Aug 23, 2019 | Global Documents |
9-317-032 R E V : J A N U A R Y 3 0 , 2 0 1 8 Professors Rebecca M. Henderson and Sophus A. Reinert, Polina Dekhtyar (MBA 2016), and Case Researcher Amram Migdal (Case Research & Writing Group) prepared this note as the basis for class discussion. Copyright © 2016, 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800- 545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. R EBEC C A M . H END ER S O N S O P H U S A . RE I N E RT P OL I N A D E KH T Y A R AM R AM M I G D AL Climate Change in 2018: Implications for Business [The Department of Defense] recognizes the reality of climate change and the significant risk it poses to U.S. interests globally. The National Security Strategy, issued in February 2015, is clear that climate change is an urgent and growing threat to our national security, contributing to increased natural disasters, refugee flows, and conflicts over basic resources such as food and water. These impacts are already occurring, and the scope, scale, and intensity of these impacts are projected to increase over time. — United States Department of Defense, July 20151 The risk of large-scale climate change is one of the central issues facing the world. There is widespread consensus among the scientific community that the Earth is warming, that this warming is caused by human emissions of greenhouse gases (GHGs), and that the consequences of continued warming are likely to be severe. There is also global concern about the issue: in a recent Pew poll, majorities in all 40 nations polled said that climate change was a serious problem, and a global median of 54% said that it was a very serious problem. But there is widespread disagreement about what—if anything—should be done in response. While many economists believe that the benefits of reducing global emissions greatly exceed the costs, there is only partial agreement as to what exactly should be done, how quickly it is appropriate to act, and who should pay the costs. Some people, particularly in the United States, reject the scientific consensus altogether. Others fear that many of the proposed solutions will be expensive and inefficient, or that the free riding problems inherent in reducing emissions—namely, that everyone benefits while particular nations, firms, or individuals must bear the costs—will make it impossible to substantially reduce the risk of significant global climate change. As a result, the risks of climate change—and the costs and regulatory changes that these risks may drive—are emerging as central issues for the private sector. Some business leaders see climate change as a threat to their firms’ viability. Others see opportunity in promoting technologies that will mitigate the risk of climate change by reducing GHG emissions or by helping the world in adapting to its effects. Some are actively lobbying against government action, while others are lobbying for industry, state, and global carbon policies. This note attempts to summarize what is known about the causes, current impacts, and likely future consequences of climate change; to outline the current debate about what should be done; and to explore the implications for the private sector. 317-032 Climate Change in 2018: Implications for Business 2 An Introduction to Climate Change The Earth’s average temperature has been increasing since the Industrial Revolution. Between 1880 and 2015, average global surface temperatures rose by 0.9°C (1.5°F) (Exhibit 1).2 In 2016, the Earth experienced its third consecutive hottest year since recordkeeping began.3 There is broad consensus in the scientific community that this warming has been largely driven by increases in atmospheric GHGs, particularly carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O). (Emissions of GHGs are often measured in equivalent units of CO2 emissions, or CO2eq, by indexing the 100-year global warming potential of each gas to that of CO2.)4 GHG emissions have been growing since the Industrial Revolution and were 60% higher in 2014 than they were in 1990 (Exhibit 2).5 Since 1880, atmospheric CO2eq concentrations have risen from around 290 ppm to 430 ppm.6 The primary sources of year-on-year GHG emissions are the “burning of fossil fuels (coal, oil, and gas), with important contributions from the clearing of forests, agricultural practices, and other activities.”7 Specifically, fossil fuel consumption for electricity and heat production generates about 25% of total GHG emissions; industry 21%; transportation 14%; other energy 10%; and buildings 6%; while agriculture, forestry, and other land uses (AFOLU) contribute the remaining 24% of total GHG emissions (Exhibit 3).8,9 In 2016, fossil fuels provided 81% of global energy supply—a trend that is expected to continue (Exhibit 4).10 Emissions vary widely across countries, and developing countries are predicted to drive emissions increases going forward (Exhibit 5). Higher levels of atmospheric GHGs raise temperatures by increasing radiative forcing, or the amount of energy arriving on Earth’s surface (Exhibit 6).11 Higher GHG concentrations increase the amount of radiation caught by the atmosphere and redirected back toward the surface. The difference between the rate at which energy arrives on the Earth’s surface and the rate at which it radiates back is the net heating, with this heat accumulating at and below the surface of Earth’s oceans, land, and ice. Currently the Earth retains approximately 816 terawatts of excess heat per year, or more than 50 times the world’s entire energy consumption.12,13 Evidence of this retained heat is discernible in observations that document Earth’s rising surface temperatures, warming oceans, and melting ice.14 Nearly 200 nations have formally acknowledged in joint statements and international agreements that human activity is responsible for global climate change, including the national academies of Brazil, Canada, China, France, Germany, India, Italy, Japan, Russia, the United Kingdom, and the U.S.15 About 97% of climate scientists agree that human activity is causing climate change.16,17 Some observers claim that climate change is not a man-made phenomenon, blaming factors such as solar cycles (variations in the amount of energy reaching the Earth from the sun) or volcanic activity for recent increases in temperature.18 Others allege that scientists lack consensus or that global temperatures have cooled.19 However, variations in the sun’s radiation are small relative to surface forcing associated with GHGs, and the dominant 11-year cycle in solar output barely registers in global temperatures. In addition to the changes in ocean, ice, and surface temperatures, the pattern of warming as a function of latitude and elevation in the atmosphere allows for fingerprinting human-caused effects.20 Climate skepticism, in the sense of raising doubt about the fundamentals of the science, is more prevalent in the U.S. than in other developed nations (Exhibit 7).21 There is little debate about the reality of global warming beyond U.S. boundaries, even amongst conservative political parties in nations such as Sweden (Moderaterna), Canada (Conservative Party), the U.K. (Conservative Party), and Germany (CDU).22 Predicting how GHG emissions are likely to evolve and the resulting changes in Earth’s temperature is a complex undertaking, fraught with uncertainty. In response, the United Nations (UN) Environmental Program and the World Meteorological Organization created the Intergovernmental Panel on Climate Change (IPCC) in 1988 “to prepare, based on available scientific information, Climate Change in 2018: Implications for Business 317-032 3 assessments on all aspects of climate change and its impacts, with a view of formulating realistic response strategies.”23,24 Scientists are independently nominated for participation by their own governments, and in 2016 over 2,000 scientists from 154 countries participated in the IPCC process.25 By 2016, CO2 concentrations in the atmosphere were 404 parts per million (ppm), the highest levels in 400,000 years and up almost 7% since 2007 (Exhibit 8).26 The IPCC’s states that, if no additional efforts are taken to mitigate the effects of climate change, CO2eq concentrations are likely to increase to approximately 450 ppm by 2030 and between 750 ppm and 1,300 ppm by 2100.27 If this occurs, by 2100 the planet may experience global mean surface temperature increases of 3.7°C to 7.8°C (6.7°F to 14°F) compared to pre-industrial levels.28,29 (See Exhibit 9.) However, many scientists stress that such estimates are probabilistic and that temperature increases could be either much greater or—perhaps—smaller (Exhibit 10). Most of the uncertainty involves the upper estimates of possible warming, because temperature changes in response to increased radiative forcing are bounded near zero on the low end but are essentially unbounded on the high end. The reason for this asymmetric uncertainty is the presence of positive feedback loops. For example, global warming reduces the amount of snow and ice covering Earth’s surface. Since snow and ice reflect more sunlight back into space than does exposed land, this reduction further accelerates the rate of global warming.30,31 Similarly, higher temperatures are causing the melting of the permafrost that covers 24% of the Earth’s Northern Hemisphere. The permafrost contains an estimated 1,400 gigatonsa (Gt) of trapped carbon, between 33 and 114 Gt of which could be released by 2100 if the rate of thawing continues, compared to a total of 850 Gt of carbon already in the atmosphere and anthropogenic carbon emissions of about 10 Gt per year.32,33,34,35 One issue that concerns many scientists is that many of global warming’s impacts have unfolded significantly faster than expected. For example, in 2007 the IPCC projected that global average sea levels would rise 0.6 meters (2 feet) by 2100, but in 2013 the prediction was revised to as much as 0.98 meters (3.2 feet), and then in 2016 revised again to up to 2 meters (6.6 feet).36 Similarly, the IPCC has historically underestimated the pace of Arctic sea ice decline. In 2007, models predicted the first ice- free Arctic summers could arrive nearly a century later, in 2100; but in 2012, the estimate was that this would occur in only 20 to 30 years.37 The actual pace of sea ice decline has turned out to be far quicker, “exceeding the worst worst-case scenario predicted in the 2007 IPCC report.”38 As of 2016, “[the] Arctic is on track to be free of sea ice this year or next for the first time in more than 100,000 years.”39 The Impacts of Climate Change Rising GHG concentrations are expected to have a wide range of effects, including: Rising sea levels As the world warms, sea levels rise, both because increasing temperatures cause ice fields to melt and because the oceans themselves are warming (and therefore expanding). Since around 1870, rates of global sea level rise (GSLR) have accelerated and are now about 3.5 mm (0.15 inches) per year.40 By 2100, sea levels are projected to rise by up to 2 meters (6.6 feet), depending on GHG emissions and the effects of warming air and ocean water on ice (Exhibit 11).41 Two thirds of the world’s largest cities are located in low-lying coastal areas, and increasing sea levels could submerge the land on which an estimated 470 million to 760 million people are living.42,43 A number of island nations—including 11 of the Solomon Islands—are already submerged or at risk a A Gt is 1 trillion metric tons (t), equivalent to 1,000 kilograms. 317-032 Climate Change in 2018: Implications for Business 4 of total destruction. By 2050, between 665,000 and 1.7 million people in the Pacific are expected to be forced to migrate due to rising sea levels, including the entire populations of islands such as Fiji, the Marshall Islands, and Tuvalu.44,45,46 In larger countries, such as Bangladesh and the Netherlands, a very large proportion of the population will probably be forced to relocate (46% and over 70%, respectively).47 By 2100, in the U.S. alone, barring a concerted mitigation effort, $238 billion to $507 billion worth of coastal property will likely be below sea level.48 Some U.S. cities, including Miami, Florida and Norfolk, Virginia, are in particular danger of inundation and increased flooding.49 Changing weather patterns and extreme weather Although it is difficult to link any single event directly to climate change, rising temperatures means that the atmosphere can hold more water vapor, allowing both for greater rates of rainfall and runoff when the air is saturated and for drier (more under-saturated) conditions otherwise.50,51 In other words, though overall rates of evaporation are not changing greatly, extremes in precipitation are becoming less frequent but more intense, and as a result rainfall patterns are shifting across the world.52 Since 2013, extreme drought has affected the Western U.S. In California, 2015 was the driest year on record, supplanting 2013; and 2014 had been the third-driest.53,54 Somalia, Kenya, and other East African countries have experienced below-average rainfall since the late 1990s, contributing to a 30% reduction in crop yields and famines in 2010, 2011, and 2016.55,56 There has also been an increase in the prevalence of hurricanes and other destructive weather events.57 For example, in 2013 the Philippines was hit by one of the worst typhoons in recorded history (Typhoon Haiyan), which led to over 6,000 deaths, displaced nearly 4 million people, and caused billions of dollars in damages.58 Pressure on water and food Food production is tightly coupled with water availability. As recently as 2014, just 16% of the Earth’s croplands were irrigated (as opposed to rainfed), but irrigated lands produced 36% of global harvest.59 As the Earth warms, the combination of shrinking glaciers, reduced snowpack, and increasingly erratic rainfall raises fears of shortages, particularly in the world’s most vulnerable regions.60 Water shortages in Pakistan and India, for example, threaten the viability of agriculture in the region.61,62 By 2030, overall demand for water may outstrip supply by 40%.63 And by the 2090s, without significant reductions in GHG emissions, the proportion of the global land surface in extreme drought could increase from 1% to 3% today to 30%.64 Global food production is also affected by warmer temperatures, increased CO2 levels, and extreme weather events.65 In some cases, increased CO2 or warmer weather may accelerate crop growth or increase yields; however, yields decline above an optimal temperature that varies by crop, and crops grown under high levels of CO2 yield less of nutrients such as zinc, iron, and protein.66 Furthermore, warmer weather allows pests, weeds, and parasites to thrive; extreme weather can be destructive to farmland, crops, and livestock; and rising sea levels can erode and salinize croplands.67,68 Political and security risks Climate change has been linked to increased political instability worldwide.69 When food prices rose sharply in 2007-2008, dozens of so-called “food riots” caused casualties in Argentina, Cameroon, Haiti, and India.70 Both the Somalian civil war and the Syrian civil war have been linked to drought and famine exacerbated by climate change.71 The U.S. military has suggested that climate change is “a salient national security concern,” which could redraw maps and spheres of engagement while compounding conflicts and resource constraints in some of the world’s already vulnerable countries, leading to further instability and even war.72,73 (See Exhibit 12 for a map of major disaster-related displacements in 2014.) Human health risks Higher temperatures increase the possibility of heat-related injury and death.74 As many as 70,000 people died in the 2003 European heat wave, and more than 50,000 died in a 2010 heat wave in Russia.75,76 Thousands more have perished in increasing and increasingly severe heat waves in India (2015), Europe (2006), and around the world.77 Water- and vector-borne diseases Climate Change in 2018: Implications for Business 317-032 5 are also projected to increase as insects and other carriers move into higher latitudes.78 For example, between 2000 and 2013, instances of Lyme disease in the U.S. doubled.79 A warmer atmosphere also increases the concentrations of smog (a lung irritant), while continuing to burn fossil fuels— particularly coal—can lead to millions of premature deaths. The burning of coal has been linked to tens of thousands of premature deaths in the U.S. annually, and the World Health Organization found that, in 2012, 7 million people worldwide died due to air pollution (Exhibit 13).80 Studies conducted to quantify economically the health impacts of climate change have suggested that the costs are substantial. According to research conducted by the Harvard T.H. Chan School of Public Health, the extraction, transportation, processing, and combustion of coal in the U.S. cause 24,000 excess lives lost annually due to lung and heart disease (evaluated at $187.5 billion per year) and 11,000 excess lives lost annually due to high health burdens in coal-mining regions (evaluated at $74.6 billion per year).81 Another study conducted by the EPA found that the health impacts of fossil fuel electricity in the U.S. totaled between $362 billion and $887 billion per year (representing 2.5% to 6.0% of GDP) due to premature mortality, workdays lost, and other direct healthcare costs.82 Impact on wildlife and ecosystems Climate change also significantly affects many natural habitats and puts many species at higher risk of extinction in the coming century.83 Observing that current extinction rates are 100 times the normal rate, some scientists predict that the Earth is headed for the sixth mass extinction event in its history.84,85 By 2100, 30% to 50% of the world’s land and marine animal species may be extinct.86,87 Climate change is also having significant effects on the oceans. Over the last 100 years, it has raised near-surface ocean temperatures by about 0.74° C (1.3° F) and made the sea significantly more acidic, likely affecting marine animals’ reproduction and survival.88,89,90 (Exhibits 14 and 15.) In some places, live coral coverage is only half of what it was in the 1960s, and scientists predict that the world’s coral reefs could be entirely extinct by 2050.91,92 As many as 1 billion people rely on the fish that live in coral reefs as their primary protein source.93 Responding to Climate Change: The Ongoing Debate The discussion of what should be done in response to climate change is complicated by two distinct but interrelated problems. The first is the sheer magnitude of the changes required to mitigate and/or adapt successfully to climate change, and the second is the global free riding problem that impedes consensus on who should pay for those changes. There is general agreement in the scientific community that global warming needs to be limited to 2°C (3.6°F) above pre-industrial levels by the end of the 21st century in order to avoid potentially dangerous impacts.94 This probably requires atmospheric concentrations of CO2eq, which in 2016 were estimated to be around 430 ppm, to remain below 450 ppm.95,96 Keeping the Earth within the 2°C limit thus requires urgent action (Exhibit 16).b In general, reducing emissions requires action on three fronts: greatly increasing the efficiency with which energy is used; “decarbonizing” the world’s energy system through the use of renewable energy b For all the comforting predictability implied by the graphs, charts, and proposals of international climate assessment reports, if climate change unfolded as forecast under some CO2 emissions scenarios, no one really knows what would happen. Harvard economist Martin L. Weitzman has argued that “the most striking feature of the economics of climate change is that its extreme downside is non-negligible. Deep structural uncertainty about the unknown unknowns of what might go very wrong is coupled with essentially unlimited downside liability on possible planetary damages.” See his “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change,” Review of Environmental Economics and Policy, vol. 5, issue 2, 2011, pp. 275, http://reep.oxfordjournals.org/content/5/2/275.abstract, accessed September 2016. 317-032 Climate Change in 2018: Implications for Business 6 or carbon capture; and changing land use and management. The Carbon Mitigation Initiative at Princeton University suggests that it is useful to think about the magnitude of the changes that are required in terms of “wedges,” where each wedge represents a carbon-cutting strategy that has the potential to avoid 1 billion tons of carbon emissions per year by 2060, or about one eighth of what is required to stabilize global emissions. The Carbon Mitigation Initiative presents a menu of 15 wedges, including “cutting emissions by 25% in all new and existing residential and commercial buildings” and “adding new nuclear electric plants to triple the world’s current nuclear capacity,” that if taken together would keep emissions at or below levels seen in 2000 (Exhibit 17).97 Improvements in energy efficiency Reducing energy demand through conservation and innovation appears to be a particularly promising means of reducing GHG emissions. For example, between the mid-1980s and 2015, energy efficiency standards and labeling for appliances and a broad range of products in the U.S., U.K., Australia, and other nations reduced the energy consumption of these products by 10% to 25%.98 In 2015, such measures saved consumers and businesses in the U.S. about $40 billion.99 A National Academies study concluded that while using LEED-Silver or equivalent standards in the construction of new buildings increased the costs of initial construction by up to 8%, energy costs would be reduced by between 5% and 30% over the life of the building.100 A report from the UN Foundation estimated that an investment of $3.2 trillion worldwide in energy conservation would avoid new supply investments of $3 trillion and would pay for itself within three to five years.101 Since most energy use occurs in cities with rising populations, policies that encourage residential density, localized employment opportunities, diversified urban land use, and public transportation are particularly important.102 Behavioral changes can also have a tangible impact. For instance, McKinsey estimates that changes such as driving smaller cars could reduce fuel demand by about 10% in 2030.103 The International Energy Agency (IEA) estimates that around 40% of the reductions required by 2050 104 could potentially come from increased energy efficiency. Moving away from fossil fuels Keeping GHG concentrations in the atmosphere below 450 ppm requires either the development of the ability to capture CO2 directly from the atmosphere at scale and/or moving away from coal, natural gas, and oil toward hydro, nuclear, solar, and wind power.105 In 2014, the world used an average of 16 to 18 terawatts (TW) of power at a given moment.c About 28.6% of this energy was supplied from coal, 31.1% from oil, 21.2% from natural gas, and 4.8% from nuclear.106 Biofuels and waste made up 10.3%, hydro 2.4%, and “other” renewables—geothermal, solar, wind, etc.—made up 1.4%.107 Despite its tiny market share, solar energy has been frequently cited as a promising contender to fossil fuels. A key reason is that the experience curve (or learning curve) of solar photovoltaic (PV) modules has been shown to be about 20%, meaning that the price per module drops by about 20% every time the cumulative production of PV modules doubles.108 Are solar and wind energy already competitive against fossil fuels today? In some parts of the world, at some times of day, the answer is almost certainly yes. In 2015, the average retail price of electricity was $0.1267 per kWh for residential, $0.1059 per kWh for commercial, and $0.689 per kWh for industrial customers.109 In areas such as the Southwest U.S. and North Africa, unsubsidized utility- scale solar PV can cost between $0.05 per kWh and $0.07 per kWh.110 The cost of land-based wind power declined from $0.55 per kWh in 1990 to between $0.04 and $0.06 per kWh in 2016 (Exhibits 18 and 19).111 Some analysts believe that wind is currently the cheapest source of power in about one third c A note about “watts” (W) versus “watt hours” (Wh): The watt is a measure of power, or the rate at which energy is generated or consumed. For example, the Three Gorges Dam has a power-generating capacity of 22,500 megawatts (MW). The watt hour is a measure of the amount of energy. The annual energy output of power stations is given in this measurement. For example, in 2014 the Three Gorges Dam generated 98.8 terawatt-hours (TWh) of electricity. When a light bulb with a power rating of 100 W is turned on for one hour, the energy used is 100 Wh or 0.1 kilowatt hours (kWh). Climate Change in 2018: Implications for Business 317-032 7 of the US.112 Moves toward increased use of solar and wind are complicated by the fact that, as of 2016, neither solar nor wind can provide baseload (or continuous) power.113 Deploying wind and solar at scale thus requires significant advances in energy storage and the development of a smart grid to redirect excess power over long distances.114 Opinions differ as to how soon this will be feasible and how much it will cost, but some analysts believe that it is likely the U.S. will be able to decarbonize its energy system by 2050 (Exhibit 20).d Expanding nuclear power is another option, in particular through the accelerated diffusion of so called “fourth generation” nuclear power: recent developments hold the promise of significantly reducing the capital costs associated with building nuclear power reactors while also making them safer and reducing their waste production.115 In addition, transportation is responsible for 26% of U.S. CO2 emissions, making it the second largest source behind electricity (30%).116 Efforts to reduce emissions from the sector include substantial investments in both biofuels and electric vehicles. Changes in agricultural, forestry, and other land use practices Changes in land use also have the potential to be an important factor in reducing carbon emissions.117 For example, from 2000 to 2005, the burning of tropical forests accounted for 7% to 14% of all anthropogenic CO 118 2 emissions. Because forests act as sinks that remove carbon from the atmosphere and place it in the ground, the destruction of those forests accelerates the pace of climate change.119 Biochar—charcoal added to soil to enhance crop yields and nutrition—is one potential means of reducing GHG emissions while simultaneously improving soil health.120 Rather than burning agricultural and forestry waste, a source of enormous GHG emissions, waste biomass could be converted to biochar, which stores carbon in soil for thousands of years.121 Other changes in agricultural practices aim to reduce methane emissions from livestock, which account for 14.5% of global CO2eq emissions.122 One possible solution is the use of feed additives, which could reduce these emissions by 25% to 30%.123 The U.N. Food and Agriculture Organization estimates that changes in practices “within existing [livestock agriculture] production systems could cut agricultural emission by about 30%.”124 Geoengineering Some scientists claim that geoengineering, or intentionally interfering in the world’s climate systems, is a possible solution to mitigating climate change.125 They suggest exploring possibilities like injecting sulfates into the atmosphere, where their high reflectivity would stop up to 1% of the sun’s radiation from reaching the Earth’s surface.126 One plan in the U.K. involves pumping “water nearly a kilometer up into the atmosphere, by way of a suspended hose” attached to a “stadium- size hydrogen balloon” in the stratosphere, 20 km above the Earth.127 The plan, called Stratospheric Particle Injection for Climate Change (SPICE), is meant to test the feasibility of one day spraying sulfate particles in place of water.128 SPICE and other geoengineering ideas were inspired by studying the atmosphere-cooling effects of volcanic eruptions, such as the Mount Pinatubo, Philippines eruption of 1991, which “spewed 20 million tons of sulfate particles into the atmosphere, cooling Earth by 0.5 degree Celsius for 18 months.”129,130 Preliminary estimates suggest that geoengineering could be relatively cheap, although it would have to be maintained continuously in order to control the Earth’s temperature.131 However, this suggestion is hugely controversial. There are concerns that we have very little understanding of what the widespread distribution of sulfates might do and fear that they will damage the ozone layer, lead to drought, and possibly “disrupt the Asian and African summer monsoons, reducing precipitation to the food supply to billions.”132 d See Chris Goodall, The Switch (London: Profile Books, 2016). 317-032 Climate Change in 2018: Implications for Business 8 The Debate: Who Should Pay and How Much Should Be Spent At the highest level, several studies suggest that the costs of mitigating the effects of climate change are likely to be much lower than the costs of leaving it unchecked. For example, the IPCC estimated that keeping GHG emissions to a level that offers a 66% chance of not exceeding 2°C warming would cost 3% to 11% of world GDP by 2100, while leaving global warming unchecked might cost 23% to 74% of global per capita GDP by 2100 in lost agricultural production, health risks, flooded cities, and other major disruptions.133,134 One approach to this question is through attempts to calculate the “social cost of carbon” (SCC), a measure designed to capture the economic damages caused by carbon emissions and usually expressed as an estimate of the damages caused by burning one ton of carbon. SCC values project the impact of carbon emissions far into the future, so they are sensitive to discount rates and to assumptions about how climate damages are likely to unfold. In 2015, the U.S. government estimated that the SCC was $36 per metric ton of CO2., using a discount rate of 3%(Exhibit 21).135 This value suggests, for example, that the social costs of burning coal are significantly greater than the entire coal industry’s revenues. The two most common types of coal in the U.S. cost $14.72 and $55.99 per ton at the mine, respectively; and each ton of burnt coal emits 1.7 t and 2.2 t of CO2, respectively.136,137,138 The International Monetary Fund concluded that in 2013, fossil fuels caused $1.1 trillion in environmental and economic damages from climate change (1.5% of world GDP) and $2.2 trillion in health damages from pollution (3% of world GDP).139 In the U.S. alone, fossil fuels led to $186 billion in climate change damages and $180 billion in pollution damages (each 1.1% of U.S. GDP).140,141 (In 2010, the U.S. spent over $800 billion on coal, natural gas, and petroleum.)e,142 The fact that the benefits of addressing the problem of climate change almost certainly outweigh the costs—and that the effects of increased emissions are likely to last for thousands of years and affect the wellbeing of billions of people yet to be born—does not make concerted global action to address the problem easy. Indeed climate change is a difficult problem because addressing it requires dealing with (at least) three thorny issues: discount rates, free riding, and global geopolitics. Discount rates How much do we value GDP 100 years in the future? If we apply a discount rate based on the conventional cost of capital of 7% to 8% the answer is “not very much.” For example, $1,000 discounted at 7% for 100 years is worth only $1.15 in 2016 dollars. Many have argued that this is the wrong calculation and that it cannot be correct to place essentially no value on the wellbeing of our children's children, but there is enormous debate about how fast it makes sense to attempt to respond to climate change.143 Analysis is complicated by the potential for technologies to become much cheaper in the future, just as solar panels have, and by the fact that climate change is already having major economic impacts. Hurricane Irene, for example, the storm system that hit New York City in 2011, caused around $15 billion or more in damage.144 The costs of the Syrian conflict are plausibly many times that, not to mention the loss of life of hundreds of thousands of people. Free riding Even given general agreement among nations that the costs of inaction outweigh the costs of action, addressing climate change still requires solving the free riding problem, or the fact that while the costs of reducing emissions must be incurred by particular firms, cities, or nations, the benefits will be experienced by everyone on the planet. GHG emissions are a classic “externality”: their e This estimate included expenditures in the residential, commercial, industrial, and transportation sectors but did not include expenditures on retail electricity or biomass. Climate Change in 2018: Implications for Business 317-032 9 emission imposes harm on the entire community, but the emitters themselves—absent some form of cooperative agreement or global regulation—have no incentive to reduce them.145 Global geopolitics This issue is further complicated by the fact that many of the countries that are most vulnerable to climate change—primarily poorer developing nations—are those with relatively small historical carbon footprints. Many of them argue that the countries whose cumulative actions have contributed most to climate change, the developed nations, should bear most of the responsibility for cutting emissions.146 This has proved to be a controversial idea, particularly as developing countries’ emissions have increased rapidly in line with their economic growth. Many developing countries have chosen to pursue cheaper but more GHG-intensive energy sources such as coal-fired power plants to foster development.147 Some experts believe that some developing countries may be able to “leapfrog” traditional energy-intensive development paths.148 Despite these formidable difficulties, the global community has been experimenting with a variety of mechanisms to address climate change. It is widely believed that the most effective way to reduce carbon emissions is to rely on market based mechanisms such as carbon taxes and/or cap and trade regimes.149,150 Cap and trade systems issue permits that allow companies to emit a certain amount of GHGs; those companies that emit less than their initial allotments are then allowed to sell their excess permits to companies that wish to emit more than their initial allotment. The U.S. Acid Rain program relied on a cap and trade mechanism and succeeded in reducing sulfur dioxide (SO2) emissions by 40% and acid rain by 65%. The estimated benefits of the program were $56 billion compared to costs of just $558 million.151,152,153 In contrast, a carbon tax places a predetermined price on every ton of CO2eq emitted into the atmosphere.154 An EIA study found that total U.S. emissions could fall by four fifths by 2040 if the U.S. imposed a $25 per ton carbon tax in 2014 and raised it by 5% every year.155 Both cap and trade systems and carbon tax programs seek to shape behavior by presenting the “real” external cost of emissions to firms and consumers.f,156 The first attempt to implement a global cap and trade regime to reduce GHG emissions was embodied in the Kyoto Protocol, which was adopted in 1997 and took effect in 2005.157 The agreement mandated that developed countries reduce their overall GHG emissions to 5% below their 1990 levels between 2008 and 2012.158 The Kyoto Protocol appears to have contributed to significant emissions reduction in the European Union but was never ratified by the U.S. and did not impose any obligations on developing countries such as China and India.159 More recently, annual UN climate change conferences have brought together world leaders to review and extend the Kyoto commitments, with varying results. In 2015, 195 countries signed an agreement at the Paris Climate Conference (also known as COP21). It was the first commitment by nearly all of the world’s nations to take steps to curb GHG emissions and keep temperature increases “well below” 2°C.160 In the absence of binding global commitments, some states and regions have experimented by imposing their own carbon taxes and cap and trade regimes. Norway introduced a countrywide carbon tax in 1991.161 Australia instituted a carbon tax in 2012 but repealed it the following year.162,163 A consortium of states including Connecticut, New York, and Massachusetts set up a cap and trade regime titled the Regional Greenhouse Gas Initiative.164 One study found that the program produced $1.6 billion in net value added and $16.1 billion in increased employment between 2009 and 2011.165 f Regulations that seek to directly shape behavior by mandating the use of energy efficient appliances can be effective tools for reducing energy consumption or supporting a shift to lower carbon fuels. Many studies have explored the conditions under which this is likely to be the case. Source: “Scientific Assessment of Ozone Depletion: 2006,” World Meteorological Organization, pp. 19, available at http://www.esrl.noaa.gov/csd/assessments/ozone/2006/chapters/ contentsprefaceexecutivesummary.pdf, accessed September 2014. 317-032 Climate Change in 2018: Implications for Business 10 California introduced a cap and trade system in 2013.166 The Canadian province of British Columbia instituted the only North American carbon tax in 2012.167 The tax, which was designed to be revenue neutral, brought in $1.1 billion in 2013.168 The tax has not had an adverse effect on the province’s competitiveness in the agriculture sector, although industries like cement manufacturing may have lost business.169 In December 2016, Prime Minister Justin Trudeau of Canada announced plans to introduce nationwide carbon pricing in 2018, which would set a minimum price of about $7.60 per metric ton on fossil fuels that would increase to $38 per metric ton in five years.170 A number of countries have experimented with a range of other policies designed to reduce emissions. Many have offered subsidies to offset the costs of developing and producing renewable energy, such as simple lump-sum rebates or grants typically provided at the beginning of a project. Such policies can help to level the playing field as many countries also continue to provide fossil fuel subsidies.171 For example, in 2015 China led the world with $103 billion in renewable energy investments, 36% of the world’s total,172 and in the same year over 20% of China’s energy generation came from renewable sources.173 Many American states have imposed renewable portfolio standards, mandating that a certain proportion of electricity supply must be generated from renewable sources.174 Congestion charging has led to significant reductions in car usage in places such as Singapore, London, and Stockholm. Tax credits have been used to incentivize investments such as renewable energy projects or residential efficiency improvements; and performance standards mandating the use of lower-energy technologies are found in many countries (Exhibit 22).175 Implications for the Private Sector The challenge of climate change presents both wide-ranging threats and opportunities for the private sector. On the one hand, public support for some form of carbon regulation appears to be quite strong (Exhibit 22), and government action to mitigate climate change poses a significant threat for some firms. The immediate effects of climate change are already threatening the viability of existing business practices in agriculture, infrastructure, and construction. But climate change also opens up opportunities. For example, 45% of consumers are willing to pay more for a product “from a company known for being environmentally friendly,” and the percentage of those willing to pay more for environmentally friendly products is highest among younger consumers.176 Investment in sustainable energy technologies also is sometimes helping companies save on costs. For example, 25% of Wal-Mart operations are powered by renewables, and the company claims that from 2005 to 2016 its stores reduced energy use by 20% for a total savings of $1 billion.177 Climate change as a threat to business as usual In the agricultural sector, widespread concern that climate change threatens the supply of key commodities such as tea, fish, and cocoa has led some of the largest firms to adopt sustainable farming and fishing practices. Many of the world’s largest food companies believe this threat is compounded by the risk that being seen to contribute to climate change will increasingly become a public relations liability.178 For example, in response to NGO accusations that they were contributing to deforestation, McDonald’s spearheaded industry-wide efforts to preserve the Amazon rainforest; Unilever helped to found the Roundtable for Sustainable Palm Oil; and Kimberly Clark committed to sourcing 50% of wood fiber from natural growth forests by 2025.179,180,181 In the insurance industry, some firms, such as Swiss Re and Prudential, have incorporated climate change into their product offerings, for example with “pricing plans that account for potential climate impacts like storms and fires” or by declining to offer policies for properties at risk of coastal erosion attributable to climate change.182 Climate Change in 2018: Implications for Business 317-032 11 Some companies have responded by including a carbon price in calculations used to make investment decisions. In 2016, 437 large companies reported using “internal carbon prices” (up from 150 in 2014) and 583 more stated that they intend to implement internal carbon pricing by 2018.183 For example, in 2012 Microsoft began charging individual business groups that used Microsoft services for their carbon use; by 2014, the internal carbon price completely offset Microsoft’s energy consumption, reducing GHG emissions by 7.5 million tons and saving the company over $10 million. One sources suggested that “carbon is expected to converge at $140 per ton of CO2 by 2030 and $400 by 2050. In a 1.5-degree scenario, these costs would be considerably higher.”184 The increasing likelihood that the world may adopt some form of global carbon regulation may also have significant implications for financial markets. Several observers have argued that current equity prices reflect a “carbon bubble,” noting that if the world decides to keep atmospheric carbon concentrations below 450 ppm, the world’s balance sheets hold energy reserves containing over twice the amount of carbon than would be burned. They suggest that this implies that current valuations do not take account of the threat that these assets and capital investments will be “stranded.” One bank estimated that 40% to 60% of the current market value of the oil and gas sector may be at risk and noted that the top 200 companies in the sector have a total market value of $4 trillion.185,186 Some of the largest firms in conventional energy have reacted to the threat of regulation by attempting to discredit climate science. For example, between 2007 and 2015, ExxonMobil contributed $1.87 million to politicians who deny climate change and an additional $454,000 to the American Legislative Exchange Council, a corporate lobbying group that impedes efforts to fight climate change.187 Some accounts suggest that Charles and David Koch, whose businesses generate $100 billion in annual revenues from fossil fuels and other related industries, have spent over $88 million to deny the science and block regulation.188,189 Climate change denier organizations often follow a multi- pronged strategy that involves objecting to scientific data, funding seemingly academic front organizations, promoting “scientific spokespeople,” declaring the need for more research regardless of the consensus, and lobbying government officials to prevent regulations.190 A Union of Concerned Scientists report found that many of these tactics (and some of the people) were borrowed from the tobacco industry’s earlier attempts to cast doubt on the scientific proof that smoking led to cancer.191 Mitigation and adaptation: the opportunities Climate change also presents the private sector with a number of opportunities in mitigation and adaptation. According to data from Bloomberg New Energy Finance, in 2015 total investments in clean energy reached a global record of $286 billion, more than six times the 2004 total.192 New solar and wind capacity composed about half of all new energy generation.193 In transportation, electric cars (both battery electric and plug-in hybrids) are projected to grow rapidly in the next 25 years. In 2015, only about 550,000 new electric cars were registered worldwide, less than 1% of the global total of 66 million passenger cars sold.194 However, some estimates show that in 2040, sales of electric cars would hit 41 million units, making up 35% of all light duty vehicle sales. A key reason is that the price of electric vehicle batteries are expected to drop significantly (the learning curve of lithium-ion batteries is about 22%); and by 2022 electric vehicles are expected to be at price parity with conventional internal-combustion cars.195,196 In 2015, Tesla Motors, the leading American electric vehicle company, had sales of only $4 billion, but its market capitalization in June of the same year was half that of General Motors—a firm whose 2015 sales were $152 billion.197,198,199 In urban planning and infrastructure, so-called “smart city” solutions might help urban centers reduce carbon emissions and be more energy-efficient. For example, Denmark operates district heating 317-032 Climate Change in 2018: Implications for Business 12 schemes—essentially large boilers that produce heat for whole neighborhoods through a networks of pipes—to reduce fuel consumption by capturing and redistributing heat that would have otherwise been dissipated. These underground pipes also combine heat transferred from industrial factories, incinerators, and transport systems. Such district heating solutions could help other cities significantly: One engineering firm estimated that in London, recapturing wasted heat could power 70% of the city's heating needs.200 Other urban planning techniques to reduce fuel consumption include the preservation of green space (which would help sequester GHGs) and putting homes, shops, jobs, schools, and other destinations closer to public transportation.201 In industry and manufacturing, mitigation and adaptation opportunities can help firms save costs and reap competitive advantages. For example, technology companies can build new server centers in cold locations to lower cooling costs, and energy-intensive firms can consider relocating to locations where they can access cheap utility-scale solar energy.202 Schneider Electric, a $29 billion revenue global energy giant, recently repositioned itself as the “global specialist in energy management,” aiming for 75% of its product revenue to be derived from products featuring its “Green Premium”TM eco- label.203,204 In construction, new buildings are increasingly designed with better energy efficiency. LEED project registrations have grown by about 2,200 registrations each quarter, even during the 2008-2009 real estate crisis.205 The energy efficient light bulb business is now a $170+ billion industry,206 while Johnson Controls had 2015 revenues of over $10.5 billion in its building efficiency business.207,208 In agriculture, firms that specialize in technologies to increase water supply or to increase its usage efficiency are expecting significant market expansion. The micro-irrigation market was valued at $1.9 billion in 2013 and is projected to grow at a CAGR of 17.2% from 2014 to 2019.209 Looking to the Future Climate change is a systemic issue that has far-reaching consequences for global health, security, and prosperity. But despite continued efforts, the world’s emissions continue to increase, and 2016 was the hottest year on record for the third consecutive year.210 Climate change mitigation will require a concerted global effort to enact systemic change, and many questions remain as to what shape such an effort should take. Should developed and developing nations be expected to participate equally in climate change reduction? How
Scientific evidence for warming of the climate system is unequivocal.
- Intergovernmental Panel on Climate Change
The current warming trend is of particular significance because most of it is extremely likely (greater than 95 percent probability) to be the result of human activity since the mid-20th century and proceeding at a rate that is unprecedented over decades to millennia.
Earth-orbiting satellites and other technological advances have enabled scientists to see the big picture, collecting many different types of information about our planet and its climate on a global scale. This body of data, collected over many years, reveals the signals of a changing climate.
The heat-trapping nature of carbon dioxide and other gases was demonstrated in the mid-19th century. Their ability to affect the transfer of infrared energy through the atmosphere is the scientific basis of many instruments flown by NASA. There is no question that increased levels of greenhouse gases must cause the Earth to warm in response.
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