Lex Megatrends: the business of climate change
The FT's Jonathan Guthrie explains the knock-on effects of global warming for politicians, businesses and investors, from farming to tourism, insurance to the car and energy industries
Animated by Russell Birkett. Additional graphics by Dreamstime
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Life on earth depends on a Goldilocks climate - not too hot and not too cold. Humankind is changing that. Industrialisation has raised temperatures around 1 degree. Experts think a further rise of another degree is possible by 2052, even after big emissions cuts. Crops will be more likely to fail, displacing human populations.
In Paris in 2015, industrialised nations agreed they would limit global warming to less than 2 degrees above pre-industrial levels, but there has been more hot air than action. Nations cannot agree how much each should cut emissions. Rising populism has fostered scepticism about global warming.
Under Donald Trump, the US has threatened to withdraw from the Paris accord. They have a collective action problem. Everyone would benefit from cutting emissions, eventually. No one wants to be the prime mover. So there is no progress.
The reason is that the costs of global warming remain an externality for most individuals. There is no immediate benefit in reducing them. As a result, impacts are an externality to most politicians, too, except when protesters from Extinction Rebellion disrupt the traffic, as they did recently in London. They are preoccupied with getting elected every few years. It is, as they sometimes say in business, NMP, or next management's problem.
By the same logic as temperatures rise, people will start bearing direct costs. For example, some populous parts of the world will become too hot to inhabit in the summer or to visit as tourists. The facts such as these will create an electoral incentive to slash emissions. Then nations will start taking action. Squabbling will continue.
One flashpoint will be output of polluting coal. This is expected to peak at well over 8bn metric tonnes in 2030.
Many in China and India see western demands for production cuts as self-serving. Even within developed nations there will be conflicts. US researchers have predicted hefty economic damage to Texas and Florida later this century, coupled with more modest benefits for the states of Washington and Oregon.
What will the consequences be for investors? The value of big oil companies, such as Royal Dutch Shell, would fall. If reserves cannot be exploited fully they need to be discounted heavily. The value of renewables groups, like Denmark's Orsted, would go up reflecting a growing market. Their technologies would depend less and less on subsidies to make profits.
Nuclear generation would make a resurgence as a supplier of baseload electricity. That would bolster the price of uranium, which has been depressed since the Fukushima disaster.
Extreme weather would become more common. That would make farming investment riskier, but agricultural commodities trading more lucrative. Demand for catastrophe insurance would continue to rise sharply, bolstering Lloyd's of London and the market for catastrophe bonds.
Some competing companies appear more committed to a low-carbon economy than competing nations. JPMorgan estimates three-fifths of car sales would be hybrids or fully electric by 2030. That compares with 2 per cent in 2015. Lex believes big traditional carmakers, such as VW and GM, will succeed in switching wholesale into electric vehicle output. They understand mass production, after all. That will leave Tesla where it is now, as a niche business, if it is not bought out.
Another interesting niche will be hydrogen fuel cell vehicles. Toyota has made a side bet these will be needed for hauling heavy loads. The reason? Growth in the weight-to-power ratio of batteries has been linear. Exponential growth would be needed for battery-powered vehicles to become universal, experts say.
Businesses will need to make a lot of other intelligent bets to build the low-carbon economy. Governments will belatedly impose the incentives and penalties needed.
The one certainty of climate change is that business as usual will not be an option.