Alan Miller's blog

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. 

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.

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.

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.

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:

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. 

Here is a trillion dollar question: How will the portfolios of long-term asset managers like pension funds, foundations and endowments be affected by climate change? These institutions, in contrast to commercial banks, are legally obligated to take a long-term view in managing their returns. A new report by Mercer, a leading consulting and investment services firm, provides the first look at yet another window on the complex consequences of climate change—the implications for strategic asset allocation. 

 

A headline result of the study is the estimated increase of up to 10 % in overall portfolio risk, primarily due to policy uncertainty—equivalent to as much as US$8 trillion by 2030. Traditional equity and bond holdings—usually the most conservative forms of hedging against uncertainty –- are most at risk of underperformance.  In contrast, carefully selected investments in climate- sensitive sectors may actually reduce overall portfolio risk. 

 

The International Finance Corporation (IFC) and UK’s Carbon Trust, along with 14 institutional investors collectively managing over US$2 trillion, funded the analysis, which was carried out by Mercer. The analysis looks at impacts by sector, region, and asset category (bonds, private equity, real estate, etc.) and builds on a set of climate change scenarios out to 2030 developed by the Grantham Research Institute at the London School of Economics and the consulting firm Vivid Economics. 

 

 

They inhabit two different worlds—buildings and climate change—both outside and within the World Bank. It should not be that way as the building sector could be central to both mitigation and adaptation efforts.  

 

Buildings are important for climate mitigation because they account for about 30% of global energy consumption and greenhouse gas emissions. According to the International Energy agency (IEA), energy use in this sector is expected to increase globally about 30 % over the next two decades if recent trends continue; however, the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report concludes buildings offer by far the largest potential source for low cost reductions in CO2 emissions. The World Bank has many projects and analyses addressing this opportunity including a recent ESMAP (Energy Sector Management Assistance Program) report on the benefits and obstacles to effective building codes. These could address over 60 % of building energy use but remain weak and often unenforced in most Bank client countries.

The recent talks in Tianjin, Washington DC and Addis Ababa show that there is serious thought being given to making good the promises on climate finance in Copenhagen (read related blog post by Andrew Steer).

 

I believe that the Montreal Protocol has some lessons to offer for tackling climate change: It is an international agreement that addresses stratospheric ozone depletion and is widely viewed as the most successful response to a global environmental problem to date. One common feature of the ozone and climate conventions is the provision of financial resources to help developing countries pay for the higher costs of measures with global environmental benefits. This topic is high on the agenda for the Cancun climate meeting in December, and is being specifically addressed by a high-level UN Advisory Group on Climate Finance that met last week in Addis Ababa.

 

Since the signing of the Copenhagen Accord last December, much attention has focused on the issue of resource mobilization and specifically how to generate the US$100 billion a year for climate finance promised by 2020. Numerous studies have also been published estimating total costs for developing country mitigation and adaptation requirements─they usually conclude that the needs are in the many billions of dollars.

A commonly heard comment in climate change discussions has been that the benefits of climate change – milder winters, increased agricultural productivity -- also have to be acknowledged. Russia and Canada, it has often been argued, could be economic “winners” from climate change due to easier access to ocean shipping routes, longer growing seasons, and the space and water necessary to increase agricultural production. A 2008 report of the U.S. National Intelligence Council notes that Russia “has the potential to gain the most from increasingly temperate weather”, citing easier access to Siberian energy reserves and an Arctic waterway. This idea was popular with some Russian scientists and politicians, who as recently as the past year questioned whether reductions in greenhouse gas emissions were necessary.

 

While consideration of benefits is appropriately included in economic studies of climate change, the recent heat waves and wildfires in Russia illustrate the limitations in thinking this way. The July heat wave – the worst in the
130 year record -- brought Moscow temperatures in excess of 100 degrees, destroyed crops on an estimated 25 million acres (about the size of Iceland), and led to intense fires across the country wiping out entire villages. Burning peat fields darkened the skies and filled the air with high levels of pollution. Breathing the outside air for an hour in Moscow is now reported to be equivalent to smoking two packs of cigarettes. In response to this, and other climate-related production declines in the EU and Canada, grain prices have risen 90 %. In order to protect domestic markets, Russia has banned grain exports.