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A renewed dire climate warning

The first part of the new Intergovernmental Panel on Climate Change report published in August vehemently sounds an urgent alarm about unprecedented and partially irreversible global climate change. Intensive climate policy efforts are needed to avert a collapse. The price that greenhouse gas emitters have to pay for their ecological footprint plays a key role in this context – it is still (far) too cheap.

 

Clear facts…

The Intergovernmental Panel on Climate Change (IPCC) released the first installment of its long-awaited sixth climate assessment report on August 9. Throughout its nearly 4,000 pages, IPCC experts describe the physical principles of climate change. The new IPCC report conveys the following core messages:

  • The role of human influence is undeniable: The increase in the concentration of atmospheric carbon dioxide (CO2) observed since 1750 is directly attributable to human activity, mainly the burning of coal, petroleum and other fossil fuels. CO2 emissions have increased immensely over time – a trend that continues to this day and which is causing ever greater global warming.
  • Everywhere, and with ever greater consequences: No region of the world can escape the climate crisis, and extreme weather events will occur more frequently and with ever greater likelihood.
  • Aftereffects for at least 30 years: The world has warmed by 1.1 degrees Celsius since the pre-industrial age. Humanity has already spewed so much carbon dioxide and other greenhouse gases into the Earth’s atmosphere that global warming will continue until at least the middle of this century even if immediate radical emissions cuts are undertaken. Weather phenomena such as extreme droughts, scorching heat waves, catastrophic rainfall and flooding will continue and worsen over the next 30 years. Some other effects such as the melting of ice sheets and a rise in the sea level will last for much longer and will be irreversible for centuries or even forever.
  • The 1.5°C target has slipped beyond reach: The Paris climate accord set a goal of keeping global temperatures from rising more than 2 degrees Celsius, or ideally 1.5 degrees Celsius, above pre-industrial levels. The more ambitious of the two targets is now no longer achievable even in the most favorable of all scenarios. The Earth will cross the 1.5°C mark by 2040 at the latest.
  • Looming tipping points: Tipping points for the Earth’s climate – thresholds beyond which small changes can lead to dramatic upheavals – cannot be ruled out. Melting ice caps or abrupt changes in oceanic circulation patterns, for example, could rank among such tipping points.
  • Every action counts: Immediate, aggressive, world-spanning emissions cuts could halt global warming beyond 2050. In the most optimistic scenario, reducing greenhouse gas emissions to net zero would even pull global warming in the second half of this century back to slightly below 1.5 degrees Celsius.

 

It’s getting hotter and hotter
Humanity’s footprint is unmistakable

Global warming of the Earth’s surface (anomaly 1901-2000 base period)

Sources: NOAA National Centers for Environmental information, Climate at a Glance: Global Time Series, Kaiser Partner Privatbank

 

…and implications

The new IPCC report is bound to form a vital basis for the 26th UN Climate Change Conference to be held in Glasgow less than three short months from now. Before it was published, all United Nations member states unanimously agreed that the report accurately conveys the scientific findings, so it accordingly can be hoped that it can serve as a powerful tool with which to induce governments to act responsibly in negotiating new climate protection targets. More pressure on heads of state and government is in fact urgently needed because countries’ voluntary emissions-reduction pledges to date are far too insufficient to hold global warming below 2 degrees Celsius (let alone 1.5 degrees).

The latest assessments by the IPCC are also a call to action for the world of finance. Although the financial economy cannot solve the climate crisis on its own, the finance industry nonetheless must make greater effort to apprehend how investment capital can bring about more sustainable outcomes in the real world. In this context, at the level of individual investors, it is important first of all to know the ecological footprint of one’s investment portfolio. Kaiser Partner Privatbank has developed comprehensive sustainability reporting precisely for this purpose. It enables you to spot companies in your portfolio that have a bad climate score and to accordingly figure out alternative investment options.

 

Air pollution is still far too “cheap”
CO2 prices must increase further

CO2 prices in different countries (in USD per ton)

Sources: World Bank, Kaiser Partner Privatbank

 

But further climate policy steps are also especially needed alongside the ongoing “greening” of the investment sector because even though the IPCC report received a lot of media attention and raises public awareness of climate change (in the near term), actual measures aimed at reducing greenhouse gas emissions lag much too far behind reality. One of the most important and effective climate policy tools in this context is CO2 emissions pricing within the framework of emissions-trading systems (ETSs) or carbon dioxide taxation. According to the World Bank, there were a total of 64 CO2-pricing initiatives in operation in 45 countries around the globe as of August 2021. They cover a total of 11.7 gigatons of CO2, or 21.5% of the world’s annual greenhouse gas emissions. The growth momentum of these new pricing initiatives has been unequivocally positive over the last two years. The emissions trading system recently launched by China – the world’s largest, with an annual trading volume of 4,000 megatons of CO2 – exemplifies this. But one (big) fly in the ointment relativizes this seeming success: the majority of CO2 prices today are still extremely low. Only a little less than 4% of emissions are subject to a price mechanism that charges more than USD 40 per ton of CO2, the minimum that experts at the World Bank estimate is needed to reach the 2015 Paris climate accord targets.

But this bird’s-eye (top-down) view isn’t all that’s somewhat disillusioning on the whole. A “cross check” – i.e. the question of how much companies actually have to pay for their emissions – also yields a hardly satisfactory result. The data required for this cross check come from the Carbon Disclosure Project, a non-profit organization that conducts an annual survey to collect emissions data on the vast majority of publicly traded companies around the world (accounting for approximately 85% of worldwide market capitalization). According to that data and a study by JP Morgan based on it, only 32% of reporting companies in 2019 were subject to a CO2-pricing mechanism. In contrast, 42% of companies reported that they do not pay anything at all for their emissions at present and (even more surprisingly) do not expect to have to in the next three years. A deeper analysis reveals that even those companies that already are subject to a CO2-pricing mechanism today very rarely have to bear substantial costs for their ecological footprint in the end. In the case of emissions-trading systems, this primarily owes to the fact that companies are generally allotted a large number of emissions credits for free and only few of them need to buy additional credits. Emissions costs for companies effectively reach a substantial size only in the energy production and infrastructure sectors, where they amount to 4% to 6% of EBITDA (earnings before interest, taxes, depreciation and amortization). In countries like Japan, Singapore, Norway and Finland where a tax on CO2 emissions exists, the effective charge on companies is likewise hardly burdensome at less than 3% of EBITDA. Finland presents an exception (at almost 7% of EBITDA).

 

A distinct upward trend, at least in the EU
European emissions trading is leading the way

CO2 price in EUR per ton

Sources: Intercontinental Exchange (ICE), Kaiser Partner Privatbank

 

So, despite some encouraging signs from politicians, our society and decision makers still have a lot of climate policy work ahead, at least if we intend to take the findings of the new IPCC report seriously. Since CO2 pricing (in combination with other measures) is considered one of the most efficient policy mechanisms for reducing greenhouse gas emissions, existing approaches need to be further improved and especially must be enforced more stringently.

 

Oliver Hackel, CFA Senior Investment Strategist

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