Energy and Environment Evidence File

Nov 18: Energy and the Environment: Indicators and Surprises
Why Is This Information Valuable?
The new US National Climate Assessment was quietly released the Friday after Thanksgiving.
The Financial Times summarized it as follows: “Climate change could cost the US hundreds of billions of dollars and cause thousands of deaths every year by the end of the century unless there is a global shift to curb greenhouse gas emissions, a federal government report has warned.”

“The latest National Climate Assessment, which the administration is legally required to publish every four years, said the global climate was “changing faster than at any point in the history of modern civilization, primarily as a result of human activities”, and was having effects that were already evident in the US and projected to intensify in the future…”

“The largest costs of climate change for the US this century were expected to come from lost ability to work outdoors, heat-related deaths and flooding, the assessment said.”

The U.N. World Meteorological Organization released new projections showing that “global temperatures are on course for a 3 – 5 degrees Celsius (5.4 – 9.0 degrees Fahrenheit rise in this century, far overshooting a global target of limiting the increase to 2c (3.6F) or less.”

However, there also appeared a very thought provoking note in Nature by Xu et al, titled “Global Warming Will Happen Faster than We Think”.

The authors claimed three causes will produce this result: (1) Greenhouse gas emissions are still rising; (2) “Governments are cleaning up air pollution faster than most climate modelers have assumed…Aerosols, nitrates, and organic compounds reflect sunlight and have kept the planet cooler, perhaps by as much as 0.7 degrees Celsius globally”; (3) “There are signs that the planet might be entering a natural warm phase that could last for a couple of decades.”

Most importantly, the authors note that rapid warming will create not only a need for higher spending to mitigate wide range of impacts (e.g., sea level rise), but also “a greater need for emissions policies that yield the quickest change in climate, such as controls on soot, methane, and hydrofluorocarbon (HFC) gases. There might even be a case for solar geoengineering – cooling the planet by, for instance, seeding reflective particles into the stratosphere to act as a sunshade.”

We strongly suspect that this “faster than expected” climate change scenario is not one that many investors have fully taken into account.
The International Energy Agency released its 2018 World Energy Outlook, which provides a number of alternative scenarios for future supply and demand.
Some highlights:

“The profound shift in energy consumption to Asia is felt across all fuels and technologies, as well as in energy investment. Asia makes up half of global growth in natural gas demand, 60% of the rise in wind and solar PV, more than 80% of the increase in oil, and more than 100% of the growth in coal and nuclear (given declines elsewhere)…”

“The energy world is connecting in different ways because of shifting supply, demand and technology trends. International energy trade flows are increasingly drawn to Asia from across the Middle East, Russia, Canada, Brazil and the United States, as Asia’s share of global oil and gas trade rises from around half today to more than two-thirds by 2040…

“Fifteen years ago, European companies dominated the list of the world’s top power companies, measured by installed capacity; now six of the top-ten are Chinese utilities…”

“The electricity sector is experiencing its most dramatic transformation since its creation more than a century ago. Electricity is increasingly the “fuel” of choice in economies that are relying more on lighter industrial sectors, services and digital technologies. Its share in global final consumption is approaching 20% and is set to rise further.”

“Policy support and technology cost reductions are leading to rapid growth in variable renewable sources of generation, putting the power sector in the vanguard of emissions reduction efforts
but requiring the entire system to operate differently in order to ensure reliable supply…[However] today’s power market designs are not always up to the task of coping with rapid changes in the generation mix…this could compromise the reliability of supply if not adequately addressed.”

As is already clear in North America and Western Europe, the many challenges the energy industry must overcome during its transition away from fossil fuels are still very non-trivial (e.g., current grid control technologies struggle when variable generation from wind and solar exceeds roughly 30%, and the integration of the gas and power systems is creating many more potential sources of largescale failures). Moreover, these challenges tend to be poorly understood by both policymakers and the public.
The US Agency for International Development (USAID) published a new report, “The Intersection of Global Fragility and Climate Risks
This report’s findings largely replicated those in previous reports on the potential impact of climate change on national security risks by intelligence and defense organizations.

“States with high exposure to climate hazards face multi-faceted challenges, including physical and livelihood risks for the population that may force states to redirect scarce resources to adaptation or humanitarian response efforts and strain the capacity of states that, in many cases, are still solidifying democratic institutions and mechanisms for meeting public needs. Similarly, fragility can affect many aspects of a state’s capacity and legitimacy across its political, economic, social, and security spheres.”

A majority of highly fragile states—26 of the 39 states with the highest or high fragility—have a large number of people or large proportion of the population facing high climate risks.

“States with more than 1 million people living in high exposure areas are mostly located in sub-Saharan Africa, followed by the Middle East and North Africa (MENA) and South and Southeast Asia. India stands out with more than 118 million people in high exposure areas, followed by Nigeria with 41 million, Egypt with 33 million, Democratic Republic of the Congo (DRC) with 19 million, and Burma with 15 million.”

Oct18: Energy and the Environment: Indicators and Surprises
Why Is This Information Valuable?
New Intergovernmental Panel on Climate Change (IPCC) Report Issued, 8 October 2018

Key research finding: global warming will trigger highly harmful societal impacts at significantly lower temperature increases than was previously assumed.

Significant impacts are expected even from a 1.5°C increase in average temperature

The report also highlights the challenge of limiting global warming to just 1.5°. Annual emissions of CO2 would need to be halved by 2030 relative to 2016 levels and renewable energy would need to supply 70–85% of global electricity demand by 2050.
Potentially large equilibrium climate sensitivity tail uncertainty” by Gernot Wagner and Martin L. Weitzman
This paper highlights the extent of uncertainty in current climate models.

“Equilibrium climate sensitivity (ECS), the link between concentrations of greenhouse gases in the atmosphere and eventual global average temperatures, has been persistently and perhaps deeply uncertain. Its ‘likely’ range has been approximately between 1.5 and 4.5 degrees Centigrade for almost 40 years. Moreover, Roe and Baker (2007), Weitzman (2009), and others
have argued that its right-hand tail may be long, ‘fat’ even.“

“Enter Cox et al. (2018), who use an ’emergent constraint’ approach to characterize the probability distribution of ECS as having a central or best
estimate of 2.8℃ with a 66% confidence interval of 2.2-3.4℃. This implies, by their calculations, that the probability of ECS exceeding 4.5℃ is less than 1%. They characterize such kind of result as “renewing hope that we may yet be able to avoid global warming exceeding 2[℃]”. “

“We share the desire for less uncertainty around ECS (Weitzman, 2011; Wagner and Weitzman, 2015). However, we are afraid that the upper-tail emergent constraint on ECS is largely a function of the assumed normal error terms in the regression analysis. We do not attempt to evaluate Cox et al. (2018)’s physical modeling (aside from the normality assumption), leaving that task to physical scientists.”

“We take Cox et al. (2018)’s 66% confidence interval as given and explore the implications of applying alternative probability distributions. We find, for example, that moving from a normal to a log-normal distribution, while giving identical probabilities for being in the 2.2-3.4℃ range, increases the probability of exceeding 4.5℃ by over five times. Using instead a fat-tailed Pareto distribution, an admittedly extreme case, increases the probability by over forty times.”
Evaluating the Economic Cost of Coastal Flooding” by Desmet et al
This paper also highlights the uncertainty inherent in today’s models of the highly complex global climate system.

Too many models fail to take dynamic adaptation into account, and thus significantly overestimate the GDP loss that could result from increased coastal flooding driven by climate change
Climatic Impacts of Windpower” by Miller and Keith

This new research paper provides a sobering perspective on the IPCC report’s recommendations regarding faster deployment of wind and solar to replace other sources of power generation.”

“We find that generating today’s US electricity demand (0.5 TWe) with wind power would warm Continental US surface temperatures by 0.24C. Warming arises, in part, from turbines redistributing heat by mixing the boundary layer. Modeled diurnal and seasonal temperature differences are roughly consistent with recent observations of warming at wind farms, reflecting a coherent mechanistic understanding for how wind turbines alter climate.”

“For the same generation rate, the climatic impacts from solar photovoltaic systems are about ten times smaller than wind systems. Wind’s overall environmental impacts are surely less than fossil energy. Yet, as the energy system is decarbonized, decisions between wind and solar should be informed by estimates of their climate impacts.”

And here is the kicker: “Power densities clearly carry implications for land use. Meeting present-day US electricity consumption, for example, would require 12% of the Continental US land area for wind at 0.5We m−2 , or 1% for solar at 5.4We m−2.”
New Asian coal plants knock climate goals off course”, in the Financial Times, 31Oct18
Read in conjunction with the above report on the potential for replacing fossil fuel based power generation with wind and solar, this column on a key indicator gets to the heart of the climate change issue, and leads to the conclusion that it is unlikely that the world will avoid a significant increase in average temperature, and the consequences it will produce.

“Asia’s existing coal plants are just 11-years-old on average and most still have decades left to operate.
A fleet of new coal plants in Asia threatening to derail global emissions targets has exposed the growing “disconnect” between energy markets and climate goals.”
The Importance of Climate Risk for Institutional Investors” by Kruger et al
In light of the evidence presented so far in this section, the conclusion of this survey – that investors do not believe that current valuations significantly underestimate climate related risks – seems very much open to question.

“According to our survey regarding climate-risk perceptions, institutional investors believe these risks have financial implications for their portfolio firms and that the risks have already begun to materialize, particularly regulatory risks.”

“Many of the investors, especially the long-term, larger and ESG-oriented investors, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although the investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large. In addition, a widespread view exists that climate-risk disclosure needs improvement.