Risky Business – Is the Carbon Shock Imminent?

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The only sure thing in how climate change will unfold in politics and the economy is that it will happen in surprising and unexpected ways. This reliable fact has been on my mind as I’ve worked with investment and risk expert, Phil Preston, on a major new paper we are releasing today that looks at carbon investment risk through the lens of climate science.

We examined whether the tipping point for the now inevitable economic transformation could occur in financial markets rather than in the world of politics or public opinion. This is the opposite of what most people expect – they assume that regulation and the pricing of carbon will be the trigger for market shift. But what if markets move first by pricing in risk and what if they do so more quickly and more dramatically than anyone expects?

In considering this possibility, Phil and I focused on the most important issue facing investors with carbon risk  – the vexed issue of timing. While collapse in value is a huge issue for companies, it doesn’t really matter for an investment manager if they can pragmatically assess the risk and get out before a price collapse. Timing is really the only key unknown with climate risk because any dispassionate investor knows that carbon exposed assets, particularly coal companies, will drop in value at some point. This is inevitable because for CO2 emissions to fall at the scale science demands, it requires governments to phase out our use of coal, oil and gas well before discovered reserves are used up. But the question is when?

There are two aspects to the timing. Firstly will this value collapse occur suddenly over months or gently over 20 years and secondly, will it start soon or is still decades away?

We started by looking at what the scientists were saying, as this is the underpinning of everything else. Politics and markets work to human emotions and beliefs, which means change is influenced by negotiations, delays and preferences. Science doesn’t work like that. The rules of physics, chemistry and biology are set in stone and don’t negotiate with us. What the science says is that allowing 2 degrees of global warming above pre-industrial levels is a step too far. It takes us into territory where system wide feedbacks could spiral out of control and threaten the stability of the global economy, perhaps even civilisation. Some argue even 2 degrees is way too high, noting this would still involve catastrophic impacts such as the likely loss of all coral reefs, quite considerable sea level rise, increased extreme weather and unstable food supplies. The fact that governments consider all that to be manageable just emphasises how bad going past 2 degrees is.

So responding to the science, all the big emitters including the US, China, EU and India have agreed that 2 degrees is the line in the sand we must not cross. This is not a radical view, having been endorsed by the likes of GE, HSBC and Rio Tinto and hundreds of other corporations at the Copenhagen climate conference. So we concluded 2 degrees was the rational basis for assessing economic and financial market impacts of climate change, particularly in terms of timing.

The next question then becomes what will achieving this goal require society to do? The highly respected Potsdam Institute for Climate Research provides the most useful basis from which to answer this question. They developed a “carbon budget” – how much CO2 in total can we put in the atmosphere if we want to limit warming to 2 degrees? Their answer was framed in probabilities, recognising as a society we will ultimately have to make a decision on how much risk we want to take. This is an interesting question – if 2 degrees of warming represents an unacceptable risk of a runaway climate and global collapse, how much risk do we want to take? Phil and I thought “not very much at all” would be a good answer! Maybe 5%?

But we ended up using their analysis that accepted a 20% chance of going past 2 degrees, recognising this was probably a real world assessment of where the politics will end up. Potsdam also gave the option of 50% but this seemed highly unlikely given the consequences of exceeding 2 degrees are catastrophic and quite possibly irreversible.

So assuming a 20% chance of a manageable future, our carbon budget is 890 billion tonnes that can be emitted between 2000 and 2050. Given we’re well into this period and assuming growth as forecast, the next question becomes – when is the budget all used up? The answer was quite startling. It’s all gone by 2024, just 14 years away. The other startling conclusion was that a full 75% of proven reserves of oil, coal and gas would then be still in the ground, never to be used, meaning they are today probably worth nothing.

When we considered this as an investment question, the logic flowed clearly. First we concluded that despite the lack of action to date, we will inevitably act and act strongly. This is what history says we do, whether it’s WWII, the financial crisis or any number of smaller scale issues, we wait until the crisis is full blown then we act dramatically. With 2 degrees an immoveable limit, approaching the point of no return on our way there becomes the crisis. However we can’t stop emitting suddenly in 14 years time, that would trigger the economic collapse we’re trying to avoid, so logically we will have to take strong action before then. This is where it gets interesting for investors.

Financial markets do not act in a smooth and orderly manner. They are like waves approaching the shore, in this case more like a tsunami. While at sea, a building tsunami is hardly perceptible and if you were floating on one you wouldn’t notice it as your boat quietly rose and fell while it passed underneath you, like the tipping point in support for action on climate that we’re floating on right now. However as the tsunami approaches the shore, it builds height because the constraint of the ocean floor below leaves it no where else to go, like our fossil full budget has a precise end date – immovable by politics or markets because its defined by physics and chemistry. As such waves or investment trends hit the shore their enormous power races across the ground sweeping away all before them.

Hard to imagine? Yes it certainly is. But it’s certainly no harder to imagine than the only alternative – doing nothing as we head towards economic collapse. Remember as an investment risk question, the question is not “will this be the outcome”, but “is there a reasonable risk of this being the outcome”. Then that level of risk is priced in.

Perhaps the most interesting conclusion we came to was that such a carbon induced financial disruption was likely to approach quite suddenly and relatively soon. We believe markets won’t wait for government to act. Markets will pre-empt this by pricing in the risk that governments will take the action science demands and that they’ve already agreed is correct.

In financial markets very few like to be first out the door but absolutely no one wants to be last. So the immovable logic of the rapidly diminishing carbon budget means the rush for the exits may come tomorrow, next year or in 5 years time. With the end date of 2024 set in stone, the clock is ticking.

You can download the report here. I look forward to your reactions.

Why I don’t believe in the climate science

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It’s time for a true confession. I don’t believe in climate science.

That’s because I’m a rational person. Belief is important in my life and I apply the term to things involving faith. Faith is how we believe when there is no rational basis for a decision – which doesn’t mean its irrational or wrong, just that there is no evidence to support the view taken. Faith and belief often apply to matters of the spiritual realm. But they also apply to matters of a more worldly nature, where the capacity for faith and belief has framed many positive developments in humanity over history. Despite the lack of supporting evidence, Churchill believed the allies would win WWII and Mandela believed majority rule would come, relatively peacefully, to South Africa. Faith is a powerful driver of human behaviour.

However, I don’t “believe” in climate science because it’s not a religious or a faith question. It’s just numbers and science on which to make rational judgements. The scientists tell us what they know, and what they don’t, and we decide how to respond. This is not a binary question, like the earth is flat or not, this is a system description based on best available knowledge.

Belief is actually a dangerous concept in relation to climate science and we should stop using the word in that context. Because belief is based by definition on “non-rational” thought, framing it this way leads to a tendency to resist counter arguments and associated data. It’s hard for more data to change a belief, because it wasn’t data based to begin with. As a result, interpreting science using a belief based approach leads to sloppy intellectual behaviour, where we discount data that challenges our “beliefs” and exaggerate the importance of data that supports them.

Climate science is at it essence just data. Always incomplete and open to challenge and debate but, fundamentally, just data which we then interpret and act on. We navigate this at times complicated process quite successfully in a range of other fields such as aeroplane and bridge design, food safety and medicine.

Where this process occurs in the absence of strong cultural or economic self-interest, there is little controversy, such as bridge design. As we move into economic self-interest, things get a little complicated, such as the reappraisal of safety levels for volcanic dust during the recent Icelandic volcano, when airlines pushed for a review, based on economic losses, from the application of what they saw as too strict an interpretation of the data. Again it worked out fine.

When we move into areas of strong cultural influence and beliefs, such as medicine and health, things get more complicated. So, for example, whereas many traditional medical scientists would argue the evidence for some alternative therapies is weak, people act on their “beliefs”, spending over many billions on them each year, including some where the science is definitely not proven and sometimes quite disproven.

In all these areas though, from bridges to medicine, as a society overall we accept the dominant scientific conventions. When a body of qualified scientists reviews the evidence and issues their judgements we generally act accordingly and the broad societal level. We make decisions on flight safety, on bridge design and on public health – not without controversy, but in the end we make decisions and we base them on rational thought.

Sometimes, though, it gets really messy, and such is the case with climate change. Here we see a great clash of cultural and political beliefs, mixed up with enormous economic self-interest. The result is quite irrational, belief-based debate and decision making or, in this case, the lack of decision making.

It’s important to recognise what’s going on in this process and to respond appropriately. So, for example, we should by now know that arguing science with a climate denier (as opposed to a genuine sceptical scientist) is as pointless as arguing the benefits of market economics and liberal democracy with an al Qaeda leader. No amount of rational data will help because they don’t want to believe, so they will deny any evidence that confronts their own beliefs.

The right approach with climate deniers is to ignore them. Fortunately their influence is on the wane and their cause now quite terminal because, in the end, we are a rational society and the evidence is clear. As US Senator Daniel Patrick Moynihan said: “Everyone is entitled to his own opinion, but not to his own facts.”

For genuine sceptics, and indeed for all of us, it is very important we maintain an open mind and keep the debate alive and vibrant. We must act urgently to reduce the risk of climate change by eliminating the net CO2 emissions of the economy as a fast as possible. But we must also keep researching, challenging and exploring the details as we do so, not least of all to identify the most effective actions we can take. Not all greenhouse gases are the same and, given what the science tells us about the urgency, it is going to take all of our ingenuity to pull us back from the cliff we seem to be racing towards.

So when someone asks if you’re a climate believer, tell them no, your far too rational for that.

A high-stakes game; China, democracy and the climate.

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Much has been written lately about the emerging battle between China and the United States in the race to a low-carbon future. While the US clearly has considerable advantage with its history of success in innovation and technology, its lack of responsiveness, to date, is seeing the advantage steadily move to China.

There is great irony in this. For decades, many western companies have argued against stronger environmental policies on the grounds of loss of competitiveness to China and the developing world – so-called carbon leakage. The argument has been that if western countries made their companies behave more cleanly, Chinese companies would be able to out-compete them because they could pollute freely and therefore have lower costs.

What’s been happening while the west has been delaying action, partly in response to this argument, is that China has caught up and is now seriously pursuing a low-carbon economy. Do they want to save the world? No, they want to own it. As The New York Times‘ Thomas Friedman has argued:

“Yes, China’s leaders have decided to go green — out of necessity because too many of their people can’t breathe, can’t swim, can’t fish, can’t farm and can’t drink thanks to pollution from its coal- and oil-based manufacturing growth engine. And, therefore, unless China powers its development with cleaner energy systems, and more knowledge-intensive businesses without smokestacks, China will die of its own development.”

So China has become an example of what I call The Great Disruption. It is being forced to act, with rapidly increasing intensity, because it is hitting the physical limits of its economic growth model.

Whatever the motivation, China has the potential to dominate the technologies of the future with the advantages of both scale and the capacity for rapid change. It’s looking increasingly likely China will put a price on carbon pollution before the US or Australia can get it through their respective political processes.

China already boasts the world’s richest solar entrepreneur, Dr Zhengrong Shi, and a world-scale electric car and battery company, BYD, that has already boosted Warren Buffett’s wealth by $US1 billion. Indeed in, lists of the top 10 companies in various new energy technologies compiled by investment bank Lazard, the US lags behind Japan, Europe and China, an uncomfortable place for a country that has prided itself on technology and entrepreneurial leadership.

Longer term, there are some deeper issues that will emerge as we see who succeeds in adapting to the emerging world. The western model of market-based democracy clearly dominated the 20th century. Indeed, without China’s success late in the century, it would have been indisputable. While people express various levels of discomfort with the political, social and cultural approach of the US, the world’s people have largely tried to emulate much of what the country represents. Reinforcing this has been the dominance of US power in most areas of competition and conflict, whether it was WWII, the Cold War, the technology revolution, music and film, or overall wealth creation – the US represents the success many aspire to.

As the 21st century gathers momentum however, it is not at all clear the US will be able to maintain its dominance and, critically, whether it will still represent the most effective political and economic model that others will want to follow. China, in recent years, has been making increasingly dramatic decisions to force environmentally-driven change in its economy, while market-based democracies have floundered.

While some are sceptical of China’s capacity to carry through, there is plenty of evidence to suggest their market is already accelerating ahead of the US, being the world’s largest solar PV manufacturer, currently, and the largest market for wind power.

What if the US, saddled by debt and military costs and well behind in the race to new energy technologies, continues to drift while China races ahead? What if China can maintain stability and lead the way forward on the environmental and technology transformation now underway? Will China’s very different approach to decision-making, democratic freedoms and open society be a hindrance as many commentators argue? Or will it be an advantage, enabling them to leapfrog in technology and drive change without the pesky limitations of western democracies’ corporate lobbying and populist politics slowing down change.

If China succeeds and the US fails, the implications could go well beyond the shift in economic competitiveness and wealth. It could undermine the moral authority of democracy and lead to a shift in global geopolitics back towards autocratic regimes. The worse the crisis of The Great Disruption becomes, the greater the risk this will occur. What’s at risk here is certainly more than economic success.

Such a result is certainly not inevitable, after all the US and UK led the victory in WWII against non-democratic enemies. And there are many powerful and proven economic benefits to democracy and freedom, with the US success in technology and innovation often being put forward as an example. Likewise many argue China’s restrictions on freedom will lead that country to political instability and possible breakdown.

Nonetheless, however many of us, myself included, view democracy as a clearly superior system, we should not lose sight of the inherent risk to it in the period we are entering now. This is now a high stakes game.

Whichever way all these issues unfold, and this is probably the most unpredictable area of all, what is very clear is this: The social, security and economic implications of climate change and sustainability will force a major realignment in national competitiveness and geopolitics. In this process, responsiveness to change will determine the winners and losers, not pre-existing power or authority.

A climate storm for investors

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Beware the coming climate storm. A moment is approaching when science and markets will collide, but then merge, with chilling consequences for investors who miss the moment, and great excitement for those who are well prepared.

The signs are all around us now. Signs that a storm of climate action will soon rage through the economy, sweeping away denial and, along with it, those companies, politicians, investors and industries that aren’t ready.

Signs like our past two Prime Ministers and opposition leaders  in Australia being removed with climate change a central issue in their downfalls. Signs like 2008 being the first year when the money invested globally in new renewable energy generation projects was greater than that invested in new fossil fuel energy generation. Signs like the last decade being the hottest on record, as of course each decade has been since 1980. Signs like the first new car company IPO in the USA for half a century being a disruptive electric car company.

There is great investment and excitement now in renewables, with over $100 billion invested in 2008 and the same in 2009, despite the uncertain financial climate. Yet we see growth in coalmines, new coal export facilities and a lack of action in politics in Australia and the US. What is an investor to do with such confusing signals?

Simple. Observe the science, because the science drives everything else.

The facts are now very straightforward on the problem and its causes, as stated by the peak US science body The National Academies of Sciences. They said last month the science of climate change is in the category of those theories that had “been so thoroughly examined and tested, and supported by so many independent observations and results, that their likelihood of subsequently being found to be wrong is vanishingly small. Such conclusions and theories are then regarded as settled facts.”

So this is not a philosophy or a political viewpoint. These are facts. Smart investors deal in rational analysis, not ideological perspectives or wishful thinking. As US Senator Daniel Patrick Moynihan said “Everyone is entitled to his own opinion, but not to his own facts.”

So if you believe in facts, you will be understand that science will, in the end, overcome resistance and denial, as argued by Professor Stephan Lewandowsky from the University of Western Australia: “The laws of physics will relentlessly assert themselves, unswayed by public opinion, political shenanigans, or elections. Ultimately, the laws of physics will speak so loudly that no amount of wishful thinking can prevent them from being heard.”

The reason we can be so confident that this storm, when it hits, will be ferocious and effective at driving change, is by considering what happens when science meets markets. The science dictates that when we act it will now have to be dramatic action.

We know that to avoid catastrophic risk we must keep warming below two degrees and, as a result, this is the target agreed to by governments from US, to China, to India to Australia. If you don’t like political metrics then consider that this is also the target endorsed by hundreds of global corporations from GE to Rio to HSBC.

Acting as late as we are, achieving this target will require us to virtually eliminate CO2 emissions from coal oil and gas within a few decades. This means eliminating whole industries and replacing them, which is where the science meets the market.

Markets are particularly good at challenges like this, using what Austrian economist Joseph Schumpter called “creative destruction”. Markets are unconcerned about collateral damage and friendly fire. They won’t deliver the change steadily or calmly. Markets don’t play politics and will have no regard for sunk capital or prior commitments.

When we act on climate this will be creative destruction on steroids, with the resulting economic storm wreaking havoc and wiping out companies and whole sectors, while creating tomorrow’s new economy and corporate giants. It will be volatile, chaotic and exciting for investors, with fortunes made and lost based on the quality of judgements.

It’s hard to look at today’s politics and investment strategies and accept this analysis. It’s hard to imagine so many people being so wrong. It was also hard to imagine, in 2007, that the world’s governments would nationalise banks and car companies and spend trillions bailing out the financial system. It was hard to imagine, in the USA in 1940, that the coming four years would see military spending go from 1.6 per cent to 37 per cent of GDP and that government would take over and direct the economy, with actions like banning the production of private vehicles. In hindsight, though, such things are always obvious. And with the benefit of hindsight in 10 years time, the coming climate storm will have been obvious as well.

There is only question you have to ask yourself when you see the signals that are now flashing in bright neon lights, screaming “warning, warning, everything is about to change”. Am I ready?

Could the global community simply remove BP from the economy?

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For over a decade I have gone out of my way to buy fuel from BP. They’ve always seemed the best of the bad, with their solar business, climate policy leadership and forward thinking culture and people. The other day I couldn’t bring myself to do it. In fact I doubt I’ll ever drive into a BP station again.

Although BP has rather bigger problems on its mind than whose fuel I buy in Australia, while driving past I started considering a potential development that would certainly get their attention. It all starts with BP’s CEO Tony Hayward now famous approach to leadership on environmental questions. He proudly explained his views in a frank speech at Stanford University last year. He said too many BP people were “working to save the world” whereas they should focus on making money because BP’s “primary purpose in life is to create value for shareholders.”

I understand quite a bit about saving the world and about creating value for shareholders. I’ve spent roughly half my working life as an environmental campaigner, including as global head of Greenpeace, and the other half as a business owner and corporate advisor working with the CEOs of a number of the world’s largest companies. The former taught me how people think and act on environmental issues, the latter taught me about the relationship between profits and good corporate citizenship. BP’s Deep Horizon disaster may bring these two issues together in ways that I never expected. As a result Tony Hayward may, ironically and unintentionally, do more to “save the world” than anyone before him at BP. Here’s why.

We live today in a global market which no one can control. It is too complex and too global for governments to effectively regulate. It also has too many inbuilt tendencies and pressures for even the most powerful and visionary CEO’s or investors to push against the tide except in marginal ways.  Yet this powerful beast of a machine is pushing us all towards a cliff, with all key indicators showing the global ecosystem and resource supply, on which our economy depends, is now on the edge of catastrophic, system wide failure – what I call the Great Disruption. The global economic consequences of such failure will be profound, not least of all being the end of economic growth.

As long argued would occur, this has now started with diminishing resources driving us to dangerously drill deeper for oil, dig up dirty tar sands and take more and more risk. In that context, the Deep Horizon disaster starts to look like the beginning of the end, a haunting specter of things to come as we push past our limits in a desperate bid for shrinking resources to feed our gluttonous economy.

With the public now increasingly aware of such challenges, BP’s business strategy under Hayward was seriously misguided. He ignored the clear lessons of decades of global experience in this area by investors and companies: good corporate citizenship boosts profits and companies that do good for the world do better for their shareholders. They attract and retain better people, they get an easier run from regulators, they face less risk, they find investors who are more patient and they are more closely in touch with the values of society and therefore their customers and employees. What struck me as I drove past the BP station was the potential for all those drivers of profitability to be reversed. What would happen if a viral campaign focused the world’s general environmental concern sharply onto BP, as the modern age’s perfect example of the sort of company we don’t want to exist anymore?

What if good people didn’t want to work for BP? If regulators subtly but consistently made life harder for BP, through thousands of little decisions taken by people who didn’t like the company? If nervous investors got worried that BP had a fundamentally flawed culture that made it more risky to invest in? If customers around the world just drove on by to the next gas station? What would happen, if this approach took hold through a viral mind shift around the world, is that BP would quite simply be removed from the economy. BP would become the historic first scalp of a new approach – “Global market regulation, by the people, for the people”.

Hard to imagine? The brutal logic of the market is very powerful. A company like BP lives and is valued on its ability to turn hard assets, in its case oil and gas reserves, into cash. What determines its ability to do this efficiently are its people, customers, regulatory support and capital. If these capacities drop off significantly relative to competitors, the assets are worth more outside the company than within. This translates into the company being valued less than its assets and the company is taken over or its assets are sold. The impact on BP would be fast and simple – it would cease to exist. However, the impact on the broader market and on environmental campaigning might last for much longer and be very deep. What Tony Hayward has done is to create the perfect storm for just this to happen, starting with investors attitudes.

Under Hayward, at the direction of the Board of Directors, BP shifted its focus sharply onto generating cash for shareholders. For BP employees the message was clear – cut corners, cut costs and deliver in the short term. No more saving the world, people, get back to making cold hard cash. In response to this very public shift, the company’s owners, the pension funds and other investors, stood by and watched. They didn’t raise the warning that should have been obvious to any modern investment risk manager. They should have said: yes, we want shareholder returns, but don’t send a signal to your people that protecting the environment doesn’t matter, because if you do, our investment will be at risk. If BP ceases to exist as a result of this chosen direction, no investor will make that mistake again.

Hayward’s approach also sent clear signals to BP’s employees and executives. BP’s leadership role on climate change and sustainability resulted in many of the company’s people becoming passionate advocates on these issues. Indeed, I’ve worked with many BP executives and they are some of the most committed corporate people I know on sustainability. They have felt BP was a place they could make a difference to the world and prove that good business and good environmental performance go together. Under Hayward’s short-term cash focus, many of these people, including top executives like Viv Cox, have moved on while many others will be questioning if they still belong there. Losing such creative and forward thinking people seriously undermines a company’s culture and its value creation prospects.

With the US oil disaster, customer and brand risk will be high on the risk screen at BP. Soon after I left Greenpeace in 1994, the Shell oil company faced a barrage of criticism for trying to dump a disused oilrig in the North Sea. Greenpeace occupied the rig and a largely spontaneous consumer boycott erupted in Germany, costing Shell tens of millions of dollars, every day, in lost sales. With the share price falling, Shell backed off and the consumers returned.

BP will likewise assume any boycott that erupts now will be short lived and will fade once the media and political storm dies down. They maybe right, but they may be very, very wrong.

Environmental groups around the world have historically struggled with boycotts. They were hard work to maintain, draining resources for years before having an impact, if they ever did. But in today’s world two things have changed that should have the risk people at BP scurrying for their web monitoring services.

The first, as outlined above, is that the evidence is clear on how to run a campaign to deliberately undermine a company’s value by mobilising and focusing public concern for environmental issues and corporate responsibility. It is broader and easier than a consumer boycott, instead focusing on employees, investors, regulators and consumers, all targeted at once. This would be modern, market focused, non-violent guerilla warfare. No one has ever organized such a deliberate value destruction campaign, but plenty of people know how to do it if they chose to.

The second and the key to likely success is the connected world of the internet. When I was at Greenpeace we would need to send activists to visit individual outlets urging a boycott, picket offices to engage employees and approach each individual investor. Today a powerful idea can spread like wildfire, recruiting quiet supporters deep inside the global economy – inside investment houses, inside government and most worrying of all, inside BP.

The scary thing for BP is that such a movement may not come from a mainstream environmental group, all of whom BP has relationships with. The threat is more likely to grow through a spontaneous web based, viral movement, probably driven by people they’ve never heard of, like the guy in Louisiana who set up a Boycott BP Facebook page that now has 650,000 supporters. This is scary for BP because these movements are based on ideas and are organized by informal networks of friends. There’s no one to call, no one to negotiate with, just a viral cancer that steadily eats away at BP’s value, until one day it’s all over.

Why would such a movement take hold? Simply because nothing else is working. Despite unprecedented levels of public support, government action and corporate engagement on climate change and sustainability, nothing of consequence is actually changing. CO2 emissions are rising, companies like BP are investing in filthy tar sands oil and governments appear powerless to stem the tide. So with all the old tactics failing, there is a huge vacuum in what is effectively a free market of campaigning approaches. In that context, there could be great appeal in global market regulation by the people, for the people, with a company’s removal from the economy a kind of environmental capital punishment.

BP is perfectly positioned to be the guinea pig. I’m sure the US oil disaster will be shown to be the direct result of cash grabbing compromises on environmental and human safety. So there is arguably no company more deserving of such punishment and certainly no more powerful symbol for the consequences of putting short term shareholder value at the centre of business strategy.

Who knows if such a movement will erupt in this case, but it no doubt will before long. When it does, the world, and the market, will be a very different place. If the Deep Horizon disaster signals the end of the old economy, then a popular movement that brings down BP would be the beginning of the new one.

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Why higher taxes on mining and resources are good economic policy

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Amongst all the focus on carbon trading around the world, the power and simplicity of taxes has taken a bit of a back seat. This may be changing with new moves in China and Australia, along with renewed debate elsewhere, to use direct taxes and charges to drive social and environmental objectives.

With trading schemes struggling to get up in democracies like Australia and the US, and governments everywhere facing huge mountains of debt, taxes may start to make a comeback. China is reported to be considering a carbon tax from 2012 and is also directly targeting high-energy users like aluminium by dramatically increasing their electricity charges as reported here. In Australia, where the government has shelved plans for carbon trading until 2013 after it failed to get the legislation through the Senate and decided the issue was politically unappealing, there is now a proposal for a mining “super profits tax”. It’s basically a higher tax rate being applied to mining and resource companies when, and only when, projects are very profitable.

The government argues this is about more equitably sharing the huge profits mining giants have reaped in the resources boom as China gobbles up the Australia’s resources. The money raised will used to build infrastructure, lower the standard company tax rate and boost investment in pensions for the public as whole. There is of course a huge uproar against this, with a well-funded campaign by mining companies that have become accustomed to the boom, not to mention the resulting huge executive bonuses. They are crying lost jobs, investment driven off shore and Australia becoming uncompetitive. Some are threatening an investment strike with the shelving of planned projects.

These cries are self-serving, short term and should be ignored by intelligent policy makers. Putting aside the irony of the Australian government embracing a new resources tax as it runs full speed away comprehensive climate action, this is still good economic and environmental policy. Here’s why.

Resource extraction is very different to other economic activity. If a country misses a trend like solar power, high-speed broadband or competitive manufacturing, it’s really hard and expensive to catch up. The train of economic opportunity has often left the station. Resources are different. When a major global company threatens to take their wind turbine manufacturing offshore they can do just that and it’s gone. However when BHP goes and invests in a mine in Kazakhstan instead of Australia, the minerals stay put. Is there potential loss? Yes, clearly investment leads to jobs, taxes and other benefits so in the short term there may be but what about the economic impacts in the medium to long term?

To answer that we need to consider the other way mining resources are different. Unlike innovation, knowledge and technology, which we create, mineral resources are limited and we can’t make any more of them. We have now arrived at a point where the global economy is stretching our capacity to feed it with these natural finite resources. That’s why when we grow the global economy up against those physical limits, as we did in 2007 and 2008, the prices of things that come directly from the earth, like food and oil, rise so rapidly. I cover this in detail in my writing on The Great Disruption.

Where will this approach to growth lead us? Consider the current state of our system, which is well and truly up against its limits, as having a starting measure of 100. This measure of 100 represents our current burden on a strained system, one where we have barely adequate resources to feed our economic and social needs. Then we plan to go to around 9 billion people by 2050. That takes our system to 150. Then we plan to increase the per capita income (and consumption) in that time frame by around 2 – 3 times as well, taking our system up to 300 to 450. So if prices spike and the system shows strain at 100, guess what happens at 450? Many things, but one of them is that resources become a lot more valuable and we use them a lot more carefully.

The economic implications of this are clear for countries that have a strong natural resource base. These resources are of absolutely limited supply and their value will keep going up. And up and up. This means those countries have plenty of time to extract them and the longer they leave it the more value they will get for doing so. The finite nature of those resources also means it is good policy to invest the resulting income to build long term economic security, not to grab the quick bucks or short term jobs on offer.

More broadly, it also means we will have to accept that an economy built on “stuff” is inherently risky when the supply of the original “stuff” is limited, as argued by proponents of peak oil. So we are all going to need to use our resources much more efficiently, and the higher the prices we pay for them the more efficiently we will use them. This means we need to steadily shift our tax base away from employment, which we want more of, and towards stuff and pollution instead, which we want less of. So the logic of higher taxes at the start of the “stuff” value chain, by taxing mining companies more, and lower taxes for activities further down the chain by taxing other companies less, is good environmental as well as economic policy.

So for Australian readers in particular: as you watch the debate on this issue rage over the coming months, consider both your economy and your kids’ economy. Think about where we are all heading and what kind of economy we need to build. And when a mining CEO earning $6 million a year talks about his heartfelt concern for Australian miners’ jobs and Australia’s economy, just observe the whole process with that great quote in mind “Hell hath no fury like a vested interest disguised as a moral principle.” And realise that this is just the beginning of a long and inevitable economic transformation.

Why melting glaciers means cleaner, cheaper cars

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When we focus on news that reinforces our environmental challenges, of which there’s no shortage, we forget just how exciting the opportunities in fixing them are and how fast these solutions are now accelerating. Every story about melting icecaps or raging floods brings a smarter, cleaner world closer. My favourite example at the moment is electric cars. While they had a bad start, we are now on the verge of the breakthrough we’ve been waiting for, with around 30 models coming into the market from the major car companies and new start-ups over the next 3 years.

If we get this right, it’s hard to overstate the significance of the upside. This is a real game changer for our transport and energy systems. Forget any old ideas you have about niche markets, limited range and slow cars. There are some very exciting cars on the way and some business concepts that could change not just personal transport but the whole electricity sector. How will this unfold?

Imagine for example not charging your car overnight, but pulling into a “battery change station” where a machine simply takes out your battery pack and replaces it with a fully charged one, all in a few minutes, while you go and pick up a coffee. The batteries will have been charged by 100% renewable energy and you will have a contract that guarantees the price you pay, eliminating fears of petrol price rises. That’s the vision now being implemented across a number of countries by the very well funded Better Place and its founder Shai Aggasi as you can read here.

But it gets even better. You could also have a car that plugs into the grid when you’re not driving it. This means when the power is cheap because demand is low you will be able to charge your car and when there is high demand and power is expensive you can sell it back to the grid and make a profit. So your car effectively becomes a power station and you become a mini power company! An additional benefit of this is that the car fleet acts as a giant battery, enabling storage of intermittent renewables like solar PV and wind power.

By the way, they are also dramatically cheaper to run because electricity is so efficient at energy conversion. If you want some more details on the numbers take a look at this excellent summary by Andrew Simpson from Curtin University.

If you’re worried these electric cars will be boring to drive then take a look at Tesla Motors who are producing the Tesla Roadster that will go from 0 – 100kh/h in 4 seconds. Who said greenies don’t know how to have fun!

This is all in addition to the clean cites, no air pollution and countless new jobs created as we build the infrastructure for this transport and energy revolution.

Heard all this before and wondering if its real? Warren Buffet certainly thinks its is. He invested US$230 million in Chinese electric car company BYD in 2008 and his 10% stake is now worth close to $2 billion. China plans to put a million electric cars on the road by 2012 so BYD is looking like delivering on its name for its owners (BYD stands for Build Your Dream!).

As a transition this dramatic takes off in a market, it’s hard to tell where it will head but in any outcome the implications for consumers, business and markets are certainly profound.  Alan Kohler makes an interesting argument in his investment newsletter The Eureka Report as to why all cars will be electric within 20 years. He points out that when people come to believe that the electric car is going to be the clear winner, they will suddenly realise their old petrol car will have close to zero resale value within a few years. At that point there will be a rush to go electric, to avoid the inevitable price collapse in second hand petrol cars. This will of course be self-reinforcing when it takes off.

Of course we can’t be sure which technologies, business models and companies will succeed. What we can now safely accept however is that with so many people and so much money focused on making this work, the time has clearly arrived when the internal combustion engine is heading for a rapid sunset.

Let you mind run over the implications of that for the oil industry and peak oil….

So next time you read about a melting glacier, remember how much fun driving into the future is going to be.

The World After Copenhagen – A Return to the Rational?

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Throughout my 35 years in sustainability it has always seemed odd that while so-called economic rationalism reigned over our political, economic and business worlds, rational thought wasn’t applied to issues like climate change. The risks were always clear, as defined by rational science, while a logical analysis of the economics showed acting early was cheaper than acting late. Yet a strange kind of religious and ideological zealotry took hold, as otherwise sensible, educated people ignored rational thought. It was a failure of reason.

While Copenhagen failed to deliver any agreement however, it may well mark a return to rational thought and with it some profound shifts in markets, politics and our approach to sustainability. Perhaps historians will mark this point and refer to the world BC and AC – Before Copenhagen and After Copenhagen.

What will historians say changed at the end of 2009? And if we could read their conclusions now, would it change our present responses – not as historians but as the creators of that history? Perhaps they will write something like this:

The old world ended at Copenhagen. It was the moment a critical mass of people came to accept that the old way of doing things was finished. They started to prepare for a new world, and for the shift to the war footing that would deliver it.

While Copenhagen failed to deliver action on reducing emissions, it delivered a very clear outcome. It shattered assumptions that had previously framed the debate and so provided an historic shift in the approach to the issue.

For a start it was the end of the debate about the science. Copenhagen marked the victory of reason over ideological and religious zealotry.

The debates continued on the detail and that was of course a healthy part of the process. There is always uncertainty in science and such debates test the strength of assumptions. But After Copenhagen there was a critical mass of powerful and influential people who accepted that despite the uncertainties, it was time to act. They kept debating 1 vs 2 degrees of warming and levels of CO2 at 350 vs 450ppm but they stopped debating the rules of physics and chemistry. They knew if you increase the thickness of the atmosphere’s blanket the world gets warmer. While many remained frustrated at the lack of action despite this acceptance, this was a critical turning point because the mathematics of what accepting the science meant for the economy were profound.

It was also the end of any chance of a measured and careful transition. That moment probably passed in 2000 but it was firmly dead and buried with the lack of an agreement in 2009. With actual emissions reduction now years away, the lags in the climate system dictated that a crisis driven, war like response was now inevitable, even with the high 2 degree target. As a result, assumptions about the pace of change and the process by which it would be delivered were finished. It was clear After Copenhagen that when the change came, the pace would be rapid, the process chaotic and the transformation radical.

This meant the level of national economic and company business risk posed by delay was now much greater than the risk posed by the change itself. As a result, business came on board at Copenhagen, now seriously worried that delay would lead to such rapid change, their companies faced catastrophic commercial risk.

Perhaps the shift of greatest historical significance was that it was now clear the pursuit of global consensus was an illusion. The major powers had played along with the UN process because the complexity of reaching consensus gave them an excuse to avoid action. They could profess support for a global deal, knowing it wouldn’t happen. But once there was a danger of it becoming real, they dropped that idea like a hot potato. There was nothing in history to suggest they were ever going to let large numbers of small, poor countries help determine the rules. As history shows, those with power don’t give it up lightly.

Instead they started the process of forming what was to become the Coalition of the Cooling, a group of powerful nations and their friends who had sufficient economic and political muscle to define the inevitable economic transition. If power was going to shift away from the sole superpower, it was in the interests of both the US and the group of large emerging powers to form a new club to guide the future. With the addition of their various allies, the future could then be negotiated with 10 people in the room. China had arrived.

What those in power missed until much later though was the strength of public concern and as a result the rising influence of civil society. Tens of thousands of advocates had gone to Copenhagen, assuming their intellectual and political contribution would help leaders get the right outcome. They left angry at the failure of world leaders but determined to force change from the bottom up.

The combination of civil society, particularly the youth movement, along with the simple mathematics of climate science, led to what most investors missed completely until it was too late.

After Copenhagen, coal was finished.

It was surprising so many missed this because the data was clear for all to see. Investment in clean energy outstripped investments in fossil fuel energy every year from 2008 on. More importantly, once 2 degrees was accepted as the maximum target, it was all over for coal. There just wasn’t any room in the remaining carbon budget for coal to keep growing. So once the world’s powers decided the science was in, coal was out.

This was the case anyway and would have unfolded over the decades to come, but when civil society decided to give up on the direct political process and focus all of its attention on coal, sentiment shifted quite rapidly.

It was of course technically illogical to focus just on coal, after all it was only 20% of global greenhouse gas emissions. But it was already clear the market would kill off oil, with electric cars and / or peak oil. All the alternative NGO campaign targets were too complex and missed the key ingredients : a powerful enemy that can be demonized, a simple NO campaign and definable physical targets to focus on. The movement had learnt the dangers of diffusion by putting so much into Copenhagen for so little tangible result.

So the group with nothing to lose, the Angry Islanders joined with the youth driven movement Our Climate Our Time and directed its powerful emotional message entirely onto coal.

Campaigns erupted everywhere – targeting every coal mine, every coal company and every coal train and ship. It was a market smart campaign with investors targeted as owners, banks as lenders and coal executives as climate criminals. It took a few years to build momentum but once the US and China jointly announced a ban on new coal plants, the house of cards came tumbling down. The valuation of coal companies collapsed, under the combined weight of public disdain, regulatory threat and shrinking market, with alternative technologies now competing on price. With investors running scared having seen their coal investments drop 75% in value over a month of carnage, the industry went into terminal decline, confined to the margins thereafter.

The litigation against directors and fund managers however, carried on for a decade more. Regulators took action against directors who hadn’t explained the key risks to investors. Shareholders asked why these risks weren’t obvious to directors given the science and why they were misled about the commercial potential of CCS.

So back to the present as we head into 2010.

Who knows how the future will actually unfold, but some parts of the above are clear. The focus on Copenhagen failed to deliver for the global climate movement. It was always going to, as I argued in my last column, but even I didn’t think it would fail quite so spectacularly. So a shift in focus is inevitable for climate campaigners. We don’t know where it will shift to, but we’ll find out in 2010.

The business community are the biggest losers from Copenhagen. Despite their really serious focus and coordinated calls for action leading up to Copenhagen, they now face heightened risk of discontinuous change. The lack of a regulatory result, combined with the political acceptance of the need for even stronger action than before, creates a huge gulf between present reality and the inevitable future. That gap will close at some point and do so suddenly. For companies determining their business strategies this poses massive risk. It makes the coal scenario painted above far from fanciful. Markets are driven by sentiment and sudden sentiment shifts are now inevitable. The challenge is working out where and when they will strike. I’d certainly be nervous if I was a coal executive or investor.

For policy makers it’s back to the drawing board. With no genuine global agreement anytime soon, perhaps they will abandon trading schemes and revert to the much simpler approach of national carbon taxes and bilateral deals, following the trade model. Meanwhile all but the lowest carbon economies now face ever increasing risk from delay. When the global market shift gets momentum, being stranded with high per capita carbon emissions could be competitive disaster for nations that are slow to act.

On personal level, part of the challenge is dealing with despair and frustration. Community activists, corporate leaders, policy makers and scientists have put so much effort into action on climate change, for little result. Sure we’ve seen great progress in understanding and have many new allies on board but negligible action to even delay the now inevitable crisis. The climate responds to emissions not to political accords.

So take a moment to grieve for the lost opportunity, shed a tear like Bill McKibben did and say thanks to all those who have thrown their all at it.

We have led the horse to water but it’s not yet thirsty enough to drink.

But don’t stay there. We don’t have time for despair. We now have to move on to the new world, the one After Copenhagen. So after some Christmas rest and reflection, decide what you’re going to do and get back to work. We have a civilisation to save.

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Why Copenhagen will fail and why that doesn’t matter

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There will probably be some kind of agreement at Copenhagen. It’s hard to imagine all those world leaders walking away without one. However I’m not spending anytime at all wondering what the result will be. Why? Because it just doesn’t matter.

You see we’re not ready to fix climate change, not yet. We have not accepted the scale of the problem. Nor have we established the political conditions necessary to fix the problem when we do. However Copenhagen does signify the shift between two eras and if you watch carefully you can see the new world emerging. That is the interesting thing happening at Copenhagen.

But before I move on to that, let me go back, because most of you are probably stuck on my statement that the result at Copenhagen doesn’t matter. Isn’t this the most important meeting in history? Surely failure here will set us back a decade? Surely having a global agreement of any type would be an important first step? No, no and no. Here’s why.

Firstly, it was always going to be a failure because the pass mark set in this important test for civilisation is actually at a level that indicates failure. The correct pass mark is simple. We need to deliver a safe climate; a climate in which we can have a reasonable chance of running an economy that can feed, house and clothe 7 – 9 billion people. As my favourite climate strategist Winston Churchill said:

It is no use saying, ‘We are doing our best.’ You have got to succeed in doing what is necessary.”

The science is very straightforward on what is necessary. The 450ppm CO2 concentration limit, which is the best possible result Copenhagen is aiming for, would give us a 50% chance of not passing 2 degrees of warming. Even reaching 2 degrees would almost certainly see the loss of the Great Barrier Reef, the melting of most of the world’s sea-ice, a number of island countries ceasing to exist and shifts in climate and water supplies that will lead to war, refugees and global food crises. This is all considered to be relatively manageable! The logic of that conclusion aside, what we also know is that going beyond 2 degrees takes us into system breakdown territory and quite possibility into unmanageable consequences. We then risk civilisation’s collapse.

So the best we can possibly hope for in Copenhagen is a target of 450ppm, which gives us a 50% chance of widespread global ecological damage, geopolitical instability and massive human suffering – that would be the good result under that plan. The other 50% chance is of a civilisation-threatening crisis. So 450ppm is failure, pure and simple. And besides the likelihood of a strong global agreement to a 450ppm target is miniscule anyway. We’re not even ready for that level of failure.

Nevertheless, Copenhagen is fascinating because all the ingredients for change are emerging and can be clearly observed. As I argued in the One Degree War paper I wrote with Jorgen Randers, we will soon wake up to what is needed and get to work. Here’s my top 4 trends we’re seeing in Copenhagen that tell us where we’ll go when we are ready.

No one is in charge. The US no longer rules the world. China knows it and Obama knows it. While it remains the world’s dominant military power, you can’t shoot CO2 emissions, making that power useless against this problem. China is on the rise and this week a China/US deal is the likely first step if we’re to have any deal at all.  That however is just the beginning of a massive geopolitical power shift, because China and the US are only 50% of global emissions. We are moving to a world we’re we act together or go down together. There is no alternative that will work and that is a seriously transformational and beneficial shift.

Angry Islanders. Like a scene from the 1976 movie Network, a group of island states is yelling at the world “We’re mad as hell and we’re not going to take it any more”. They’ve woken up to the reality their countries are literally underwater at around 450ppm. They are angry, articulate and thanks to the modern connected world we’re going to hear a lot more from them. This is the world’s conscience and they’re telling us loud and clear “your cars and coal are killing my country.” It’s like an invisible army slowing destroying them, every building, every farm, every business. The significance here is not the islanders but the idea : those who caused the pollution will be held to account by the victims of it. This means global justice is firmly on the table.

The science won, the sceptics lost. Despite the media’s fascination with the scientific debate no-one with any power or sense is questioning the science any more. In the end facts rule and that’s why the Angry Islanders are saying 350ppm is the right target. We should now completely ignore the sceptics and let them whip themselves into a frenzy of self-delusion as they fade into being crazy old men (yes men, how many prominent women sceptics have you heard from?)

A dot com boom on steroids with military support. Winning or losing is a choice and China is now clearly winning the green energy race. The USA is shifting on climate because they know they’re losing and they hate that. India is chasing China’s tail and South Korea and many others are closing in. This will be an exciting time as governments increasingly panic about the targets they have agreed to and act to mobilise the market like never before. HSBC says this will be a $2 trillion per annum market by 2020.

So whether we get a political agreement in Copenhagen or not just doesn’t matter. But if you want to see the future then take good look for a taste of what’s to come. You see we will, certainly and inevitably, wake up. Not yet, but soon. Then the fun really begins.

Time to prepare for The One Degree War

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Amidst the noise of the day-to-day debates, we have lost sight of the simple logic of the advice coming from the world’s top climate scientists. Despite the uncertainties in the details, the science carries one underlying message from which we can draw only one rational conclusion.

It is time to declare a global emergency and mobilise all available resources, political will and human ingenuity towards one task – to reduce the risk of catastrophic climate change to an acceptable level.

Today, we are releasing a paper detailing our response to this conclusion. ‘The One Degree War Plan’ began to take form a few years ago, the product of a challenging conversation between myself and Professor Jorgen Randers. Jorgen, a lifelong advocate for action on sustainability, rose to prominence in 1972 as one of the original authors of the Club of Rome’s famous “Limits to Growth”, the bestselling environmental book of all time – over 30 million copies in 37 different languages.

Jorgen and I had both accepted the scientific reality and were discussing the question it posed – what would a rational response to the climate science look like? If you stripped away all the politics and debate and took a fresh look, what would be the logical action plan?

In 2008, after many more such conversations, we decided that we needed to articulate our answer to that question, in detail and on paper.

We started by considering what the science meant, in human terms.  This was the simple part, as the peer-reviewed climate science is very clear on the level of risk. There is a high degree of certainty that humanity will face severe disruption to the global economy and society, with widespread economic damage, geopolitical instability and human suffering. Perhaps more importantly, there is a lower but still material risk of catastrophic collapse and tipping points being past that would see the effective collapse of our current civilisation and economy. Once this was understood, we could begin to consider what a logical response to this level of risk would be.

But before we got there, we made another initial but fundamental conclusion: that the momentum in the climate system is now so great that the world will, before long, wake up to a threat of this magnitude. It will recognise that despite the remaining uncertainties, we cannot afford to risk the collapse of the global economy and civilisation. Thus an appropriate response – one that recognises the science and the true scale of the risk – will occur.

When this emergency response is designed, we concluded it would need to aim to bring warming below 1 degree, and therefore, CO2e concentrations below 350ppm. Anything less would leave civilisation at too great a risk of catastrophe, and would therefore be irrational. Our remaining task was then to develop a plan of action that was capable of achieving this outcome.

The attached paper is the result. It has taken over a year of development and research, including considerable feedback from colleagues and modelling by C-Roads, the climate simulator developed by MIT, the Sustainability Institute and Ventana Systems.

We were actually surprised by the outcome of our work, which showed that not only is One Degree and 350ppm possible, it is surprisingly achievable and practical. It certainly requires that we act very soon and that we act with a level of determination and commitment not seen since WWII, but it can be achieved. In recognition of this comparison, we called our paper The One Degree War Plan.  It is a plan that shows what humanity can achieve – and we believe will achieve – when it develops a rational response to the climate threat.

We are releasing our paper for public reaction and comment, because we recognise that this is not an intellectual exercise. A response like the One Degree War Plan, if it is to be implemented, is going to require years of development by global experts across many disciplines. It will also require strong public support globally if our political leaders are to have the courage to adopt such an approach.  This in turn will only happen if many millions of people engage and decide that, in the end, we are a rational species and this is the way forward we consciously choose to take.

Building a robust plan and the support to implement it is of course an enormous task. So we think now is a good time to start.

We encourage you to consider this paper, to circulate it amongst your networks and to help us together build the courage we need to face reality.

Click here to download the full paper