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Why We Must Engage the Private Sector in Climate Change Adaptation Efforts

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 Lauren Day/World Bank

Late last month, I retired after spending more than 30 years in the climate arena, the last decade as a principal climate change specialist at the International Finance Corporation.

During the span of my career, climate change has moved from the sidelines to be recognized as a serious development challenge. And while we’re still far from achieving the international commitments needed to avoid potentially dangerous and even catastrophic climate events, much has been accomplished.

Scientists have reached near-consensus about climate change and its impacts. We’ve also seen the creation of several significant donor-supported climate funds, as well as a steady increase in policy and financial support for climate-friendly technologies.

In one critical respect, however, we need more progress: making the private sector a partner in helping nations build resilience and adapt to climate change.

Carbon Dioxide Levels Reach Unprecedented Highs: But Catastrophic Climate Change Can Still be Avoided

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 Courtesy of World Meteorological Organization
Graph shows concentrations of atmospheric Co2 for the last 800,000 years, with measurements, starting from 1958, made at Mauna Loa in Hawaii. - Image courtesy of World Meteorological Organization

Scientists monitoring atmospheric concentrations of CO2 from a mountaintop in Hawaii recently reported that the presence of this greenhouse gas exceeded 400 parts per million (ppm) for the first time in at least three million years – a period when temperatures were much warmer than today. The significance of this seemingly dry statistical trend is stunning as reported in the New York Times:

From studying air bubbles trapped in Antarctic ice, scientists know that going back 800,000 years, the carbon dioxide level oscillated in a tight band, from about 180 parts per million in the depths of ice ages to about 280 during the warm periods between. The evidence shows that global temperatures and CO2 levels are tightly linked.

In addition to the location in Hawaii, several other Global Atmosphere Watch stations from the Arctic to the Equator reported CO2 concentrations exceeding 400ppm.

Experts believe that in order to limit warming to 2°C – a goal based on expected impacts – concentrations should rise to no more than 450 ppm, a level we may reach in only about 25 years based on current trends.

Communicating Climate Risks to Investors: the Next Major Ratings Failure

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 Reserves of coal outside a power generation plant. - Photo: Shutterstock

Only a few years ago, the failure to properly quantify and communicate the risks of a widely traded commodity, mortgage-backed securities, caused major damage to the US and ultimately the global economy. According to the IMF, total losses will approach $4 trillion (pdf). A significant share of the losses were incurred by pension funds and insurance companies typically viewed as among the more risk-averse and cautious segments of the investment community.

A new report by the Carbon Tracker Initiative and the Grantham Research Institute on the Environment and Climate Change evaluates the failure to properly value the risks of climate policy to companies with major fossil fuel reserves and finds a similar potential for massive financial fall-out. They conclude that “Between 60-80% of coal, oil and gas reserves of publicly listed companies are ‘unburnable’ if the world is to have a chance of not exceeding global warming of 2°C.” (A short video explaining the research and mapping the amounts of investment at stake in different countries is available online).

A tribute to John Hoffman, an unsung champion of the global environment

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The accomplishments of mid-level bureaucrats, particularly in this time of anti-government sentiment, are rarely celebrated. It was therefore striking to see major newspapers devote significant space to obituaries for John Hoffman, a long-time friend and former colleague who did as much as any one individual I know to design and implement measures to protect the global environment.

I first met John as a young lawyer in the late 1970s, while working on the then new issue of ozone depletion – he for US EPA, me for an environmental advocacy group. We quickly became close confidants working to leverage a unilateral US phase-out of CFCs to achieve an effective international agreement, the Montreal Protocol (recently celebrated at events hosted by the World Bank).

Before almost anyone, he saw the linkages between ozone depletion and climate change, and used his office to produce the first major government report on climate policy – “Can We Delay a Greenhouse Warming?” – in 1983. He was equally adept at highly technical matters such as the creation of a single metric for comparing the impact of ozone depleting substances and policy issues such as the design of environmental regulations. 

A new `Climate Normal' needed

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The impact of climate change on investment and development is fundamental but is yet to be appreciated, or some in cases even understood. One related issue is a seemingly obscure technical calculation, the use of “Climate Normals” – a standard way of estimating the weather expected in a particular location for any given day. Such estimates have enormous significance for planning power plants, ports, water systems, roads, and long-lived infrastructure.

The difference between temperatures in the ‘70s (a cool period) and the ‘00s (the warmest decade on record) can mean large increases in summer peak demand. The planning of water supply and demand will similarly be dramatically affected with change in temperature and precipitation. Getting it wrong can mean serious under or over investment, with social as well as economic disruption.

The concept of Climate Normals was originally mandated by the WMO and IMO in the 1930s, initially calculated and updated every 30 years. In 1956, the same organizations recommended updates more frequently, every decade. In 2011, the leading US center for archiving and summarizing climate data, National Climate Data Center (NCDC), released the new Climate Normals that cover the period between 1981 and 2010, replacing the previous 1971-2000 installment. 

Tar sands: The story behind the headlines

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The complexity of climate change issue is a challenge for most mainstream media, which increasingly seek the shortest possible sound bite to interest an audience with a very limited attention span. Yet a recent example illustrates the importance of looking past the headlines to understand the importance and true meaning of scientific announcements.  The article featured the optimistic headline: “New study finds oil sands fuels would cause imperceptible temperature rise.” 

This declaration understandably attracted considerable attention from climate policy-watchers because Canadian oil sands (also commonly referred to as “tar sands” reflecting the heavy, molasses like quality of the substance) are the resource proposed for transmission via the controversial Keystone XL pipeline recently denied a permit by the Obama Administration. (Oil sands deposits have also been found in Russia, Venezuela and Kazakhstan, but a majority of identified reserves and virtually all commercial production are in Canada.)  

Some advocates for developing the oil sands see their use as essentially a national energy security issue, maintaining the pipeline is an important step forward toward fulfilling the long cherished dream of US energy independence, not to mention the potential to reduce or at least stabilize gasoline prices: ``Is US Energy Independence Finally Within Reach”, National Public Radio, March 7, 2012.

To be sure, the promise of lower gasoline prices and energy security are strong considerations. But an ongoing debate continues as to whether or not this economically attractive resource can be extracted, refined, and distributed without unacceptable environmental harm. This is why an otherwise academic analysis by Neil Swart and Andrew Weaver at the University of Victoria in British Columbia proved newsworthy. They calculated the global temperature rise that would result from the carbon dioxide released by burning currently proven reserves of Canadian oil sands: Neil Swart and Andrew Weaver, “The Alberta oil sand and climate,” Nature Climate Change, Feb. 19, 2012.

Crystal gazing with McKinsey on resources for the future

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In 1980, the biologist Paul Ehrlich and business school professor Julian Simon famously wagered on the likelihood of resource scarcity over the coming decade. Based on his expectation that population growth would lead to a rapid growth in demand for basic resources, Ehrlich bet that the prices of five commodity metals would increase; Simon, argued that rising prices incent human innovation and consequently that resource prices should be stable or declining. In the decade that followed, despite population growth of 800 million, the prices of all five commodities chosen by Ehrlich declined and he paid the bet. In July 2011, the investor Jeremy Grantham noted that if the bet had been extended to 2011, Ehrlich would have won – by a lot. 

McKinsey Global Institute, a research arm of McKinsey & Company, recently revisited the debate about economic growth and resource scarcity with the release of a major study, “Resource Revolution: Meeting the world’s energy, materials, food, and water needs”. One of the lead authors, McKinsey partner Jeremy Oppenheim, recently visited the World Bank in Washington DC to describe the report’s conclusions and discuss its implications for development strategy, particularly for the World Bank. His presentation captivated a large audience and provoked a lively discussion.

The key findings of the report can be summarized in two categories – challenges and opportunities. The former starts from the projected increase of up to 3 billion more middle class consumers in the next 20 years, driving up demand at a time when finding and extracting resources is becoming increasingly difficult and expensive, while also resulting in enormous environmental pressures.

The good news is the existence of sufficient technically and economically feasible efficiency improvements and alternative technologies to meet nearly 30 percent of predicted demand and offset much of the projected growth. Some of these measures are already identified and well understood, such as improving the efficiency of buildings and irrigation – a “resource productivity revolution”. These measures would, however, not be sufficient to alleviate poverty and avoid global warming in excess of the two degrees Centrigrade widely considered the threshold.

To meet these goals, McKinsey outlines an additional level of ambition with respect to clean energy and carbon sequestration.

Save the chocolate and the planet

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With Durban climate change meetings around the corner, discussion on the long-term risks to Africa and the severity of recent extreme events has understandably increased – for example, hot, dry weather that could make farming more challenging for large parts of Africa.

These changes will almost certainly affect all of us at least indirectly, as populations are forced to migrate, disaster relief costs escalate, and increased uncertainty lowers market returns and economic growth.

But it may help to appreciate the true meaning of the expected changes from climate change to consider some of the less dramatic – but far reaching – smaller impacts that will affect all of us in a myriad of ways in our daily lives. A good example is recent predictions of climate impacts on some of our favorite foods – not necessarily life shattering, but a big part of our daily rituals and pleasure in life. Consider three in particular: coffee, chocolate, and wine. The first two are particularly important agricultural exports for Africa.

Starbucks recently announced concerns about the future of its supply chain due to the impacts of climate change. Short-term impacts are already evident due to floods in key coffee growing nations such as Columbia. The Union of Concerned Scientists observes that coffee growing is tied to specific locations such that even small changes in temperature can affect production and increase exposure to pests and disease.

Time to engage the private sector on climate finance

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I was at the Climate Investment Funds meetings in Cape Town last week with several other representatives from development banks, NGOs and governments to discuss results, impacts and the future of this financial mechanism. One of many themes cutting across meetings in Cape Town was the importance and challenge of engaging the private sector in climate finance. The private sector is by far the largest source of investment, the dominant provider of technology, and often essential for implementation of mitigation and adaptation measures. However, based on the discussions this week, it’s apparent there is much to learn about what is actually expected or sought from the business community. Here are some of my observations from the meeting:

  1. In my experience references to “the” private sector are common but largely meaningless and often confusing in failing to distinguish between entities as different as major multinational manufacturers, international financiers, and locally- based entrepreneurs. Some speakers even used the term more broadly to encompass markets, including policies directed at consumers.
  2. There are some unavoidable tensions between emphasizing country plans and priorities and the promotion of markets for climate-friendly products and services. This is particularly true in smaller and poorer countries. Control of donor resources is fundamental for many governments but sometimes difficult to reconcile with the flexibility, consistency, and speed required by investors. Public-private partnerships (the focus of a Cape Town session) is one solution but not always appropriate or workable.   Finding models which can blend the two, as in the collaborative IFC/World Bank Lighting Africa project, will be increasingly important. The World Bank was able to build a relationship with energy ministries while IFC focused on helping businesses. Together, they have been able to address a wide range of issues from regulatory systems to that of supply chain development.

Diet for a low-carbon planet

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Most of the proposed solutions to climate change such as substitution of fossil fuels require large investments, policies that are politically contentious or difficult to enforce, and years to fully implement. However, some of the most effective and lowest cost opportunities for greenhouse gas (GHG) reductions are lifestyle choices that can be made today that cost little, and that are actually good for us. Chief among them is the decision to adopt a healthier, less meat intensive diet. 

The significance of this opportunity was emphasized in a recent presentation at the World Bank by Jonathan Foley, director of the University of Minnesota Institute on the Environment. According to analysis by the Institute, every pound of meat is equivalent to about 30 pounds of grain production in its contribution to climate change when allowance is made for the full life cycle of livestock production. This is primarily because methane emissions from ruminants have a GHG impact roughly 25 times that of carbon dioxide.

Another expression of the resource intensity of meat production, Foley explained, is that even highly efficient agricultural systems like that in the US only deliver about the same calories per hectare in human consumption terms as poor African countries with more grain based diets. The surprisingly large role of livestock in global warming was explored in a 2009 article by Robert Goodland, formerly a World Bank economist, and Jeff Anhang, an IFC environmental specialist. They estimate that when land use and respiration are taken into account and methane effects are properly calculated, livestock could account for half of current warming when using a 20 year time-frame. According to Goodland and Anhang, replacing 25% of livestock products with alternatives would liberate as much as 40% of current world grain production with comparable benefits in reduced burdens on land, water, and other resources. 

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