlier, increasing the risk of flooding and decreasing how much snow-melt could be captured in reservoirs. The state will rely more on increasingly scarce groundwater, even as droughts become more frequent and more severe.

On a less sober note, the state's renowned wine industry could suffer everywhere except on the coast, the scientists say — countering previous projections that at least the wine might improve.

Climate change and the financial markets

Investors, too, seem to be realising that climate change is not just an academic playground, but something that could indeed severely affect the value of and returns on their investments.

The Carbon disclosure project is a forum representing over 95 institutional investors comprising assets in excess of $10 trillion. Commencing in 2002 these investors are signatories have been signatories to a request for disclosure of investment relevant information relating to the risks and opportunities presented by climate change.

Key findings of the 2004 report include:

The mainstream investment community has woken up to the financial implications of climate change; signatories to CDP increased by over 250%. Analysts and fund managers are starting to see risks and opportunities take shape. Assessing climate change is now becoming part of smart financial management.
The social and economic costs of climate change began to emerge: in 2003 weather-related disasters cost $70 billion and a European heat wave killed 20,000 people. The number of natural disasters recorded by reinsurance companies reached a historical peak. More extreme weather events should be expected in the future.
The effects of this will be felt in key sectors and commodity markets – notably, the power, energy, insurance, transportation, heavy manufacturing and building/infrastructure industries, and the crude oil, gasoline, grain, soy and wheat markets. The application – and bundling together – of weather derivatives, catastrophe bonds and other environmental financial risk-hedging instruments is turning into a viable, but underutilized, risk-management option for many firms.
Companies are likely to face increased pressure from financial market authorities, fiduciaries, company officers and accounting bodies to deal with climate risk factors. 'Generally Accepted Carbon Accounting Principles' – ‘GACAP’ – appear likely to emerge.
Legislation designed to put a price on carbon accelerated in 2003/4 throughout the OECD. The 2004 global carbon market could reach $480m (c400m). Weather, GHG and green power markets are converging to broaden risk management options. Certain industrial sectors and commodity markets will experience greater volatility; wholesale electricity prices will impact profitability; adaptation to this ‘new normalcy’ will be required.
More FT500 firms now see opportunities in the ‘clean tech’ sector. Investment in the sector has quadrupled to $2.5 billion over the past 2 years.
Mainstream pension trustees, analysts, bankers, insurers and fund managers have begun to appreciate the implications of climate change and greenhouse gas (GHG) policies in financial terms. No longer can fiduciaries claim to be unaware of what is at stake. Taking climate risks into account is now becoming part of smart financial management. Failure to do so may well be tantamount to an abdication of fiduciary responsibility. FT500 firms can expect to come under greater pressure from shareholders as a result.
Carbon finance is now a reality. Legislation favouring a shift to a low carbon intensity economy is now a fact of life for FT500 companies across the EU as well as in many parts of the US, Japan, Australia and Canada. In January 2005, over 14,000 entities will begin trading carbon in what promises to be the largest, most liquid carbon market in the world: the EU Emissions Trading Scheme (ETS). Approximately 29% of the FT500 companies contacted through the CDP are located in countries that are included in the EU ETS. In the US, more than 20 states have passed or proposed legislation on CO2 emissions, or have developed carbon registries, sequestration studies and similar measures.

Research groups within leading investment banks have started to take notice of Climate Change and have started to adjust stock ratings and sector weightings as a result of the impact.

WestLB Panmure have predicted, based on a set of macroeconomic scenarios, we estimate a Market Value at Risk (MVaR) for the world.s equity markets of between $192bn and $915bn (using a target stabilisation level for atmospheric CO2 concentration of 450 ppm [parts per million] and a discount rate of 5%).

DKNW have predicted that Carbon Liabilities as a result of the carbon liability introduced by the EU Directive on CO2 emissions will change the merit order of the leading European energy firms and could result in a price shock of up to thirty percent to some of the larger electricity generators.