No ag­nos­tics in the cli­mate fox­hole

Financial Mirror (Cyprus) - - FRONT PAGE -

On a re­cent 14.5-hour flight from Los An­ge­les to Syd­ney, I had time to read the colum­nist Charles Krauthammer’s col­lec­tion of es­says, It made for a dis­turb­ing flight.

I have en­joyed Krauthammer’s writ­ing over the years, but there was some­thing in his book that I found deeply trou­bling: his de­scrip­tion of him­self as an “ag­nos­tic” on cli­mate change. He “be­lieves in­stinc­tively that it can’t be very good to pump lots of car­bon diox­ide into the at­mos­phere,” and yet he “is equally con­vinced that those who pre­sume to know ex­actly where that leads are talk­ing through their hats.”

The word that I found most galling was “ag­nos­tic” – not only be­cause Krauthammer is a trained sci­en­tist, but also be­cause the word was used re­peat­edly by for­mer Aus­tralian Prime Min­is­ter John Howard when he ad­dressed a group of cli­mat­e­change de­niers in Lon­don in late 2103. “Part of the prob­lem with this de­bate,” Howard told the as­sem­bled skep­tics, “is that to some of the zealots in­volved their cause has be­come a sub­sti­tute re­li­gion.”

As Howard and Krauthammer should know, the sub­ject of cli­mate change is not a mat­ter of re­li­gion, but of science. Ac­cord­ing to a 2013 sur­vey of peer-re­viewed publi­ca­tions on the sub­ject, some 97% of sci­en­tists en­dorse the po­si­tion that hu­mans are caus­ing global warm­ing. Any­one fa­mil­iar with the sci­en­tific process is aware that re­searchers are trained to dis­agree, to con­test one another’s hy­pothe­ses and con­clu­sions. A con­sen­sus of such mag­ni­tude is as close as we ever get to a recog­nised sci­en­tific fact.

Given that even Krauthammer con­cedes that pump­ing the at­mos­phere full of car­bon diox­ide “can’t be very good,” the next log­i­cal step in the de­bate is to de­ter­mine the best way to ad­dress the prob­lem. As an economist, I fa­vor an auc­tion-based cap-and­trade sys­tem to put a price on car­bon. But I also un­der­stand the po­ten­tial use­ful­ness of reg­u­la­tory mea­sures like tar­gets for re­new­able energy, bans on in­can­des­cent light bulbs, and man­dates for the use of bio­fu­els. What I can­not ac­cept is for some­body who of­fers no so­lu­tions to claim that those of us who do are “talk­ing through our hats.”

For­tu­nately, voices like Krauthammer’s are be­com­ing in­creas­ingly rare. To be sure, there are still hold­outs, like Aus­tralian Prime Min­is­ter Tony Ab­bott, who re­placed a car­bon tax with a plan to tax the coun­try’s cit­i­zens in or­der to pay pol­luters to cut emis­sions. As a pol­icy, this is in­equitable, in­ef­fi­cient, and un­likely to lower emis­sions at a pace that is suf­fi­cient to meet the con­di­tions of the global cli­mate-change agree­ment ex­pected to be reached in Paris in De­cem­ber.

A sure sign of a shift in men­tal­ity is the grow­ing recog­ni­tion by fi­nan­cial in­sti­tu­tions that loans and in­vest­ments may be over­ex­posed to the risks of cli­mate change. These risks in­clude nat­u­ral dis­as­ters, more ex­treme weather, ef­forts by gov­ern­ments to re­duce green­house-gas emis­sions, and the knock-on ef­fect of a tech­no­log­i­cal revo­lu­tion in re­new­ables, energy ef­fi­ciency, and al­ter­na­tive tech­nolo­gies.

Ac­cord­ing to the As­set Own­ers Dis­clo­sure Pro­ject, which I chair, the top 500 global as­set own­ers are alarm­ingly ex­posed to the dan­gers of cli­mate change. More than half of their in­vest­ments are in in­dus­tries ex­posed to the dan­gers of cli­mate change; less than 2% are in low-car­bon in­ten­sive in­dus­tries. As a re­sult, there is a risk that their in­vest­ments and hold­ings will be­come “stranded,” as changes in pol­icy or mar­ket con­di­tions cut the value of in­fra­struc­ture, other prop­erty, and fos­sil-fuel re­serves. As Hank Paul­son, Sec­re­tary of the US Trea­sury when the global fi­nan­cial cri­sis erupted in 2008, once warned, the risks of a cli­mate-in­duced fi­nan­cial cri­sis would dwarf those of the sub­prime cri­sis.

The price of coal, for ex­am­ple, has plunged to around half of its peak level, with plenty of room re­main­ing on the down­side. Con­se­quently, shares in coal com­pa­nies have fallen by as much as 90%, leav­ing as­set own­ers scram­bling to divest. By con­trast, in­vest­ing in a com­pany like Tesla Mo­tors – which has now de­vel­oped a recharge­able bat­tery for home use, which could lead to a sharp in­crease in the num­ber of house­holds switch­ing to so­lar power – looks far more at­trac­tive.

As this re­al­i­sa­tion per­co­lates through the mar­ket, as­set own­ers are hedg­ing their bets by in­creas­ing their in­vest­ments in low­car­bon in­dus­tries and com­pa­nies like Tesla. Over time, this will have a sig­nif­i­cant ef­fect on the al­lo­ca­tion of global in­vest­ment funds. Krauthammer may think that I am talk­ing through my hat, but I am con­fi­dent that soon enough he – and those who lis­ten to him – will be eat­ing theirs.

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