26 May 2020

The climate debate has fallen from the headlines: collateral damage of the Coronavirus outbreak. The focus on the Covid-19 pandemic, of course, is understandable. However, the need for urgent action aimed at achieving the carbon dioxide emmission reduction goals established in Paris in 2015 has not gone away.

Indeed, there lessons from the Covid emergency that can be applied to the climate debate. First of all, while there’s no reason to suspect direct links between Covid-19 and climate change, high pollution levels may have contributed to the severity of the symptons suffered by some victims of the virus. During the pandemic we all become familiar with graphs depicting exponential growth. And, one would be excused for thinking the Chart below referred to Covid cases. However, the graph illustrates the expontential grow in CO2 emissions during recent decades.

Fortunately, we have learned that these curves can be successfully bent. However, we have also discovered that dramatic action and changed lifestyles may well be necessary, small adjustments are not enough. Hopefully, we have discovered that “we are all in this together”. While the actions of individual nations are critical, global problems require world-wide solutions. And, while some advocate de-globalisation in response to the Covid-19 pandemic, this is not an option for climate change. Following scientific advise will again be critical. And, as climate change (like Covid) is a health issue, we have no doubt witnessed the vital role of a robust, responsive health care system. During health-related emergencies we discover the poor are the most vulnerable: both within individual countries and world-wide.

Sadly, regaining focus on the climate debate many be difficult. Unlike the Covid crisis, the deleterious impact of climate change is more incremental; thereby, giving the impression that urgent action is less necessary. The postponement of November’s Glasgow Climate Summit is a missed opportunity for global leaders to outline new, deeper commitments to Green House Gas (GHG) reductions. The collapse in oil prices improves the attractiveness of fossil fuels at the expense of more extensive use of renewable energy sources.

Moreover, businesses are fully focused on surviving the economic depression. And, especially with emissions declining this year, private climate-oriented investments may be postponed. Likewise, government spending priorities are understandably now focused on income and employment support and health care. Hopefully, the second phase of fiscal stimulus will prioritise climate investment. But, high public sector debt levels may be a contraint for many years.

In a post-Covid world, climate change will be the most critical issue for the global economy in the future. And, the next decade is critical. As such, the issue should be at the heart of every investment decision. Presently, despite the growth in ESG funds and happy talk at Davos, it is not. In the coming weeks I intend to publish a series of blogs providing the tools needed to put climate change at the centre of the investment process. Fortunately, recent experience suggests CO2 mitigation and economic growth are not incompatible. To the contrary, GHG reductions are required to sustain healthy, long-term economic growth. Further mitigation delays, however, increase the risk of a more painful, disruptive adjutment in the future.

The Lost Decade

Beginning with the Copenhagen Accord of 2009, and formalised in Cancun the following year, national leaders began to recognise the need to establish goals aimed at reducing emissions sufficiently to limit temperature increases to less than 2 degrees above historical levels. The Chart above illustrates the abject failure to curb the relentless rise in GHGs in the past decade.

While every nation has an important role to play, the Chart above illustrates the critical role of China, USA, EU, India, Japan, and Russia, as these nations account for 70% of annual emissions. Gains in world-wide CO2 levels amounted to 1% annually between 2007 and 2017, before accelerating to 2% in 2018 and 1% in 2019. Chinese emissions advanced nearly 2.5% per year, and the nation became the world’s largest polluter in 2006. Meanwhile, India added a staggering 5.5% per annum. At the same time, EU emissions declined nearly 2% per year. And, perhaps some will be surprised by the nearly 1% yearly reductions in the USA. In short, GHG cuts in the advanced countries were not sufficient to offset the increases in developing economies.

The level of national income plays a large role in each nation’s emissions level: larger, more prosperous nations pollute more. Indeed, on a per capita basis, the USA remains the world’s largest polluter, but even this metric is improving. However, Europe’s much lower (and declining) level of emissions per person indicates countries at similar income levels can differ widely. Per capita GHG levels are much lower in less-prosperous China, India, and elsewhere, but are rising sharply as these nations industrialise.

Silver Linings and Early Lessons

Despite the poor performance of the past decade, there are silver linings and positive lessons to be learned. First, a bit of simple arithmetic. The amount/growth in the world’s level of emissions depends on GDP growth, the amount of energy used to create GDP (energy intensity/efficiency), and the amount of carbon created per unit of energy used (carbon intensity).

The Chart above breaks down the past decade’s growth in emissions. The first vital lesson is that GDP growth does not necessarily come at the expense of reducing pollution levels. To be sure, stronger GDP in non-OECD nations contributed to out-sized GHG gains. However, OECD nations enjoyed expanding output, but managed to reduce CO2 levels.

Second, both OECD and non-OECD nations reduced energy intensity, e.g. they managed to use energy inputs more efficiently. Obviously, this is good news. However, national performance varied widely. For example, OECD energy efficiency improved about 1.5% per year. But, Germany’s 2.5% annual gains suggest other nations can improve energy productivity considerably further. This is encouraging news. (I will discuss this topic further next week).

Third, carbon intensity — the amount of carbon produced per unit of energy used — showed only small improvements in the OECD and rose further in non-OECD nations. The energy mix is the key determinant of carbon efficiency. The Chart above illustrates the world-wide share of energy produced by heavily-polluting coal remains high and stable, especially in emerging Asian nations (including China and India). The replacement of oil by less-polluting gas is good news. Most importantly, despite strong growth, the share of renewable energy sources remains very low. There remains considerable scope for improvement in carbon intensity in coming years. The sharp decline in solar and wind prices will help this transition, although the recent oil price collapse will be a headwind (next Chart). (I will investigate this further next week).

Finally, countries can learn from each other. Developing countries can adopt practices and technologies that have allowed advanced economies to grow and lower emissions simultaneously. Even within developed economies, the US can learn how Europe has achieved much lower levels of per capita energy use and emissions levels.

The Poor are the Most Vulnerable

Fortunately, the number of Covid-19 cases in developing countries remains relatively low, at least for now (Brazil’s recent experience suggests this may change, sadly). However, within countries, the evidence suggests that the poor have been the most vulnerable. The same is true for climate change: poor nations and low-income people within individual nations will be most at risk. The Chart above illustrates that the share of global CO2 emissions emanating from low and low-middle income nations is disproportionately small compared to their share of the global population. Indeed, CO2 per capita in these nations is only 10% of that in the world’s most affluent countries.

Nevertheless, the Chart above illustrates these poor nations are considerably more vulnerable to the economic and social consequences of rising temperature levels. (I will provide an in depth investigation of reasons for this vulnerability in coming blogs). There are numerous indices of of national vulnerability. As an alumnus, perhaps, I am biased toward the one produced by the University of Notre Dame. Nevertheless, they all deliver the same verdict.

Furthermore, the Chart above illustrates the advanced economies (Europe and USA mostly) account for the majority of the cumulative amount of global CO2 emissions: the key contributor to rising world-wide temperatures. Naturally, perhaps, developing countries are aggrieved, especially those with still low levels of emissions. Likewise, these developing countries anticipate they will produce higher levels of emissions, as industrialisation occurs. Not surprisingly, this has frequently made multi-lateral agreements aimed at establishing national contributions to emissions reductions highly problematic.

The Chart above illustrates the complex relationship between the level of national income and pollution. To be sure, emissions increase as industrialisation occurs and income levels rise. Eventually, however, a tipping point is reached. Affluent nations shift to less-polluting service sector activities. Likewise, they can afford to develop emission-reducing technologies. Hopefully, such knowledge can be shared with developing nations; thereby, offseting the polluting impact of their strong future GDP growth, and contributing to lower global income inequality.

Much Work to Do: The Next Decade Is Critical

So, we have failed even to cap GHG emissions, let alone reduce them. The United Nations now estimates current policies will not prevent further GHG increases, and lead to disasterous temperature increases of 3-4% by 2100. GHG reductions of 33% and 65% by 2030 will be required to limit temperature rises to 2% and 1.5% respectively by 2100. Even the already-established pledges are not nearly enough. The UN suggests these commitments must increase 3- to 5-fold to establish a pathway to the 2% and 1.5% temperature goals respectively.

Deeper reduction pledges were expected at the Glasgow Climate Conference, so its postponement is highly consequential. Net Zero Carbon plans continue to be be widely discussed. However, the table above illustrates the countries in which these programs either have been written into law or are in formally proposed legislation represent only about 10% of global CO2 emissions. Further delay is not an option: the required annual emissions reductions rise with every year decisions are put off. The UN estimates that annual cuts of 3-8% by 2030 are now necessary — 2 to 3 times the yearly reductions that would have been needed if the past decade had not been lost! As a result of the deep recession in 2020, global emissions are expected to decline 5-7% this year. This gives an indication of the scale of the task we face!

Strategic Conclusions

• The next decade will be critical. Recent experience illustrates that economic growth and emissions reductions are not incompatible. To the contrary, limiting temperature rises is a precondition for healthy, sustainable long-term growth.
• The poor are potentially the most vulnerable. The goal must be to establish a global energy system that simultaneously promotes economic growth, reduced emissions, and lowers world-wide income inequality. Advanced economies have shown that economic growth and lower emissions can go hand-in-hand. Emerging nations must learn from that experience. Pollution-reducing technology transfers to developing countries would help lower the economic and social cost of climate change for the most vulnerable nations.
• In a post-Covid world, unfortunately, the investments required to reduce emissions may confront formidable headwinds in coming years. To be sure, one can be lulled into a false sense of security by the very incremental damage caused by rising temperatures. Hopefully, however, we have learned that health-related emergencies can have significant consequences.
• I will continue my deep dive into these issues in coming weeks/months. Stay tuned!!