Feeling Peaky about Oil?

One thing the G8 did manage to agree was a common statement on climate change, which was recognised as a “serious long-term challenge” for the entire planet. The original draft communique had said “our world is warming”, reflecting the fact that global ambient temperatures have risen 0.6C in the past 60 years, and each of the last 25 years have been the hottest on record.145 However, this reality was uncomfortable for the administration of US President G. W Bush, and they had the G8 text watered down, in similar ways to their influence on the UN summit in September.146

Despite the ostrich-impression of some world leaders, the realities of climate change demanded attention during 2005, with spiraling demand for oil, increasing oil prices, severe weather events, droughts and economic implications being felt worldwide.

In August the price of oil bumped up against $70 a barrel. This was not just an anomaly due to political instability or speculation, with Goldman Sachs predicting that oil prices could move to $100 a barrel in the near future. Instead, major changes in supply and demand have been affected the price of oil. Key to growing demand has been the industrialization of large countries such as China. It had already increased its oil consumption by 11 percent in 2004, becoming the second largest oil consumer after the United States. The other side to the price equation is supply. Overall discoveries of oil peaked in the 1960s, with just one new barrel of oil being discovered today for every four that is consumed. New extraction techniques and new discoveries may keep things going, but estimates of the oil peak, when supply wont keep up with demand, range from between 2006 and 2020. A global peak in production is not the same thing as oil running out, as large amounts of oil will still be pumped after that point, but on an unavoidably declining basis. Although debates about the end-of-oil may have a 70’s retro feel to them, given the last time an oil shock hit the world, this time the evidence suggests that we are arriving at the beginning of that end.147

The impact of past and present consumption of oil continued to be felt during 2005, but this time in ways that made the global media. Changing weather and seasons had already been disrupting people’s lives from China, the Pacific, and Peru.148 Poor monsoon rains had hit agriculture in India, reducing economic growth.149 However, the hurricanes in the United States were broadcast to the world, and led many to discuss the implications of climate change. It was the regions’ worst hurricane season in history, with the weather authorities running out of names for the number of storms. Although meteorology is complex, this upturn in storm activity was consistent with predictions based on current patterns of climate change. The impact of Hurricane Katrina on the thinking of some in the US was clear. Wal-Mart CEO Lee Scott said he had an epiphany on climate change and the wider environmental challenge. "We should view the environment as Katrina in slow motion," he said."This used to be controversial, but the science is in and it is overwhelming." Wal-Mart announced it will invest $500 million a year in new environmental technologies, including renewable energy systems.150

The business implications of climate change continued to unfold during 2005. Lloyds Insurers announced that Katrina would probably cost it over US$2 billion. Allianz, the giant German financial services group, released a report jointly with WWF, which reported that weather related disaster costs are currently rising at 2-4% a year, with premiums rising to meet the costs. It called for a 60-80% reductions in global emissions by 2050. Meanwhile, prices for carbon allowances rose sharply in the middle of the year, up from 12 euros a tonne in April to almost 29 euros by July. One reason is the EU’s reduction of allowances to some countries, but another important reason is the rising price of natural gas, which has led more electricity companies to source energy from coal, which is proving cheaper, despite the carbon charges due to its greater production of CO2.151 This again raises concerns that the carbon trading system may do little to reduce carbon emissions. The limited geographical application of the system to Europe also raises questions about its effectiveness: some companies, including Norsk Hydro and Corus have said they may move their factories abroad to mitigate high fuel costs and carbon charges.152

Despite concern about the competitiveness implications of action on climate change, Nick Robins of Henderson Global Investors argues that there are many opportunities “for those who understand the dynamics of the coming carbon crunch and invest in industries of the future”.153 In light of this KLD Research and Analytics Inc has launched the Global Climate 100 Index, the first investor index comprising companies focusing on solutions to global warming. The CEO of the world’s largest company GE, Jeff Immelt, announced his conviction that “green is green”, making reference to the colour of the US dollar, and that his company “plan to make money” from investing $1.5 billion in environmental technologies. It is estimated that the world market for environmental goods and services is already worth around £270 billion.154

Not all companies can find easy win-win solutions to the carbon crunch. The airline industry faces a particular challenge. In July a coalition of UK airlines, airports, aircraft manufacturers and air navigation operators began working on the ‘Sustainable Aviation’ initiative to increase fuel efficiency by 50% by 2020 compared with 2000 levels, and seek to enter the EU’s Emissions Trading System. Environmental groups pointed out that a threefold increase in the volume of air flights in the next 30 years is being planned for by the industry. It is difficult to see how voluntary corporate action on reducing the volume of passenger sales is possible, and so the challenge appears to be one for government.

The inevitability of major changes arising from the carbon crunch is making more investors hungry for good information on the risks and opportunities faced by their portfolios. Henderson Global Investors has worked with Trucost to create a way of measuring companies’ carbon emissions relative to their earnings.155 Henderson’s Nick Robins, said that if companies had to pay the UK government estimate of the economic damage done by a tonne of carbon, about 20 pounds a tonne, then more than 12% of the FTSE 100’s earnings would be at risk. He explained that more disclosure of carbon emissions is essential for investors. “Carbon is set to become a critical factor in business strategy, influencing the pattern of corporate acquisitions and divestments, for example. There should be no surprise when the first carbon-driven profits warning is issued. For investors, getting standardized comparable carbon data from companies is now imperative”.156

In a new book on the future of capitalism, Jonathon Porritt called for concerted action between government, business and civil society to address the systemic challenge of climate change and sustainable development more broadly. “It is critical that politicians the world over stop flirting with renewables as ‘an interesting little niche’ and start investing in them as if our future depended upon them – which, indeed, it does.”157 Porritt notes that renewables will not substitute oil like for like, and so societies will need to adapt in more profound ways. Agriculture, energy, manufacturing and transportation will all be impacted in ways that require shifts in how we understand and meet our needs. For example, although more hybrid cars will be useful, they will not play a role in meeting personal mobility needs, without a major change in those needs, and options to fulfill them through non-carbon emitting forms of transport. A fundamental questioning of current concepts of personal and societal progress is necessitated by the environmental challenge. In the past decade many environmentally aware people have become skilled professionals in government, business and elsewhere, and focused on achieving incremental or small-scale changes. This has lead to a death of vision, according to Michael Schellenberger and Ted Norhaus in Grist Magazine. “Those of us who call ourselves environmentalists have a responsibility to examine our role and close the gap between the problems we know and the solutions we propose,” they wrote. It appears that with environmental problems moving from prediction to reality, a renewed moral conviction and transformative vision may arise from the environmental movement in the coming years, with implications for the corporate citizenship agenda, and beyond.158

contents © Greenleaf Publishing, apart from the Introduction © jem bendell, 2006. site by waywardmedia.com