The heat is on

Today’s financial crisis has been heralded as the worst since the 1930s, although governments have taken emergency action to try to stave off similarly dire consequences. Even if they succeed, the world’s economies are suffering, and several have already entered recession.

But even a severe recession would be small compared with what is likely to result from climate change if greenhouse gas emissions are left unchecked. Global warming has the power to plunge the world into a crisis deeper and more permanent than the Great Depression and two world wars of the last century, according to Lord Nicholas Stern, author of an influential study for the UK Treasury on the economics of climate change.

Other experts agree. The International Energy Agency warned last month that without drastic action to curb greenhouse gases, the world was on track to double the concentrations of carbon dioxide (CO2) in the atmosphere, which it said would lead to a temperature rise of 6°C by 2100. Warming on such a scale would have catastrophic results, long before the century’s end.

In fact, the financial crisis should serve as a warning of the far greater crisis that lies in store unless emissions are cut, argues Mindy Lubber, president of Ceres, a US-based coalition of institutional investors. “The subprime risk was something we should have known about,” she says. “But we ignored it. We know about the risk of climate change.

“The risk from climate change is substantially larger than the subprime risk. Continuing to ignore it will bring us a crisis much greater than we are dealing with now.”

Lord Stern agrees: “The financial crisis is surely a very powerful lesson that the longer you ignore risk, the more difficult the consequences. People had a cavalier attitude to risk in general for the last 10 years. Let’s hope they start taking all aspects of risk a little bit more seriously – and particularly the risks of postponing action [on emissions].”

Climate change will put all businesses at risk. The probable effects of a warming climate, documented by the Intergovernmental Panel on Climate Change – the body of the world’s leading climate scientists convened by the United Nations – are sweeping in their nature. A changing climate will lead to more droughts, more floods, fiercer storms and heatwaves – and to less rainfall in some places, more in others.

These effects will cause serious problems for countries’ infrastructures. The floods that hit the UK in the summer of 2007 caused an estimated £3bn worth of damage, according to the Association of British Insurers. But they also caused severe damage to electricity and transport networks, with knock-on effects to businesses.

Floods can overwhelm sewage systems and disrupt water supplies. Companies, in the developed world as much as in emerging economies, may have to learn to live with less water on tap.

Sea levels will rise, threatening coastal cities and low-lying countries. Some islands may disappear altogether: one of the first statements of the new president of the Maldives, Mohamed Nasheed, was that he would try to set up a fund to buy land in other countries where his people could go if displaced by climate change.

Coastal defences will have to be strengthened around the world. Companies with coastal sites may be forced to relocate or abandon facilities, as the coast erodes. If sea level rises are at the upper end of predictions, coastal cities such as New York and Hong Kong will be threatened with inundation when storms strike. Of the world’s 20 biggest cities, 13 are located on a coast.

Food production will also be threatened by a changing climate. Agriculture will become more difficult, and perhaps impossible, in large swathes of the world, though some areas that are now cold will enjoy longer growing seasons and be able to produce a wider range of crops.

The failure of agriculture will disproportionately affect developing countries, leading to widespread hunger but also to the mass migration of people. The UN estimates that more than 500m people could be displaced by the warming climate.

Other effects of global warming will be more subtle. For instance, electricity suppliers in colder countries may have to change the way they operate. Currently, they experience peak demand in winter but that may change if more people turn to air conditioning. Consumer buying habits will be affected by the changing temperatures and more extreme weather.

Governments are currently meeting in Poznan, Poland, for negotiations on a new global deal on climate change that would succeed the Kyoto Protocol, the main provisions of which expire in 2012. However, there are many disagreements over the level of emissions cuts required, the timetable for cuts and how the burden of emissions reductions should be shared among the developed and developing world. The deadline set by the UN for reaching a deal is next December, when a conference will be held in Copenhagen.

If the world does come to an agreement and countries move to cut emissions by the extent likely to be required – scientists suggest at least a halving of global emissions by 2050 – then businesses will have to change enormously.

The world economy has run on plentiful supplies of cheap fossil fuels since the industrial revolution. Moving from that state to a low-carbon economy will affect all businesses, not just those in the energy sector. Companies will have to change their business models, their buildings, their transport, their supply chains and their investments.

José Manuel Barroso, president of the European Commission, has called the changes needed “a third industrial revolution”, encompassing all business sectors, individuals and governments.

As well as posing a threat to some companies, the effort to cut emissions will open up vast new economic opportunities. The IEA estimates that a $45,000bn investment in clean energy will be required by 2050. Barack Obama, US president-elect, held out the prospect of 5m new “green collar” jobs and a $150bn investment in clean energy by 2020.

Driven by concerns over climate change and energy security, and by volatile conventional energy prices, investment in alternatives to fossil fuels has already soared. Global investment in renewable energy and other “clean” or low-carbon technologies reached almost $150bn last year, according to Ms Lubber.

Alternative energy companies are the most obvious beneficiaries, but companies in other sectors are presented with opportunities, too. The transport sector will have to move to lower emissions vehicles, such as electric or hydrogen cars. Construction companies will have to change the materials they use and the way in which they design buildings. Waste management companies will benefit from the increased emphasis on recycling and burning waste for energy. All companies can benefit from using their energy more efficiently, which drives down costs.

“When you rattle the technological cage, there are huge opportunities,” says Lord John Browne, former chief executive of BP and now a managing director at Riverstone Holdings, a private equity company specialising in energy. “Last time it was IT. Then [it spreads to] things that are not related. Different things happen and it spurs different nodes of growth. Who would have imagined what has happened to IT?”

The promise of economic growth from tackling climate change, involving some public sector investment as well as private sector resources, has been likened to a “Green New Deal” by some.

According to Achim Steiner, executive director of the United Nations Environment Programme: “Enormous economic, social and environmental benefits [are] likely to arise from combating climate change and re-investing in natural infrastructure – benefits ranging from new green jobs in clean-tech and clean energy businesses up to ones in sustainable agriculture and conservation-based enterprises.”

Moreover, these opportunities are not far in the future. Companies must start to make the changes required urgently, argues Ms Lubber, if the world is to be set on a path to low emissions. “Before we put a shovel in the ground to say let’s build a new coal-fired power plant without carbon capture and storage, before we think about that we need to begin [cutting emissions].”

What will the cost of such a revolution be? Lord Stern put it at about 1 per cent of global gross domestic product by mid-century. This is far lower than the probable costs of the havoc that would be wreaked by unchecked emissions growth and the resulting climate change, he concluded.

But some companies in developed nations are worried that they are being asked to pay a disproportionate amount of the costs, and that their efforts are in any case undermined by those governments – mostly in the developing world – that have resisted calls to curb their own emissions.

The European Union’s Emissions Trading Scheme (EU ETS) was the first mandatory cap-and-trade system for CO2 emissions, setting a limit on the emissions of some of the most energy-intensive companies and allowing them to trade their allocation of permits to emit CO2 with one another.

In the first phase, from 2005 to 2007, companies received all of their permits for free. In the current phase, to 2012, some were forced to pay for a proportion of their quota. The European Commission proposes that from 2013, power companies should have to buy all of their permits at auction and other heavy industries should have auctioning phased in by 2020.

But the plans have roused stiff opposition from some business groupings. For instance, BusinessEurope, an EU employers’ federation, says: “[We do] not consider the requirement to purchase allowances – through auctioning or otherwise – as an appropriate allocation mechanism for manufacturing industry as it adds to the cost burdens already imposed in meeting the mandatory emission reduction targets.”

It argues: “Auctioning of allowances will not lead to more emission reductions than their free-of-charge allocation based on benchmarking. It will merely shift capital from the private sector to the state, thus hindering industry investment in environmentally efficient technologies and research into new breakthrough technologies.”

The fear is that customers will desert European companies for cheaper rivals if their costs are increased by emissions trading, and production will shift to countries such as China or India, which have resisted calls to set limits on their emissions. This would merely exacerbate climate change.

BusinessEurope bases its objections clearly on the financial crisis, which it calls “a major historic global challenge [that] seriously weakens European industrial companies, including those that have invested consistently in environmentally friendly products and processes”.

The federation’s fears over the effects of the financial crisis are echoed elsewhere. In the US, some politicians and companies have signalled they will oppose attempts to set up a cap-and-trade system there, as promised by Mr Obama, unless the financial crisis eases.

Governments gathering in Poznan, and negotiating throughout next year in the run-up to Copenhagen, will have to deal not only with the long-standing problems of how to agree an equitable emissions-cutting regime, but with a world reeling from arguably the biggest shock to the financial system since the Great Depression.

Both threats and opportunities from climate change abound, and businesses will bear the brunt of the former and the benefits of the latter. How they do so will be determined by the outcome of those negotiations.

Fiona Harvey is environment correspondent