A reminder of the background. The target of the Paris Agreement, agreed by every independent nation on the planet in December 2015, is to keep global warming at less than 2˚C. If society is to do that, most reserves of fossil fuel will have to stay underground, unburnt. Since companies view all reserves as having financial value, this means a risk - should governments do what they promised to do in Paris, or some it - of what investors call “stranded assets”: having money invested in a resource that you then can’t realise. Investing any more money to add to this stock of potentially unburnable reserves creates what can be thought of as a “carbon bubble”. The risk of stranded assets is growing with every decision made by fossil-fuel companies to invest in yet more unnecessary fossil fuel projects: new coal mines, new oil and gas fields, new fracking, new fossil fuel power plants, and so on and so on.
The Bank of England awoke to this issue as a systemic risk in September 2015. After listening to arguments by Carbon Tracker, a financial think tank I chair, and other worried financial experts, they came to fear that fossil-fuel asset-stranding would risk wasting a lot of investment capital, and might even threaten global financial stability.
The effort to stop this threat soon went international. The G20’s Financial Stability Board set up a taskforce in December 2015 with a brief to specify the information investors need to be provided with in order for them to avoid stranded-asset risk. It is chaired by no less a figure than Michael Bloomberg. As soon as his Task Force's report came out out, more than 30 organisations - including Aviva, Axa, BHP Billiton, JPMorgan and Daimler – announced their support for its conclusions. Many more will surely follow, because the starting point in the TCFD’s proposed roadmap is that companies should include climate-related financial disclosures in their public financial filings. Not to do so would be to ignore material risks to organisations, the Task Force professes.
Those disclosures should span the core elements of how organisations operate: governance, strategy, risk management and the setting of metrics and targets. Crucially, the TCFD advocates, companies should align business models with a 2°C future. Remuneration of chief executives and boards should be linked to the extent to which their companies are hitting targets aimed at a sub-2˚C world.
Even before the Paris Agreement was adopted last year climate risk was high on the agenda of the world’s largest institutional investors and asset managers. Resolutions asking oil and gas companies to stress test their business models against a 2°C-consistent climate outcome were generally opposed by boards, but received record-high support levels from shareholders. Now there will be no hiding place. The TCFD report provides a template for best practices and a road map for better disclosure. Neither fossil fuel companies nor asset managers investing in them will easily be able to ignore it.
Some investors have not waited for the G20 Task Force’s advice. By the time of the December 2015 Paris climate summit, investment funds with collective assets of $3.4 trillion had either divested from all or some fossil fuels, or announced their intention to. This movement has continued to grow in 2016. On 12th December the value of funds divested passed $5 trillion. 80% of the funds involved, spanning 688 institutions, are managed by commercial investment and pension funds. This shows that the campaign is now mainstream in the capital markets. Capital is fleeing fossil fuels just as the fossil fuel industries manoeuvre their capos into the White House for the first time.
What damage can a Trump administration do to this analysis? According to a PWC report this month, the impact they can have on global greenhouse emissions will be “pretty small”, if others hold course. With the trends I have chronicled each month in 2016, and the declaration by all governments in Marrakech in November that the Paris process is "irreversible", a holding of course seems a more than a reasonable assumption.
Trying to derail Paris, and revive coal, Trump will have to somehow suppress the progressive American states. His problem is that 33 states and the District of Columbia have cut carbon emissions while expanding their economies since 2000, including some Republican states. How do you persuade officialdom in those states to revert to a failed economic model that seeks essentially to recouple economic growth and fossil fuel use? Fifteen of the states, led by California, New York, Virginia, Vermont and New Mexico, have already told Trump that if he tries to kill US climate plans, they will see him in court.
How has Big Energy coped on the transition frontier as 2016 came to a close? Two snapshots. The utility industry continues to be split into companies seeking to defend the fast shrinking status quo, and those now rushing to be part of the new world. One of the latter, Engie (formerly GdF Suez) announced that it sees the oil price falling to $10 as a result of current trends in energy markets, and the wave of clean-energy investments it and other major corporates are making. That would be interesting, should it transpire. For example, on 1st December BP gave the green light to a $9bn investment in a deepwater oilfield, rather appropriately named Mad Dog 2, due onstream (cue laughter, based on the industry's record of delivering major projects on time) in 2021. Good luck to them in recouping their investment if Engie's view of the world comes to pass.
My conclusion, as the new year begins, is that the global energy transition is progressing faster than many people think, and is probably irreversible. Trump's prospects of resurrecting coal, and giving the oil and gas industry the expansionist dream ticket most of it wants, are very low.
There is a caveat, of course: that he doesn't manage to blunder into a world war. All bets would be off then.
In 2017, I will consider this wider security question in my summaries, plus the issues of cybersecurity and fast-emerging artificial intelligence and robotics. For they have all now become clearly relevant to the ultimate outcome of the great global drama in the energy-climate-data nexus.
My latest for Recharge:
Donald Trump’s would be climate saboteurs might have hoped that merely the mention of their intention to quit the Paris Agreement would be enough for the climate talks to fall apart at the annual climate summit in Marrakech. Exactly the reverse happened: the rest of the world pulled together. In the second week, with ministers and some heads of state in attendance, nations strengthened their collective resolve to decarbonise global energy. 195 countries issued a Marrakesh Action Proclamation reaffirming the Paris Agreement, the urgent imperative for it, and the speed of the energy transition in the real economy. They spoke of their “urgent duty to respond” to the threat of climate change, and agreed that “momentum is irreversible – it is being driven not only by governments, but by science, business and global action of all types at all levels.”
Key countries pledged their commitments in similar vein. China spoke of a “a global trend that is irreversible”. Russia said they will stick the treaty “even if others don’t.” No major country disagreed, not even Saudi Arabia. Eleven countries elected to send the clearest of messages to Trump Tower by ratifying the treaty during the summit, including two that could easily have used the incoming Republican regime as an excuse for foot dragging, the UK and Australia. A group of 48 countries known as the Climate Vulnerable Forum, determined to shoot for a 1.5˚C ceiling to global warming, pledged to meet 100% of their energy from renewable sources as soon as they could.
“Marrakesh sends out strong signal on climate change” read the headline in the Financial Times on the final day. “UN delegates determined to push through Paris accord despite Trump vote”.
The Paris summit in December 2015 was about targets. Marrakech was about plans. Germany assumed leadership with a sector-by-sector plan for decarbonisation by 2050. “By 2050, the whole German economy will be fully renewable”, Jochen Flasbarth, State Secretary at the Environment Ministry announced.
The US, Canada, and Mexico joined Germany in tabling plans for deep cuts by 2050: the US and Canada by 80% from 2005 levels, and Mexico by 50% from 2000 levels. They are the vanguard of a “2050 Platform” group, launched at the summit, who have pledged to follow with plans through 2050 soon. They include Colombia, Costa Rica, Peru, UK, Marshall Islands, Sweden, EC, Chile, Norway, Mexico, Italy, New Zealand, Japan, Ethiopia, Switzerland and France.
Trump may simply drop the US plan, but many of his states and companies won’t. This is the big difference from the previous time the US became a rogue climate state, in 2001, when George Bush pulled out of the Kyoto Protocol. Then, many big businesses remained to be persuaded that climate change was a significant threat. Not so today. 360 US businesses urged Trump not to back out of the Paris agreement. DuPont, Hewlett Packard, Kellogg, Mars, Nike, Starbucks and other well known brands all agreed that “failure to build a low-carbon economy puts American prosperity at risk”. 196 companies joined governments in the 2050 Platform. Over $100 trillion in investor assets now acknowledges the reality of climate change.
As for the states, California, Vermont and Washington state all sent delegations to Marrakech. California, the sixth biggest economy in the world, is considering applying to join the Paris Agreement should the federal government pull out. 10-12 US states, representing 30% of the US economy, are set to actively oppose Trump’s plans to quash climate laws, according to a Californian delegate.
Trillium Asset Management CEO Matt Patsky summed up the Marrakech summit well. “The train has left the station”, he said, “and to stand in its way is folly”.
Will Trump commit such folly? We will see. The renewables industries will be among the many on the train looking down at him on the tracks, should he and his appointees choose to stand there.
My latest column in Recharge magazine:We live in an era where change seems to be accelerating, wherein eventualities once deemed black swans because of their unlikelihood regularly come to be viewed as predictable surprises after the event. In this context, imagine sitting down for confidential in-depth interviews with 60 business leaders and their equivalent in public service, and asking them what they honestly feel about their situation: in particular their personal ability to spot what is coming, and to put proactive plans in place. That is what BBC veteran Nik Gowing and change guru Chris Langdon did in 2015. In a report entitled “Thinking the impossible: a new imperative for leadership in the digital age”, they share the results. They found that many leaders, once guaranteed anonymity, admit to a dire state of doubt and inadequacy, and many say their insecurity burgeoned in 2014. Gowing and Langdon describe their findings as “deeply troubling”. They talk of 2014 as “the great wake up” year, because of the multiple geopolitical and strategic disruptions it threw at the world. They found that the insecurity of leadership, and the unwillingness of leaders to square up to “unpalatable” issues, is particularly marked in the digital domain. “In what is fast becoming a new disruptive age of digital public empowerment, big data and metadata”, they write, “leadership finds it hard to recognise these failings, let alone find answers and solutions.” In the light of these conclusions, it is interesting to consider the full extent of the challenges energy-industry leaders face today. Let me consider five themes, all greatly relevant to the energy markets of the future: transition, data, artificial intelligence, robotics, and capital. First, the challenges of transition from fossil fuel dependency to zero carbon. Business models are dying in the incumbency, yet the best operable replacements are far from obvious. Prizes are huge, and penalties dire. On the one hand, Tesla can raise $400 million of free money from customers tabling deposits for a product (the Model 3) that can’t even be delivered to them for a year. On the other hand, SunEdison can plunge from multi-billion dollar status to bankruptcy within less than a year. Second, the world of big data has largely yet to manifest in energy markets. It will. Ever more advanced algorithms have allowed tech companies to grow in recent years from nothing to multiple-billion-dollar valuations. They have done so utilising a broad array of strategies, including use of real time data (e.g. Waze), peer to peer bypassing (e.g. Skype), hyper personalisation (e.g. amazon), the leveraging of assets in the citizenry (e.g. airbnb), leveraging of assets and workers (e.g. Uber), sharing of assets (e.g. zipcar), outsourcing of data processing (e.g. kaggle), and people-power financing (e.g. Kickstarter). Tech giants with operations that span these strategies, such as Apple, Google and Facebook, have made their first plays in energy long since. This in a world where, to take one example of massive relevance, the UK national electricity grid achieved a first in October by transmitting data down its own wires. Third, artificial intelligence. This new technology, which has so many potential benefits for society alongside inherent threats, is breaking out all around us. Machine learning of a kind only dreamed of for years is now reality, and applicable to multiple business sectors. In energy, driverless car technology is not just in design phase. Uber is testing the first self-driving taxi fleet, on the streets of Pittsburgh. Fourth robotics, with which AI will go hand in hand. Toyota, for example, has launched a $400 robot with the intelligence of a 5 year old for use in homes. Why? “This (product) may help people get interested or fond of Toyota, or help in connecting with our customers who have let go of Toyota vehicles”, says a company spokesperson. Fifth, capital. Gillian Tett has written in the Financial Times recently that our future has become “unfathomable”, and investors generally are particularly ill equipped to cope with it. Banks come high of the inadequacy list. They have lost consumer trust on a grand scale since the financial crisis, and are now leaking customers to alternative service providers of many kinds. One bank CEO says openly that his sector is becoming “not really investable”. The banks are trying to fight back by grasping the changes underway in use of technology. Some are pitching to central banks a narrative that holds they will become more efficient if they are granted use of a utility settlement coin for clearing and settling blockchain trades. (If you haven’t heard of blockchain, now is the time for a few study hours). UK banks are readying to roll out robot tellers, aiming to improve customer service via learned empathy. So pity the poor confused and insecure CEOs of the energy industry in their casino, as they try to make sense of a world changing as fast as this. But not too much. Some of them will grab the chips, shuffle them around, and place the right bets. These people will come to know what it feels like to ride an exponential-company rocket. And, if we are lucky, to improve society as they do so.
A slightly extended version of my column this month in Recharge Magazine:
Familiar transformative technologies such as the telephone, car, and air conditioner mostly disseminated slowly in the 20th century. They took decades in America to reach 50% of households and move beyond. In the 1990s, the computer, cellphone, and internet travelled much faster growth curves. Such accelerated technology takeup seems likely to continue in the 21st century, as renewable energy, batteries, and electric vehicles are in the process of demonstrating.
Two things are changing alongside this speeding up of product penetration. The first involves power and fuel for manufacturing and dissemination of products. Increasingly emissions constraints will entail renewables providing this. The second involves waste. Almost all of the product lifecycles in the twentieth century were linear: the products were made, used, and at the end of their useful lives either incinerated or sent to landfill. Increasingly materials and pollution constraints will entail those products following circular rather than linear pathways, wherein products and their component parts will be recycled, remanufactured, and refurbished.
The transition to renewables, as I argue regularly in this column, will be mainly driven by mutually reinforcing megatrends in environmental law making, development of a disruptive family of insurgent energy technologies and industries, and contemporaneous decline of incumbency industries in the face of ageing problems. The transition to circular economies is well summarised by Accenture analysts Peter Lacy and Jakob Rutqvist, in an excellent book, “Waste to Wealth”. “The old linear model of business is not only environmental suicide”, they write, “it's also business suicide.” These are strong words for consultants making a living by advising some of the largest corporations in the world, entities often not noted for the ease with which they embrace fundamental change. The authors go on to argue that the savings are too big to ignore - a $4.5 trillion reward for performing circular economy business models by 2030 - even if one rejects the environmental imperative driven by an increasingly stressed resource base.
They take no prisoners articulating the extent of the change inherent in a switch to a circular economy. “It’s about eliminating the very concept of ‘waste’ and recognizing everything has a value.”
Business models become very different in this world, just as they do in energy. Companies intent on embracing the circular economy have to go well beyond the point of sale, creating connections through product returns and customer engagement. As energy companies move from centralised to decentralised power, they have to do the same: they are operating in new waters, where people are beginning to provide the energy they need for homes and commercial premises themselves, and will increasingly do so if energy companies don’t find attractive new offerings consistent with the global energy transition.
The emissions prizes of both a renewable economy and a circular economy are huge. The Paris Agreement is essentially a charter for the decarbonisation of energy industries, to be achieved as soon as humanly possible. This explains why so many cities and corporations have taken on 100% renewables targets. Meanwhile, adopting a circular economy could involve 70% cuts in carbon emissions by 2030, according to a recent Club of Rome study of five European economies. Modelling a mix of renewable energy, energy efficiency and material efficiency strategies, the study finds that GNP would grow by c.1.5% across the nations studied, and more than 100,000 additional jobs would be created, cutting unemployment by one third.
Champions are essential in this new confederacy, and they already exist. Take the city of San Francisco. It has a 100% renewables target, and is taking policy steps consistent with that, not least requiring solar to be installed on or incorporated in all new buildings. As long ago as 2002 it became a pioneer of the circular economy, taking on a target of zero waste to landfill or incineration by 2020. Within a decade of that it had reduced waste to landfill by 50%, becoming Greenest American City in 2011 as a consequence. It currently holds the North American record for recycling & composting, with an 80 % diversion rate. As for greenhouse-gas emissions reductions, its targets are a 40% reduction below 1990 levels by 2025, and a 80% reduction below 1990 levels by 2050: consistent with the Paris Agreement. Continuing to target a renewable-powered economy and a circular economy economy in parallel will surely help it achieve those, inspiring other cities to do the same.
Of course, it is possible in principle to go much faster even than this. The Centre for Alternative Technology’s “Zero Carbon Britain” plan gets the UK to decarbonisation as soon as 2030 without any outlandish assumptions about new disruptive technologies. Bioenergy comprises more than a quarter of the fuel mix by then: a mix of biomass, synthetic liquid fuel / biofuel, and synthetic gas / biogas. The scope for using the recycling of existing biological material in this scenario is huge. Incredibly, global food waste alone would be the third biggest emitter of greenhouse gases after the USA and China, were it a country.
And of course, there will be innovation en route by the new confederacy. This too is already happening. Take Dong Energy’s recent funding of the first full-scale power plant using bugs to clean up household waste. Novozyme enzyme technology “washes” organic matter from unsorted waste from the equivalent of 110,000 homes, creating a slurry that can be turned into gas for use in power generation, or motor fuels.
The future can be both renewable, and circular. Sooner than many think.
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