According the US National Oceanic and Atmospheric Administration (NOAA), in May the amount of CO2 in the atmosphere reached 419 parts per million, which some analysts claim is the highest level in human (but not planetary) history.

Due to rising CO2 levels, the World Meteorological Organization’s “Global Annual to Decadal Climate Update” estimated that:

“Annual mean global (land and sea) mean near-surface temperature is likely to be at least 1°C warmer than pre-industrial levels (defined as the average over the years 1850-1900) in each of the coming 5 years and is very likely to be within the range 0.9 – 1.8°C”

“It is about as likely as not (40% chance) that at least one of the next 5 years will be 1.5°C warmer than pre-industrial levels and the chance is increasing with time.”

A recently published research paper (“Complex Systems Approaches for Earth System Data Analysis” by Boers et al) emphasizes the uncertainty we face regarding the potential for non-linear weather effects once critical thresholds/tipping points are passed (and, for example, their impacts on coastal flooding and food production).

While such tipping points are hard to specify, complex systems theory suggests that warning signs will appear as we grow closer to them.

In another recent paper, Boers and his co-authors note that one such warning sign (known as the “critical slowing down” of a complex system) may be occurring in the case of the Greenland Ice Sheet.

They note that, “The Greenland Ice Sheet (GrIS) is a potentially unstable component of the Earth system and may exhibit a critical transition under ongoing global warming. Mass reductions of the GrIS have substantial impacts on global sea level and the speed of the Atlantic Meridional Overturning Circulation, due to the additional freshwater caused by increased meltwater runoff into the northern Atlantic…

“Melting rates across Greenland have accelerated nonlinearly in recent decades, and models predict a critical temperature threshold beyond which the current ice sheet state is not maintainable.” They conclude that, “significant early-warning signals indicate that the central western GrIS is close to a critical transition…suggesting substantial GrIS mass loss in the near future.”

In a new report, the International Energy Agency (IEA) set surprisingly aggressive targets for reduction in fossil fuel use (“Net Zero by 2050: A Roadmap for the Global Energy Sector”).

SURPRISE

The IEA claims that cutting carbon emissions to zero by 2050 would limit the increase in global temperature to 1.5 degrees centigrade.

However, there is a catch. As the FT noted, this “would require a total transformation of the global economy over the next three decades.”

Looking just at the electric power generation sector, it would require nearly the total elimination of global coal and gas fired power without attached carbon capture and storage (CCUS) technologies, whose use today would substantially increase electric prices, and which still significant regulatory skepticism (e.g., about the long term safety of storing large amounts of CO2 underground).

The IEA also assumes that electric vehicles will account for 60% of total sales, up from about 5% today.

A global carbon tax would also need to be imposed, rising to USD 250/metric ton by 2050.

Perhaps the best that can be said about this report is that, by making clear the real constraints on reducing emissions, perhaps a better use of the scarce resources available for environmental investment would be to spend a greater portion of them projects to mitigate the very likely consequences of further increases in average global temperature.

Another new IEA report, “The Role of Critical Minerals in Clean Energy Transitions” makes it clear why Net Zero by 2030 is almost certainly an unrealistic goal.

“Today’s supply and investment plans for many critical minerals fall well short of what is needed to support an accelerated deployment of solar panels, wind turbines and electric vehicles. Many minerals come from a small number of producers.
“
For example, in the cases of lithium, cobalt and rare earth elements, the world’s top three producers control well over three-quarters of global output. This high geographical concentration, the long lead times to bring new mineral production on stream, the declining resource quality in some areas, and various environmental and social impacts all raise concerns around reliable and sustainable supplies of minerals to support the energy transition.”

Writing in the defense publication “War on the Rocks” (“Trading One Dependency For Another”), Nadia Schadlow is even more blunt:

“Several of the Biden administration’s key climate goals — particularly steps to reduce U.S. greenhouse gas emissions in the power and transportation sectors — are likely to be held hostage by China. A shift away from fossil fuels to renewables to produce electricity, and the deployment of more electrical vehicles on America’s roadways, depends upon batteries. Since China currently controls the entire lifecycle of battery development, the Biden administration needs a strategy to mitigate China’s dominant position…

“The battery supply chain is complex, but it can be reduced to four key elements: mining the critical minerals, processing them, assembling the battery parts, and recycling…

“China has spent the last two decades solidifying control over the main critical minerals for battery cells — lithium, cobalt, and graphite. Beijing now controls some 70percent of the world’s lithium supplies, much of which is located in South America. More than two-thirds of the world’s cobalt reserves are found in the Democratic Republic of the Congo, and China has secured control over 10 of the country’s 18 major mining operations, or more than half its production.

“Beijing is also the world’s largest consumer of cobalt, with more than 80 percent of its consumption being used by the rechargeable battery industry.

“Graphite is the largest component by volume in advanced batteries, but spherical graphite, the kind that makes up the anode in electrical vehicle batteries, must be refined from naturally occurring flake graphite. And China produces 100 percent of the world’s spherical graphite."

Environmental advocates scored impressive victories in their fight to force public companies to cut emissions.

SURPRISE

In the United States, an activist investment fund won a proxy contest to seat two directors on Exxon’s board, who promised to push for a more aggressive strategy to reduce emissions.

Across the Atlantic, a Dutch court ordered Shell to accelerate the reduction of its net carbon emissions, so that by 2030 they are 45 percent lower than they were in 2019. Shell had previously announced a goal of reducing them by 20% by 2030. Shell immediately said it would appeal the judge’s decision.

Of the two, the Shell decision was almost certainly the most consequential, as it established a potential precedent for a court to intervene in a private company’s operations, on the theory that it has a duty of care to pursue emissions reductions goals that are in line with the Paris Climate Agreement and its goal of limiting the rise in global temperature to 1.5c.

“How the Insurance Industry Could Bring Down Fossil Fuels” by Tom Johansmeyer in Harvard Business Review

Having done turnarounds (where directors of a company operating in financial distress give great deference to their counsel and terms of their Directors and Officers Insurance policy before making any decisions), and also worked as an energy industry executive, I have always observed that the power of insurance carriers to affect decisions is vastly underappreciated by many people.

Clearly, Tom Johansmeyer is not one of them. At developments like the above mentioned Shell decision raise prospect of a rising tide of liability litigation and potentially rising payouts (nobody has forgotten to the tobacco industry), I suspect that the impact of the increasing cost for insurance coverage in fossil fuels industries will have a much larger impact – at least in the short term – than any regulatory changes or changes in the preferences of institutional investors.

The Biden Administration announced a target of cutting US greenhouse gas emissions by at least 50% by 2030 (relative to the level at 2005), to achieve net zero emissions by 2050.

SUPRRISE

Treasury Secretary Janet Yellen supported the new target, observing that because of the high uncertainty inherent in current climate models, this approach is consistent with the prudence principle.

Needless to say, there is much less clarity about the policy changes (and, critically, their economic costs and impact on aggregate demand growth) that will be needed to achieve this target.

Equally important is the need for other countries to adopt and implement similar emission reductions in order to slow or stabilize the increasing level of CO2 in the atmosphere (and the related if uncertain increase in average global temperature).

“Anthropogenic Climate Change Has Slowed Global Agricultural Productivity Growth”, by Ortiz-Bobea et al

“Agricultural research has fostered productivity growth, but the historical influence of anthropogenic climate change (ACC) on that growth has not been quantified. We develop a robust econometric model of weather effects on global agricultural total factor productivity (TFP) and combine this model with counterfactual climate scenarios to evaluate impacts of past climate trends on TFP.

“Our baseline model indicates that ACC has reduced global agricultural TFP by about 21% since 1961, a slowdown that is equivalent to losing the last 7 years of productivity growth. The effect is substantially more severe (a reduction of ~26–34%) in warmer regions such as Africa and Latin America and the Caribbean.

“We also find that global agriculture has grown more vulnerable to ongoing climate change.”

“Day-To-Day Temperature Variability Reduces Economic Growth”, by Kotz et al

SURPRISE

Kotz et al “show that increases in seasonally adjusted day-to-day temperature variability reduce macro-economic growth independent of and in addition to changes in annual average temperature.” On average, “an extra degree of variability results in a five percentage-point reduction in regional growth rates.”

“Observational Evidence Of Increasing Global Radiative Forcing” by Kramer et al

“Climate change is a response to energy imbalances in the climate system. For example, rising greenhouse gases directly cause an initial imbalance, the radiative forcing, in the planetary radiation budget, and surface temperatures increase in response as the climate attempts to restore balance. The radiative forcing and subsequent radiative feedbacks dictate the amount of warming.

“While there are well‐established observational records of greenhouse gas concentrations and surface temperatures, there is not yet a global measure of the radiative forcing, in part because current satellite observations of Earth’s radiation only measure the sum total of radiation changes that occur.

“We use the radiative kernel technique to isolate radiative forcing from total radiative changes and find it has increased from 2003 through 2018, accounting for nearly all of the long‐term growth in the total top‐of‐atmosphere radiation imbalance during this period.

“We confirm that rising greenhouse gas concentrations account for most of the increases in the radiative forcing, along with reductions in reflective aerosols. This serves as direct evidence that anthropogenic activity has affected Earth’ energy budget in the recent past.”

“India Castigates Richer Countries As Climate Tensions Heat Up”, by Leslie Hook in the Financial Times

SUPRRISE

“While the US, China and the EU are broadly in agreement about the importance of cutting emissions to near zero by the middle of the century, India remains as outlier…

“India wants richer countries to adopt ‘net negative’ emissions targets and launched a broadside against the climate goals of big emitters in the EU and China, in a sign of how climate negotiations are heating up ahead of a UN summit this year…

“Net negative emissions refers to the absorption of more carbon dioxide from the atmosphere than a country emits — currently Bhutan is the only country in the world that is net negative because of its extensive hydropower and forests…

“Indian energy minister R K Singh told a virtual gathering of the world’s climate leaders that targets set for 2050 or 2060 were just “a pie in the sky”. He said that developing countries such as India should not be forced to cut their emissions to net zero.”

“Reflecting Sunlight: Recommendations for Solar Geoengineering Research and Research Governance” by the National Academy of Sciences

SURPRISE

“In 2015, the National Research Council published a two-volume report that provided a technical evaluation and discussion of the impacts of geoengineering climate. One volume addressed technologies for removing carbon dioxide from the atmosphere.

“The other explored prospects for cooling the planet by albedo modification—increasing the reflection of solar radiation. A central conclusion from the 2015 study was that the two families of approaches for geoengineering climate differ greatly, in terms of scientific understanding, technical feasibility, risks, and societal implications…

“Since 2015, the motivation for understanding the full range of options for dealing with the climate crisis has gotten even stronger. Globally, 2015–2019 were the 5 warmest years in the instrumental record. Understanding of the link between warming and extreme heat, wildfires, drought, hurricanes, and diverse socioeconomic impacts is stronger than ever…

“Meeting the challenge of climate change requires a portfolio of options. The centerpiece of this portfolio should be reducing GHG emissions, removing and reliably sequestering carbon from the atmosphere, and pursuing adaptation to climate change impacts that have already occurred or will occur in the future.

“Concerns that these three options together are not being pursued at the level or pace needed to avoid the worst consequences of climate change—or that even if vigorously pursued will not be sufficient to avoid the worst consequences—have led some to suggest the value of exploring additional response strategies. This includes solar geoengineering (SG), which refers to attempts to moderate warming by increasing the amount of sunlight that the atmosphere reflects back to space or by reducing the trapping of outgoing thermal radiation ...

“This current study was tasked to update the 2015 assessment of the state of understanding and to provide recommendations for how to establish a research program, what to encompass in the research agenda, and what mechanisms to employ for governing this research …

“SG could reduce surface temperatures and potentially ameliorate some risks posed by climate change (e.g., to avoid crossing critical climate “tipping points”; to reduce harmful impacts of weather extremes).

“Yet these interventions could also introduce an array of potential new risks, for instance, related to critical atmospheric processes (e.g., loss of stratospheric ozone); important aspects of regional climate (e.g., behavior of the Indian monsoon); or numerous interacting environmental, social, political, and economic factors that can interact in complex, potentially unknowable ways…

“SG research to date is ad hoc and fragmented, with substantial knowledge gaps and uncertainties in many critical areas. There is a need for greater transdisciplinary integration in research, linking physical, social, and ethical dimensions, and inclusion of robust public engagement…

“Research to understand the potential magnitude and distribution of SG impacts—on ecosystems, human health, political and economic systems, and other issues of societal concern—is in a particularly nascent state. Studies published to date do not provide a sufficient basis for supporting informed decisions.”

Two new Gallup polls found Americans more concerned about a future energy shortage and less concerned with environmental protection.

SURPRISE

In “Americans Show Elevated Concern About Energy”, Gallup reports that, “73% of Americans worry about the availability and affordability of energy, up from 54% last year”. This includes 73% of Republicans, 69% of Independents, and 73% of Democrats. In addition, “a majority (53%) says U.S. will face critical energy shortage in next five years”, up from 32% in 2016.

In “Americans' Emphasis on Environmental Protection Shrinks”, Gallup finds that, “As the country continues to recover from the economic shock waves created by the coronavirus pandemic, Americans are more divided than they have been in several years about whether protecting the environment (50%) or strengthening the economy (42%).”

“The split between Republicans (68% of whom say the economy should take precedence) and Democrats (71% of whom prioritize the environment) is stark.”

“Low Energy: Estimating Electric Vehicle Electricity Use”, by Burlig et al

SUPRRISE

“We provide the first at-scale estimate of electric vehicle (EV) home charging. Previous estimates are either based on surveys that reach conflicting conclusions, or are extrapolated from a small, unrepresentative sample of households with dedicated EV meters. We combine billions of hourly electricity meter measurements with address-level EV registration records from California households.

The average EV increases overall household load by 2.9 kilowatt-hours per day, less than half the amount assumed by state regulators. Our results imply that EVs travel 5,300 miles per year, under half of the US fleet average. This raises questions about transportation electrification for climate policy.”

“US Power Line Tensions Rise Over Green Energy Surge”, in the Financial Times.

It described the fight over a proposal to build a new 230 kilometer (143 mile) high voltage electricity transmission line through the Maine forests.
“Clearing a path for linear infrastructure — such as highways, oil pipelines or electric transmission — always encounters resistance. The fight over permitting the Maine power line shows how fearsome that resistance can be.

“An Iberdrola subsidiary in the US, called Avangrid, launched the NECEC project in 2018 to carry 1.2 gigawatts of hydropower — enough to supply more than 1m households — from dams in Quebec. Utility customers in Massachusetts will fund the cost under that state’s policy to drive down emissions.

“The project has splintered environmentalists. It was endorsed by the Conservation Law Foundation and Union of Concerned Scientists, who cited the clean energy that would flow into New England.
“But the Sierra Club, the Appalachian Mountain Club and the Natural Resources Council of Maine sued to block the line and last month won the court stay of tree-cutting on a 53-mile segment.

“They are not the only opponents. The political action committee challenging Iberdrola’s Spanish roots on TV, called Mainers for Local Power, was bankrolled by merchant generators that stand to lose sales in New England’s power market…

“The Maine and New Hampshire experiences show why expectations are modest for the Biden administration’s transmission goals. US states can veto transmission lines that cross their borders — unlike natural gas pipelines, in which the permitting authority of the Federal Energy Regulatory Commission reigns supreme…

[Also], “most interstate lines are owned by utilities, which earn returns on equity of about 10 percent under rates regulated by FERC, according to C Three Group, an infrastructure research firm. Parceling out the costs of transmission across different states and customers has been a roadblock for new projects.”

SUPRRISE

In December, Princeton University published “Net Zero America”, a very detailed 345 page analysis of the steps required to get to net zero emissions in the United States by 2020.

At the end, it included just one slide on “Potential bottlenecks for a 2050 Net-Zero America.” They included the following very non-trivial issues:

• “Creation of the coalitions of public support and political will needed to achieve 2020’s targets.
• Upfront cost premiums for efficient and electric consumer durable goods (EV’s, heat pumps, etc.).
• Rate of mobilization of risk-capital to support project development and construction activities.
• Rate of divestment/new investment among incumbent supply-side and demand-side firms.
• Regulatory capacity to review and permit investment proposals at the required scale and pace.
• Building the [Engineering, Procurement, and Construction company] and the supply chain capacities needed to support deployment rates.
• Developing human / skills capacity at the pace required to support the transition.
• Concentrated employment losses in particular communities.
• Community opposition to visual and land-use impacts of wind, solar, transmission; bioenergy industrialization; environmental impacts of CO2 sequestration; nuclear power due to safety and environmental concerns.”

The FT story highlights just how challenging this last obstacle is likely to be. The other will likely be no easier to overcome.

“Risk Of Tipping the Overturning Circulation Due To Increasing Rates Of Ice Melt”, by Lohmann and Ditlevsen

“Current Atlantic Meridional Overturning Circulation Weakest In Last Millennium”, by Caesar et al

SURPRISE

Lohmann and Ditlevsen state that, “central elements of the climate system are at risk for crossing critical thresholds (so-called tipping points) due to future greenhouse gas emissions, leading to an abrupt transition to a qualitatively different climate with potentially catastrophic consequences.

“Tipping points are often associated with bifurcations, where a previously stable system state loses stability when a system parameter is increased above a well-defined critical value. However, in some cases such transitions can occur even before a parameter threshold is crossed, if that the parameter change is fast enough.

“It is not known whether this is the case in high-dimensional, complex systems like a state-of-the-art climate model or the real climate system. Using a global ocean model subject to freshwater forcing, we show that a collapse of the Atlantic Meridional Overturning Circulation can indeed be induced even by small-amplitude changes in the forcing, if the rate of change is fast enough…

“Furthermore, we show that due to the chaotic dynamics of complex systems there is no well-defined critical rate of parameter change, which severely limits the predictability of the qualitative long-term behavior. The results show that the safe operating space of elements of the Earth system with respect to future emissions might be smaller than previously thought.”

Caesar et al begin by noting that, “the Atlantic Meridional Overturning Circulation (AMOC)—one of Earth’s major ocean circulation systems—redistributes heat on our planet and has a major impact on climate.”

They “compare a variety of published proxy records to reconstruct the evolution of the AMOC since about AD 400. A fairly consistent picture of the AMOC emerges: after a long and relatively stable period, there was an initial weakening starting in the nineteenth century, followed by a second, more rapid, decline in the mid-twentieth century, leading to the weakest state of the AMOC occurring in recent decades.”

“Germany's Energiewende, 20 Years Later”, by Vaclav Smil

and,

“A Tale of Two Markets: How the US Electric Power Sector is Diverging”, by Clune et al from McKinsey

In 2000, Germany launched its “Energiewende”, a targeted program to reduce CO2 emissions by subsidizing renewable energy.

Smil notes that, “the initiative has been expensive, and it has made a major difference. In 2000, 6.6% of Germany’s electricity came from renewable sources; in 2019, the share reached 41.1 percent. In 2000, Germany had an installed capacity of 121 gigawatts and it generated 577 terawatthours, which is 54 percent as much as it theoretically could have done (that is, 54 percent was its capacity factor).

“In 2019, the country produced just 5 percent more (607 TwH), but its installed generating capacity was 80 percent higher (218.1 GW) because it now had two generating systems.

“The new system, using intermittent power from wind and solar, accounted for 110 GW, nearly 50 percent of all installed capacity in 2019, but operated with a capacity factor of just 20 percent. (That included a mere 10 percent for solar, which is hardly surprising, given that large parts of the country are as cloudy as Seattle.)

“The old system stood alongside it, almost intact, retaining nearly 85 percent of net generating capacity in 2019. Germany needs to keep the old system in order to meet demand on cloudy and calm days and to produce nearly half of total demand. In consequence, the capacity factor of this sector is also low.

“It costs Germany a great deal to maintain such an excess of installed power. The average cost of electricity for German households has doubled since 2000. By 2019, households had to pay 34 U.S. cents per kilowatt-hour, compared to 22 cents per kilowatt-hour in France [which heavily relies on nuclear generation] and 13 cents in the United States.”

These results from Germany are a critical reference case, in light of McKinsey’s report on the growing split between US electricity markets that are driven by a goal of minimizing electricity costs and those that are driven by minimizing carbon emissions.

As the German experience shows, this is likely to lead to widening divergences in generating capacity, utilization, and electricity costs (and thus economic competitiveness and social conditions) across different regions of the United States.

In turn, this could also increase political conflicts between regions, especially if the federal government attempts to effectively raise electricity prices in the middle of the country to match prices on the coasts by imposing national renewable generation mandates.

“Three Prongs for Prudent Climate Policy”, by Aldy and Zeckhauser

SURPRISE

“For three decades, advocates for climate change policy have simultaneously emphasized the urgency of taking ambitious actions to mitigate greenhouse gas (GHG) emissions and provided false reassurances of the feasibility of doing so. The policy prescription has relied almost exclusively on a single approach: reduce emissions of carbon dioxide (CO2) and other GHGs.

“Since 1990, global CO2 emissions have increased 60 percent, atmospheric CO2 concentrations have raced past 400 parts per million, and temperatures increased at an accelerating rate. The one-prong strategy has not worked.

“After reviewing emission mitigation’s poor performance and low-probability of delivering on long-term climate goals, we evaluate a three-pronged strategy for mitigating climate change risks: adding adaptation and amelioration – through solar radiation management (SRM) – to the emission mitigation approach…

“SRM is a geoengineering instrument, as an amelioration measure. The most promising SRM measure would inject aerosols into the upper atmosphere to reflect back incoming solar energy. This would lower the temperature for a given accumulation of atmospheric GHGs…

“We identify SRM’s potential, at dramatically lower cost than emission mitigation, to play a key role in offsetting warming. We address the moral hazard reservation held by environmental advocates – that SRM would diminish emission mitigation incentives – and posit that SRM deployment might even serve as an “awful action alert” that galvanizes more ambitious emission mitigation. We conclude by assessing the value of an iterative act-learn-act policy framework that engages all three prongs for limiting climate change damages.”

“Investors Start To Pay Attention to Water Risk” in the Economist

SURPRISE

“At current rates of consumption, the demand for water worldwide will be 40% greater than its supply by 2030, according to the un. Portfolio managers are realising that physical, reputational and regulatory water risk could hurt their investments, particularly in thirsty industries such as food, mining, textiles and utilities…

“Disclosures of water risk are even patchier than those of greenhouse-gas emissions. In part, that is because it is more difficult to measure.

“Underestimating the Challenges of Avoiding a Ghastly Future”, by Bradshaw et al

SURPRISE

Writing about the attack on Pearl Harbor, Thomas Schelling famously observed that, “there is a tendency in our planning to confuse the unfamiliar with the improbable. The contingency we have not considered looks strange; what looks strange is therefore improbable; what seems improbable need not be considered seriously.”

That is a warning we forget at out peril. Yet many people do just that.

It is for this reason that papers like this one are critical. In complex adaptive systems the global climate, there is (as noted in previous issues of The Index Investor) a great deal of remaining uncertainty about the tail risks associated with climate change.

The authors of this paper “review the evidence that future conditions will be far more dangerous than currently believed”, focusing especially on the potential and poorly understood consequences of the accelerating loss of biodiversity.

In light of Grisogono’s paper noted above, it is also interesting that Bradshaw et al highlight the “time delays between ecological deterioration and socio-economic penalties [that] impede recognition of the magnitude of the challenge and timely counteraction needed.”

As a key cause of this, they cite, “disciplinary specialization and insularity [that] encourages unfamiliarity with the complex adaptive systems in which these problems and their potential solutions are embedded.”

“Extreme Weather Causes Surge In Solar Power Insurance Costs”, by Gregory Meyer in the Financial Times

SURPRISE

“Solar power is crucial to addressing climate change, but extreme weather is making solar power projects more costly, damaging solar panels and driving up insurance premiums as much as fivefold over the past two years.

“Hailstorms, wildfires and tornadoes have caused underwriters to restrict terms for renewable project owners, according to industry executives, following an above $70m payout for a Texas solar farm smashed by hail in 2019 and large claims on three sola farms scorched by record blazes in California this year…

“We have seen projects that were achieving their expected returns no longer able to do that, as a result of the change in the cost of insurance,” said Michael Kolodner, US power and renewable practice leader at Marsh, an insurance broker.”

“Fossil Electricity Retirement Deadlines For A Just Transition”, by Emily Grubert

SURPRISE

Stranded assets are defined by the International Energy Agency as “investments which have already been made but which, at some time prior to the end of their economic life, are no longer able to earn an economic return.”

“Decarbonizing the electricity sector is critical for addressing climate change, particularly given the expected role of an expanded clean electricity system for home heating, transportation, and industry.

This will require vast investment in new infrastructure such as renewable-energy power plants and batteries. Absent major investment in carbon-capture equipment or fuel switching, it will also require the retirement of carbon-based power plants…

“Determining which assets are “stranded,” or required to close earlier than expected absent policy, is vital for managing compensation for remaining debt and/or lost revenue…

“In the United States, a 2035 electricity decarbonization deadline, as proposed by President-elect Biden would strand only about 15% of fossil capacity-years and 20% of job-years…

“A key finding of this research is that a 2035 deadline for completely retiring fossil based electricity generators would strand only about 15% (1700 GW-years) of fossil fuel–fired capacity life, alongside about 20% (380,000 job-years) of direct power plant and fuel extraction jobs remaining as of 2018.”

The paper doesn't mention the political consequences of losing 20% of high paying electric generating jobs…

“Decarbonisation Goals Require Huge Commitment to Critical Metals”, by John Dizard in the Financial Times

SURPRISE

“Copper, nickel, cobalt, chromium and other critical minerals will be required in much larger quantities for decarbonisation…

“Political debates and investor allocations have been neglecting the long lead times required for the metals and metallurgical techniques needed for electric or hydrogen economies.

“Any decarbonisation goals must take into account the minimum of seven to 10 years required for developing the new mines we will need…

“There is a great deal of attention devoted to the increased efficiency of solar panels and wind turbines. Mine productivity, though, is steadily going down as ore grades decline for critical metals such as copper and nickel.

“The economic effect of lower ore grades has been offset for the past couple of decades by a few innovations such as much larger mining trucks, but productivity improvements in mining are petering out. There are fewer new, rich metals deposits being discovered, and those that are found tend to be in politically and socially unstable places…

“There is a lot of political support for the hydrogen economy. This enthusiasm has, generally, not been accompanied by an appreciation of how much new, and highly engineered, metal it would require. Hydrogen is not just a non-polluting gas that leaves only water vapour in its wake. It is a hard-to-handle molecule that is not very forgiving of the weaknesses of our legacy metal infrastructure…

“Whether zero net carbon is set for 2035, 2050, or some other ambitious goal, the PowerPoint assumptions that the metal needed will be available when required are not based in reality”

“What Matters for Electrification? Evidence from 70 Years of U.S. Home Heating Choices” by Lucas Davis

“The percentage of U.S. homes heated with electricity has increased steadily from 1% in 1950, to 8% in 1970, to 26% in 1990, to 39% in 2018. This paper investigates the key determinants of this increase in electrification using data on heating choices from millions of U.S. households over a 70-year period…

“Households in warm states are close to indifferent between electric and natural gas heating, so would be made worse off
by less than $500 annually…

“Household in cold states, however, tend to strongly prefer natural gas so would be made worse off by $3000+ annually”.

Once again — can you imagine the political consequences of forcing a $3,000 increase in their energy bill on millions of households?

“Renewable Energy and Infrastructure Policy Scenario Analysis”, by the American Clean Power Association and Wood Mackenzie

SURPRISE

“Transmission-focused policies will be critical to unlocking renewable potential… Required transmission expansion to accommodate increased renewables represents over 70 new or upgraded transmission lines, representing over 10,000 miles and $70 billion in capital investment.”

Another new study, “Net Zero America” by Larson et al from Princeton University, projects that substantially higher transmission investments will be required.

Anyone familiar with the regulatory and political challenges of building long-distance, high voltage transmission lines knows that building 10,000 miles of new transmission lines will almost certainly face very substantial obstacles.

“Food price rally sparks warnings of pressure on developing countries”, by Emiko Terazono in the Financial Times

“A sharp rebound in food prices is stirring concerns over inflation and potential unrest in some developing countries.

“Stockpiling, logistical bottlenecks and dry weather have pushed wheat, soyabeans, rice, and corn markets higher…

“In 2007-08, severe droughts drove up prices, triggering food riots in some African countries. A wheat export ban by Russia in 2010 also led to a surge in food prices in the Middle East, contributing to the Arab uprising.

“Some are now concerned about a “COVID shock” hitting some of the more vulnerable countries.

“The real impact is the access to food. People have lost their income. There are a lot of unhappy people and this is a recipe for social unrest,” said Abdolreza Abbassian, senior economist at the FAO.

“The issue is not a food shortage at this point — grains and oilseeds have had bumper crops over the past few years, leading to higher inventories. But analysts worry that higher prices at a time of economic stress bodes badly, especially for poorer countries, particularly while an economic rebound in Asia is bumping up demand for grains and soyabeans.

“Food inflation is the last thing governments need right now,” said Carlos Mera, analyst at Rabobank.”

“From Passive To Active: Flexibility From Electric Vehicles In The Context Of Transmission System Development”, by Gunkel et al

“Molehills Into Mountains: Transitional Pressures From Household PV Battery Adoption Under Flat Retail And Feed-In Tariffs”, by Say and John

“Energy Suppliers Search for ‘Inertia’ to Power a Greener Future”, by John Dizard in the Financial Times

SURPRISE

Increasing electrification of the transport sector, though greater penetration of electric vehicles (EVs), is not only increasing electricity demand (a typical EV doubles household electricity usage), but also shifting its distribution over time (e.g., due to greater demand for vehicle charging overnight).

This paper finds that, given current charging patterns, EV penetration of 30% or more will create significant problems for control of electrical grids.

The second paper makes a similar point about the grid control issues that are emerging due to increasing growth of household combined photovoltaic and battery storage (PVS) systems.

Finally, the FT’s John Dizard offers this typically pithy observation: “It is deeply moving to hear announcements of aggressive decarbonisation targets, and it must be deeply gratifying for politicians, such as Boris Johnson, to make them. It is also deeply disturbing to find how little the political and financial leadership understands about what it will take to hit them.”

In his column, Dizard delves into the details of why grid stability becomes exponentially more difficult to maintain as more variable renewable generation (e.g., solar and wind) is added to it.

For a more technical review of grid control issues when the share of variable renewable generation is high, see, “Modeling The Dynamics And Control Of Power Systems With High Share Of Renewable Energies”, by Auer and Kittel.

“How PV-Plus-Storage [PVS] Will Compete With Gas Generation in the US”, by Bloomberg New Energy Finance

This new report paints an optimistic picture of PVS replacing a substantial portion of the current fleet of natural gas generation plants that only come online to meet peak electricity demand.

However, it is based on two sets of quite optimistic assumptions: (1) the speed of development and deployment of reliable grid-scale battery storage; and (2) the speed at which various grid control issues created by deployment of variable renewable generation (including battery storage) will be resolved at an acceptable price – e.g., see Dizard’s article noted above, and our August 2020 feature: “Joe Biden Wants to Remove Carbon From US Electricity Generation by 2035. Is That Realistic?”

“Banking On Coal? Drivers Of Demand For Chinese Overseas Investments In Coal In Bangladesh, India, Indonesia And Vietnam”, by Gallagher et al

SURPRISE

As many observers have pointed out, it is essentially impossible to limit the growth of global emissions as long as China keeps building coal fired electricity generation plants at a torrid pace.

The authors of this paper observe that this problem extends beyond China.

They “investigate why new coal-fired power plants are being financed and built in South and Southeast Asia, given that new coal plants without carbon capture and storage are incompatible with a 1.5 ◦C temperature goal. The paper particularly focuses on developing countries where these coal-fired power plants are being built that are recipients of Chinese government-backed finance” …
“Field research was conducted in four recipient countries: India, Indonesia, Vietnam, and Bangladesh. We find that the demand for Chinese-backed coal plants in the four recipient countries is mainly driven by domestic policy that embraces a growth of coal-fired power in their economies.

“Recipient country demand is well matched by China’s willingness to finance and export equipment and services to build new coal-fired power plants overseas.

“In every case, there are explicit, preferential domestic policies for coal, and in at least one case renewables are disallowed by regulation from competing with coal on a level-playing field. None have environmental policies that would require cleaner or more efficient plants to be constructed and operated.”

“Ambient Heat and Human Sleep”, by Minor et al

“The 2020 Report Of The Lancet Countdown On Health and Climate Change: Responding to Converging Crises”, by Watts et al in The Lancet

SURPRISE

Minor et al note that, “rising nighttime temperatures shorten within-person sleep duration primarily through delayed onset, increasing the probability of insufficient sleep. The effect of temperature on sleep loss is substantially larger for residents from lower income countries and older adults, and females are affected more than are males. Nighttime temperature increases inflict the greatest sleep loss during summer and fall months, and we do not find evidence of short-term acclimatization.”

Among other conclusions, Watts et all find that, “Vulnerable populations were exposed to an additional 475 million heatwave events globally in 2019, which was, in turn, reflected in excess morbidity and mortality. During the past 20 years, there has been a 53·7% increase in heat-related mortality in people older than 65 years…

“The high cost in terms of human lives and suffering is associated with effects on economic output, with 302 billion hours of potential labour capacity lost in 2019. India and Indonesia were among the worst affected countries, seeing losses of potential labour capacity equivalent to 4–6% of their annual gross domestic product.
“In Europe in 2018, the monetised cost of heat-related mortality was equivalent to 1·2% of regional gross national income.”

“Shale Binge Has Spoiled US Reserves, Top Investor Warns” (Financial Times, 12Oct) and “Harold Hamm Hits Back at ‘Crazy’ Shale Claims” (Financial Times, 15Oct)

The first column noted the claim by Will van Loh, CEO of Quantum Energy Partners (one of the largest energy focused private equity firms) that drilling wells too close together and fracking them too aggressively has significantly reduced reservoir pressures, and thus the future production capacity of many shale basins.

In the second column, Harold Hamm, CEO of Continental Resources, a shale oil pioneer, denied van Loh’s claim.

SURPRISE
This spat is actually about something much larger and more important than the future productivity of different shale oil basins.

The valuation of energy companies by financial markets misses the forest for the trees. Energy is the economy, because the economy runs on energy. Technology only converts energy into work. Ultimately money and debt are both claims on energy.

Increasing energy density (energy per unit of volume) over time (e.g., from wood to coal to oil to nuclear), has led to accelerating economic growth that enabled the world to support both a growing population and rising living standards.

“Energy Return on Energy Investment”, or EROEI measures the difference between the amount of energy needed to produce a unit of fuel (e.g., coal, oil, gas, renewables, etc.) and the amount of energy that unit contains.

Economic growth is ultimately constrained either by a shift to less dense energy sources and/or a decline in EROEI.
Today, the world is experiencing both, which is an underlying and usually unacknowledged fundamental cause of slowing global growth.

First, to limit greenhouse gas emissions and slow climate change, policies are encouraging a shift away from fossil fuels and towards sources like solar and wind with much lower energy density. While solar energy’s density has been improving, it still orders of magnitude lower than fossil fuels and uranium (nuclear).

Second, over time EROEI is a race between the increasing difficulty of producing the next unit of a diminishing resources and the rate at which improving technology reduces the cost of doing so. In this race, Mother Nature has been winning in recent years, as the discovery of new cheap “monster” oil and gas fields that are cheap to produce has given way to much more expensive methods (e.g., horizontal drilling and fracture stimulation).

This is the underlying cause of the narrowing gap between the minimum price producers need to receive to profitably produce different types of energy, and the maximum price consumers can pay for it if they have high levels of debt and their incomes are stagnant or falling in a weak economy.

Today, there are two obvious solutions: Expanded use of nuclear and substantial improvements in solar energy’s density. The first faces political obstacles, and the latter technical ones. Until either or both are resolved, worsening energy economics will very likely impose a growing drag on economic growth.

As both Biden and Trump fought to win the swing states of Pennsylvania and Ohio, fracking again became an issue in the US presidential campaign, with Trump claiming Biden will ban it, and the latter denying the charge.

All else being equal, a fracking ban would almost certainly lead to a substantial increase in energy prices, which would put upward pressure on overall inflation and thus could very likely weaken or reverse an incipient economic recovery from COVID.

However all else is unlikely to remain equal – the upward price impact from any fracking restrictions and resulting cuts in oil and gas supplies could be offset by weakening economic demand, if COVID cases continue to rise and the US Congress fails to pass a second, and more effective, stimulus package.

Speaking to the UN General Assembly, Xi Jinping announced plans for China to become carbon neutral by 2060.

It is hard to reconcile this pledge (however much certain audiences cheered it) with the fact that China as nearly 150GW of new coal plants either planned or under construction. This is about equal to the total amount of the European Union’s coal-fired electricity generation capacity today. Through the Belt and Road Initiative (BRI), China is also financing the construction of new coal plants in other countries.

“Petra Nova Mothballing Post-Mortem: Closure of Texas Carbon Capture Plant Is a Warning Sign”, by the Institute for Energy Economics and Financial Analysis

SURPRISE

The gap between China’s claims and reality was made starker by the announcement that a carbon capture plant in Texas will be mothballed.

This is also yet another example of how when it comes to emissions reducing technologies, the hope and the hype they inspire too often outrun the much slower pace of the science and engineering progress that are needed to make them cost effective (speaks someone who has more than his fair share of scar tissue from experience in this area).

“The 240-megawatt Petra Nova carbon capture and storage project at Unit 8 of NRG Energy’s W.A. Parish Generating Station near Houston is the only operational coal-fired power plant CCS facility in the U.S. As such, it is frequently cited by promoters of CCS retrofits at other coal-fired power projects as proof that the process works and that it is an economically viable option for cleaning up coal-fired generation.

“But there have long been serious questions about the performance at Petra Nova. These questions have only been heightened by NRG’s official announcement in late July that it mothballed the carbon capture project in the spring due to falling oil prices. NRG’s plans for the project remain uncertain, with the company only saying it could be brought back online “when economics improve.”

“The mothballing of Petra Nova highlights the deep financial risks facing other proposed U.S. coal-fired carbon capture projects, including Enchant Energy’s plan for the San Juan Generating Station in New Mexico and Minnkota Power Cooperative’s Tundra Project at the Milton R. Young Station in North Dakota.

The combination of California’s aggressive shift to renewable power generation (e.g., 9 GW of gas generation has been closed) and a persistent heatwave in the western United States (which limited California’s ability to import power from other states, while increasing cloud cover and diminishing winds in California) led to blackouts which highlighted the limitations of the current system.

As the Financial Times headlined, “Green Ambition Has Short-Circuited California’s Power Supply.”

Closing down nuclear and gas fired power generation plants before the state installed sufficient battery capacity was a choice that implicitly accepted higher risk of exactly what happened.

As a Bloomberg headline noted, “California Doomed to Frequent Blackout Risk by Battery Shortage.

The story found that, “California’s grid operator estimates that as much as 12 gigawatts of batteries would eventually be needed to store enough renewable energy to help maintain the balance between supply and demand. That’s a huge jump from the more than 500 megawatts worth of batteries operating in the state at the end of last year.”
Moreover, as we noted in last month’s feature article, there are many other obstacles to rapid deployment of grid scale battery storage technologies.

In sum, recent events in California highlight why decarbonization of the United States’ power system is almost certainly going happen more slowly than many expect.

Supporting this, another recent paper found that most of the world’s utilities have not been rushing to close down their fossil fuel generation assets (“A Global Analysis Of The Progress And Failure Of Electric Utilities To Adapt Their Portfolios Of Power-Generation Assets To The Energy Transition”, by Galina Alova).

Historically, models of economic growth assume it is based on three inputs: capital, labor, and total or multifactor productivity growth. A key criticism of this model is that it fails to fully take into account the critical role of energy as an input into the economic growth process.
A new paper finally rectifies this (“An Energy-Driven Macroeconomic Model Validated By Global Historical Series Since 1820”, by Bercegol and Benisty

SURPRISE
The authors demonstrate that since 1920 a series of innovations has increased both the growth energy supply and the efficiency with which it has been used to generate economic growth.

If the transition to renewable energy reduces this measure of efficiency, economic growth will likely suffer. It is very likely that this relationship has not been fully integrated into current market and environmental narratives.

The UK Department for Business, Energy, and Industrial Strategy released a new report on the cost of electricity generation from various sources. Critically, it includes not just the marginal cost of generating an additional megawatt hour of power, but full lifetime system costs (“levelized cost”), including those related to varying levels of reliability.

“Electricity Generation Costs 2020”

SURPRISE
The FT’s article about the report (“Green Power Needs to Account for All Its Costs”) noted that, “Much of the recent story has been about the plunging cost of renewables. For instance, in 2013 the UK government estimated that an offshore wind farm opening in 2025 would generate electricity for £140 per megawatt hour (MWh). It now forecasts that could be achieved for just £54/MWh.

“The report sees this trend continuing. By 2035, it estimates an offshore wind farm might on average produce power for as little as £41/MWh; and large-scale solar just £33.

“However, these figures exclude those system costs, mainly because the solar or wind developer does not have to meet them. At present, these are simply spread across the network as a whole.

“When you add them in, as the Beis report does, attributing them to the generating source thatcaused them, the picture changes.

“Take the 2035 figure of £41/MWh for offshore wind. With estimated system costs on top, Beis believes the all-in price is closer to £59 to £79 (43-92 percent higher). For solar, £33/MWh becomes £45-£61. In each case, the range depends on how widespread the use of these renewables is…Essentially, the marginal cost of each extra renewable on the system keeps going up as their use increases.

“Not only does this erode their advantage over other alternatives such as nuclear and as-yet unproven carbon capture and storage (CCS). It suggests that getting to 100 percent renewables could be expensive.”

“Mines, Minerals, And Green Energy: A Reality Check”, by Mark Mills from Northwestern University

SURPRISE
“As policymakers have shifted focus from pandemic challenges to economic recovery, infrastructure plans are once more being actively discussed, including those relating to energy. Green energy advocates are doubling down on pressure to continue, or even increase, the use of wind, solar power, and electric cars. Left out of the discussion is any serious consideration of the broad environmental and supply-chain implications of renewable energy…

“All energy-producing machinery must be fabricated from materials extracted from the earth. No energy system, in short, is actually “renewable,” since all machines require the continual mining and processing of millions of tons of primary materials and the disposal of hardware that inevitably wears out. Compared with hydrocarbons, green machines entail, on average, a 10-fold increase in the quantities of materials extracted and processed to produce the same amount of energy…

“Replacing hydrocarbons with green machines under current plans—never mind aspirations for far greater expansion—will vastly increase the mining of various critical minerals around the world. For example, a single electric car battery weighing 1,000 pounds requires extracting and processing some 500,000 pounds of materials…

“Oil, natural gas, and coal are needed to produce the concrete, steel, plastics, and purified minerals used to build green machines. The energy equivalent of 100 barrels of oil is used in the processes to fabricate a single battery that can store the equivalent of one barrel of oil.”

“An Assessment Of Earth’s Climate Sensitivity Using Multiple Lines Of Evidence” by Sherwood et al

SURPRISE
This interesting and potentially important paper evades a critical point: Achieving substantial emissions reductions, and thus slowing the rate of global warming, fundamentally depends on China’s willingness to adopt policies (like stopping construction of coal fired electric power generating plants) it has thus far refused to do.
The authors note that, “the objective of this work is to analyze all important evidence relevant to climate sensitivity, and use that evidence to draw conclusions about the probabilities of various values of the sensitivity…

“All observational evidence must be interpreted using some type of model that relates underlying quantities to observables, hence there is no such thing as a purely observational estimate of climate sensitivity.

"Uncertainty associated with any evidence therefore comes from three sources: (1) observational uncertainty, (2) potential model error, and (3) unknown influences on the evidence such as unpredictable variability (which may or may not be accounted for in one’s model)…

“Earth’s global “climate sensitivity” is a fundamental quantitative measure of the susceptibility of Earth’s climate to human influence. A landmark report in 1979 concluded that it probably lies between 1.5-4.5℃ per doubling of atmospheric carbon dioxide, assuming that other influences on climate remain unchanged. In the 40 years since, it has appeared difficult to reduce this uncertainty range.

"In this report we thoroughly assess all lines of evidence including some new developments…We find that a large volume of consistent evidence now points to a more confident view of a climate sensitivity near the middle or upper part of this range. In particular, it now appears extremely unlikely that the climate sensitivity could be low enough to avoid substantial climate change (well in excess of 2℃ warming) under a high-emissions future scenario.

“We remain unable to rule out that the sensitivity could be above 4.5℃ per doubling of carbon dioxide levels, although this is not likely. Continued research is needed to further reduce the uncertainty and we identify some of the more promising possibilities in this regard.”

“Housing Market Value Impairment from Future Sea-Level Rise Inundation”, by Rodziewicz et al from Federal Reserve Bank of Kansas City

The next two papers highlight the way too much climate research is spun to generate headlines and clicks, and not to help decision makers dispassionately weigh evidence. When it comes to climate research, critical reading is a must.

“The rate of future global sea-level rise will likely increase due to elevated ocean temperatures and increases in land-ice melt. Nearly 40 percent of the U.S. population lives in coastal communities, and coastal properties are expected to become more prone to coastal flooding in the coming decades due to relative sea-level rise caused by both global and local factors. Understanding how this projected sea-level rise translates to lost economic value is critical to the decisions of insurance companies, banks, governments, investors, and regulatory agencies.”

The authors “estimate a range of housing market value impairments from future sea-level rise in 15 major U.S. coastal cities as well as the associated timing of those impairments. Our estimates include only residential properties with four or fewer units and thus provide a lower bound estimate of economic risk from sea-level rise."

They "estimate that within these 15 major U.S. coastal metros, sea-level rise will inundate between 2,000 and 28,000 properties by 2100 in a relatively low greenhouse gas concentration scenario and between 7,000 to 77,000 properties under an unlikely, extreme greenhouse gas concentration scenario. These estimates equate to direct economic losses between $0.1 to $1.8 billion under the low green- house gas scenario and $3.8 to $50.6 billion under the high scenario.”

To put these estimated losses into perspective, in 2019 the estimated total value of US residential real estate was $33.6 trillion according to Zillow.com

“Projections of global-scale extreme sea levels and resulting episodic coastal flooding over the 21st Century”, by Kirezci et al

In the last month, this new paper received much more sensational (and uncritical) media attention than the one just discussed above.

However, a careful read uncovers two critical points: First, it is based on the IPCC’s most extreme high emissions scenario (RCP 8.5), which assumes an average global temperature increase of 3.2 to 5.4 degrees centigrade. Second, it (implausibly) assumes “no coastal protection or adaptation.”

Unsurprisingly, the results are grim: “there will be an increase of 48% of the world’s land area, 52% of the global population and 46% of global assets at risk of flooding by 2100. A total of 68% of the global coastal area flooded will be caused by tide and storm events with 32% due to projected regional sea level rise.”

“What We Know and Don’t Know About Climate Change, and Implications for Policy”, by Robert Pindyck

This excellent new paper focuses on an issue near and dear to The Index Investor’s heart: The critical impact of uncertainty on a debate in which claims are often stated in what Pindyck considers excessively precise terms.

He observes that, “there is a lot we know about climate change, but there is also a lot we don't know. Even if we knew how much CO2 will be emitted over the coming decades, we wouldn't know how much temperatures will rise as a result.

“And even if we could predict the extent of warming that will occur, we can say very little about its impact…
We face considerable uncertainty over climate change and its impact, why there is so much uncertainty, and why we will continue to face uncertainty in the near future...

“Climate change uncertainty has important policy implications. First, the uncertainty (particularly over the possibility of a catastrophic climate outcome) creates insurance value, which pushes us to earlier and stronger actions to reduce CO2 emissions.
“Second, uncertainty interacts with two kinds of irreversibilities.

First, CO2 remains in the atmosphere for centuries, making the environmental damage from CO2 emissions irreversible, pushing us to earlier and stronger actions.

Second, reducing CO2 emissions requires sunk costs, i.e., irreversible expenditures, which pushes us away from earlier actions. Both irreversibilities are inherent in climate policy, but the net effect is ambiguous.”

“Solving the Climate Crisis” – The Democratic Minority of the US House of Representatives’ Climate Action Plan

While this plan has no chance of passing the Senate and being signed into law by President Trump, it offers an advance view of what is very likely in store if the Democrats sweep the US House, Senate, and Presidency in November’s elections.

The plan calls for the US to reach a goal of net zero emissions by 2050. Policies recommended by House Democrats focus on speeding up electrification in general, further limiting the role of fossil fuels (including making it more difficult to obtain approvals for fossil fuel-related infrastructure), reducing methane emissions, and increasing the resilience of infrastructure the negative effects of climate change.

“Climate Math: What a 1.5 degree pathway would take”, by Henderson et al, from McKinsey

see also:

“Energy Technology Perspectives – A Special Report on Clean Energy Innovation” by the International Energy Agency

This new McKinsey report provides practical balance to the House Democrats’ policy proposals. It notes that, “Adapting to climate change is critical because, as a recent McKinsey Global Institute report shows, with further warming unavoidable over the next decade, the risk of physical hazards and nonlinear, socioeconomic jolts is rising.

“Mitigating climate change through decarbonization represents the other half of the challenge. Scientists estimate that limiting warming to 1.5 degrees Celsius would reduce the odds of initiating the most dangerous and irreversible effects of climate change.”

The authors conclude that, “The good news is that a 1.5-degree pathway is technically achievable. The bad news is that the math is daunting. Such a pathway would require dramatic emissions reductions over the next ten years—starting now”…

It “would require significant economic incentives for companies to invest rapidly and at scale in decarbonization efforts. It also would require individuals to make changes in areas as fundamental as the food they eat and their modes of transport. A markedly different regulatory environment would [also] likely be necessary to support the required capital formation.”

“Will the World’s Breadbaskets Become Less Reliable?” by the McKinsey Global Institute

SURPRISE

“Over the past few decades, people around the world have benefited from a growing supply of food, keeping prices relatively stable and reducing undernourishment to near all-time lows. This positive long-term trend was briefly interrupted by one episode of globally spiking food prices between 2006 and 2008 and a smaller increase between 2010 and 2012, causing significant disruptions to markets and societies alike” …

“Relative stability in prices has been achieved primarily through continuously higher productivity (rather than major expansion of croplands) and the absence of a major event that could have caused large-scale crop failure.
“If these trends continue, the global food supply could increase over the next decade by an estimated 20 percent, more than the 13 percent projected increase in world population….

[However], “climate change and related acute weather events are similarly introducing new risks into the food system. While many of them may not yet be fully appreciated, they expose similar vulnerabilities to COVID…

"We examine the changing likelihood of a harvest failure occurring in multiple breadbasket locations as well as the potential socioeconomic impact of such an event.

“We define a breadbasket as a key production region for food grains (rice, wheat, corn, and soy) and harvest failure as a major yield reduction in the annual crop cycle of a breadbasket region where there is a potential impact on the global food system.

“We examine the impact of a changing climate absent mitigation and adaptation…on the current food production system to highlight its vulnerabilities and do not assume further improvements in yields or other adaptation measures.

“We find that the likelihood of a multiple-breadbasket failure (which we define as a global harvest failure of more than 15 percent relative to average) occurring in a given year has increased from roughly one percent in the past 20 years to roughly two percent in the next decade to 2030, and to roughly four percent by 2050—a quadrupling in likelihood that could have significant socioeconomic impact.

“Similarly, the probabilities of a multi-breadbasket failure occurring at least once within a 10 year period increase from 10 percent today, to 18 percent by 2030 and to 34 percent by 2050.”

“Why Are Fossil Fuels So Hard To Quit?” by Samantha Gross from Brookings

This new analysis takes a sober look at the obstacles to fossil fuel displacement.

Gross argues that, “throughout history, humanity’s energy use has moved toward more concentrated, convenient, and flexible forms of energy. Understanding the advantages of today’s energy sources and the history of past transitions can help us understand how to move toward low-carbon energy sources” …

“The first big energy transition was from wood and charcoal to coal, beginning in the iron industry in the early 1700s. By 1900, coal was the primary industrial fuel, taking over from biomass to make up half the world’s fuel use. Coal has three times the energy density by weight of dry wood and is widely distributed throughout the world. Coal became the preferred fuel for ships and locomotives, allowing them to dedicate less space to fuel storage…

“Oil was the next major energy source to emerge. Oil has twice the energy density of coal by weight…Oil entered the market as a replacement for whale oil for lighting, with gasoline produced as a by-product of kerosene production. However, oil found its true calling in the transportation sector…overtaking coal to become the world’s largest energy source in 1964…

“In more recent times, natural gas has become valued for its clean, even combustion and its usefulness as a feedstock for industrial processes and power generation…

“A final key development in world energy use was the emergence of electricity in the 20th century…which transformed the energy system from one in which fossil energy was used directly into one in which an important portion of fossil fuels are used to generate electricity…Fossil fuels are still the backbone of the electricity system, generating 64% of today’s global supply…

“In sum, the story of energy transitions through history has been a constant move toward fuels that are more energy-dense and convenient to use than the fuels they replaced…

“Pound for pound, gasoline or diesel fuel contain about 40 times as much energy as a state-of-the-art battery…

“Electrify everything” is a great plan, so far as it goes, but not everything can be easily electrified…Certain qualities of fossil fuels are difficult to replicate, such as their energy density and their ability to provide very high heat, as is required for the production of steel, cement, and glass….

“Those pushing to end fossil fuel production now are missing the point that fossil fuels will still be needed for some time in certain sectors. Eliminating unpopular energy sources or technologies, like nuclear or carbon capture, from the conversation is short-sighted.

“Renewable electricity generation alone won’t get us there — this is an all-technologies-on-deck problem. I fear that magical thinking and purity tests are taking hold in parts of the left end of the American political spectrum, while parts of the political right are guilty of outright denialism around the climate problem. In the face of such stark polarization, the focus on practical solutions can get lost — and practicality and ingenuity are the renewable resources humanity needs to meet the climate challenge.”

“Integrating Batteries in the Future Swiss Electricity Supply System”, by Vandepaer et al

SURPRISE

This new analysis provides a lifecycle perspective on the environmental impact of increased use of batteries for energy storage.

“Stationary batteries are projected to play a role in the electricity system of Switzerland after 2030. By enabling the integration of surplus production from intermittent renewables, energy storage units displace electricity production from different sources and potentially create environmental benefits.

“Nevertheless, batteries can also cause substantial environmental impacts during their manufacturing process and through the extraction of raw materials. A prospective consequential life cycle assessment (LCA) of lithium metal polymer and lithium-ion stationary batteries is undertaken to quantify potential environmental benefits and drawbacks…

“Energy scenarios are used to obtain marginal electricity supply mixes, and projections about the battery performances and the recycling process are sourced from the literature…

“By enabling the integration of surplus production from intermittent renewables, energy storage technologies displace electricity production from different sources and potentially create environmental benefits. [However], increased use of stationary batteries is likely to cause additional [negative] environmental impacts…

The amount of new debt that governments will eventually be forced to repay (and at minimum service), along with the continuing desire to mitigate both rising carbon emissions and the impact of climate change, have made it very likely that in the future we will see carbon taxes imposed.

Carbon taxes are far simpler than emissions trading schemes, and arguably do more to promote innovation. However depending on the price/tonne of CO2 emissions (or its equivalent) at which they are set, the marginal cost they impose can have substantial impacts. Perhaps the best example of this is on the coal industry, with heavy emitters like cement and steel not far behind.

However, controversy is sure to arise over the impact of proposed carbon taxes clash on industries that are heavy emitters (e.g., steel and chemicals) whose supply chains are being moved out of China and “reshored” back to the US at a time of rising conflict between those two nations.

“Scale-up of Solar and Wind Puts existing Coal, Gas at Risk”, Bloomberg New Energy Finance, 28Apr20

“Solar PV and onshore wind are now the cheapest sources of new-build generation for at least
two-thirds of the global population. Those two-thirds live in locations that comprise 71% of gross domestic product and 85% of energy generation. Battery storage is now the cheapest new-build technology for peaking purposes (up to two-hours of discharge duration) in gas importing regions, like Europe, China or Japan”…

The latest analysis by research company BloombergNEF (BNEF) “shows that the global benchmark levelized cost of electricity, or LCOE, for onshore wind and utility-scale PV, has fallen 9% and 4% since the second half of 2019 – to $44 and $50/MWh, respectively.”

Note, however, that others have claimed this type of estimate is too low, because it leaves out cost related to increased grid stability and control issues as greater amounts of variable generation (solar and wind) is added.

“Meanwhile, the benchmark LCOE for battery storage has tumbled to $150/MWh for projects with a four hour duration, about half of what it was two years ago. Today, BNEF estimates that the average capacity of storage projects sits at about 30 megawatt-hours… [Note that in 2018 the average capacity of newly installed onshore wind turbines in the US was 2.43 megawatt-hours. So the average storage project only covers about 4 hours of output from about 12 wind turbines].

“Seb Henbest, chief economist at BNEF, said: “The coronavirus will have a range of impacts on the relative cost of fossil and renewable electricity. One important question is what happens to the costs of finance over the short and medium term. Another concerns commodity prices – coal and gas prices have weakened on world markets. If sustained, this could help shield fossil fuel generation for a while from the cost onslaught from renewables.”

“Crops at risk as coronavirus lockdown grounds bees”, Financial Times

SURPRISE

“Lockdowns, quarantine requirements and border closures introduced in recent weeks around the world to slow the coronavirus pandemic are threatening to hit food production by limiting the movement of bees, agriculturalists have warned.

“Farmers around the world growing fruits, vegetables and nuts rely on bees to pollinate their crops. In many cases bees are trucked through agricultural areas, rather than staying local to one area — but now they cannot travel.

“A third of our food depends on the pollination by bees. The production of those crops could be affected,” said Norberto Garcia of Apimondia, the international federation of beekeepers.”

“Evaluating the mineral commodity supply risk of the U.S. manufacturing sector”, by Nassar et al

SURPRISE
“Trade tensions, resource nationalism, and various other factors are increasing concerns regarding the supply reliability of nonfuel mineral commodities. This is especially the case for commodities required for new and emerging technologies ranging from electric vehicles to wind turbines. In this analysis, we use a conventional risk-modeling framework to develop and apply a new methodology for assessing the supply risk to the U.S. manufacturing sector.

Specifically, supply risk is defined as the confluence of three factors: the likelihood of a foreign supply disruption, the dependency of U.S. manufacturers on foreign supplies, and the ability of U.S. manufacturers to withstand a supply disruption. The methodology is applied to 52 commodities for the decade spanning 2007–2016. The results indicate that a subset of 23 commodities, including cobalt, niobium, rare earth elements, and tungsten, pose the greatest supply risk”…

“This subset includes commodities that have a high degree of production concentration in countries that may become unable or unwilling to supply to the United States, are mainly imported from other countries, and are consumed in economically important manufacturing industries that may be less able to withstand a price shock that may result from a supply disruption.”

“The Green Swan: Central banking and financial stability in the age of climate change” by the Bank for International Settlements

“Integrating climate-related risk analysis into financial stability monitoring is particularly challenging because of the radical uncertainty associated with a physical, social and economic phenomenon that is constantly changing and involves complex dynamics and chain reactions. Traditional backward-looking risk assessments and existing climate-economic models cannot anticipate accurately enough the form that climate-related risks will take.”

“These include what we call ‘green swan’ risks: potentially extremely financially disruptive events that could be behind the next systemic financial crisis.”

“Alternative Foods as a Solution to Global Food Supply Catastrophes”, by Baum et al

“Analysis of future food security typically focuses on managing gradual trends such as population growth, natural resource depletion, and environmental degradation.

However, several risks threaten to cause large and abrupt declines in food security. For example, nuclear war, volcanic eruptions, and asteroid impact events can block sunlight, causing abrupt global cooling.

“In extreme but entirely possible cases, these events could make agriculture infeasible worldwide for several years, creating a food supply catastrophe of historic proportions. This paper describes alternative foods that use non-solar energy inputs as a solution for these catastrophes.

“For example, trees can be used to grow mushrooms; natural gas can feed certain edible bacteria.

“Alternative foods are already in production today, but would need to be dramatically scaled up to become the primary food source during a global food supply catastrophe. Scale-up would require extensive depletion of natural resources and difficult social coordination.

"For these reasons, large-scale use of alternative foods should be considered only for desperate circumstances of food supply catastrophes. During a catastrophe, alternative foods may be the only solution capable of preventing massive famine and maintaining human civilization.”

“Are Economists Getting Climate Dynamics Right and Does It Matter?”, by Dietz et al

SURPRISE
“We show that several of the most important economic models of climate change produce climate dynamics inconsistent with the current crop of models in climate science.

“First, most economic models exhibit far too long a delay between an impulse of CO2 emissions and warming. Second, few economic models incorporate positive feedbacks in the carbon cycle, whereby carbon sinks remove less CO2 from the atmosphere, the more CO2 they have already removed cumulatively, and the higher is temperature.

“These inconsistencies affect economic prescriptions to abate CO2 emissions. Controlling for how the economy is represented, different climate models result in significantly different optimal CO2 emissions. A long delay between emissions and warming leads to optimal carbon prices that are too low and too much sensitivity of optimal carbon prices to the discount rate.

“Omitting positive carbon cycle feedbacks also leads to optimal carbon prices that are too low. We conclude it is important for policy purposes to bring economic models in line with the state of the art in climate science.”

“Global LNG demand to double by 2040, Shell predicts”, FT 20Feb20

“Global demand for liquefied natural gas is expected to double to 700m tonnes by 2040 as energy consumption, particularly in Asia, rises and as the world shifts away from dirtier burning fuels, Royal Dutch Shell said on Thursday."

“In its annual outlook for the supercooled fuel, the energy major said that gas will play a significant role in shaping a lower-carbon future. Around 80 per cent of global energy demand growth is forecast to be met by renewables and gas.”

“Salt of the Earth: Quantifying the Impact of Water Salinity on Global Agricultural Productivity”, by Russ et al from the World Bank

SURPRISE
“Salinity in surface waters is on the rise throughout much of the world. Many factors contribute to this change, including increased water extraction, poor irrigation management, and sea-level rise. To date no study has attempted to quantify the impacts on global food production. This paper develops a plausibly causal model to test the sensitivity of global and regional agricultural productivity to changes in water salinity...

“Average global food losses over 2000–13 are found to be high, in the range of the equivalent of 124 trillion kilocalories, or enough to feed more than 170 million people every day, each year. Global maps building on these results show that pockets of high losses occur on all continents.”

“Decreasing market value of variable renewables is a result of policy, not variability”, by Brown and Reichenberg

SURPRISE
“Although recent studies have shown that electricity systems with shares of wind and solar above 80% can be affordable, economists have raised concerns about market integration. Correlated generation from variable renewable sources depresses market prices, which can cause wind and solar to cannibalize their own revenues and prevent them from covering their costs from the market. This cannibalization appears to set limits on the integration of wind and solar, and thus contradict studies that show that high shares are cost effective…

“We show from theory and with numerical examples how policies interact with prices, revenue and costs for renewable electricity systems. The decline in average revenue seen in some recent literature is due to an implicit policy assumption that technologies are forced into the system, whether it be with subsidies or quotas.

“If instead the driving policy is a carbon dioxide cap or tax, wind and solar shares can rise without cannibalising their own market revenue, even at penetrations of wind and solar above 80%.
“Policy is thus the primary factor driving lower market values; the variability of wind and solar is only a secondary factor that accelerates the decline if they are subsidised. The strong dependence of market value on the policy regime means that market value needs to be used with caution as a measure of market integration.”

“Heavy flows into ESG funds raise questions over ratings”, FT 3Mar20

“ESG ratings are becoming embedded in financial markets. A growing number of investment indices now hinge on companies’ rankings for environmental, social and governance criteria, and some banks are even offering better borrowing terms to companies with strong ESG scores.

“But these are not like credit ratings, which are regulated, and tend to be governed by specific triggers such as a company breaching a certain threshold of leverage. And with so many different methodologies on the market, from a growing number of providers, there can be a wide spread of views on the same company”.

“ESG investments: Filtering versus Machine Learning Approaches”, by de Franco et al

SURPRISE
The authors “designed a machine learning algorithm that identifies patterns between ESG profiles and financial performances for companies in a large investment universe. The algorithm consists of regularly updated sets of rules that map regions into the high-dimensional space of ESG features to excess return predictions."

“The final aggregated predictions allow us to design simple strategies that screen the investment universe for stocks with positive scores. By linking the ESG features with financial performances in a non-linear way, a strategy based upon our machine learning algorithm turns out to be an efficient stock picking tool, which outperforms classic strategies that screen stocks according to their ESG ratings…

“We show indeed that there is clearly some form of alpha in the ESG profile of a company, but that this alpha can be accessed only with powerful, non-linear techniques such as machine learning”.

“Energy’s stranded assets are a cause of financial stability concern”, FT 1Mar20

SURPRISE
“Goose herds, rendered redundant by the 19th century switch from quills to metal nibbed pens, were an early example. So were the whaling ships no longer needed when electric light replaced oil lamps. So-called stranded assets have long existed. Today, their incarnation as coal mines, oilfields and gas reserves in an unsustainably warming world, is a growing cause of financial stability concern…As the world moves towards a target of net zero carbon emissions companies will find themselves with a range of fossil fuel assets that will never be tapped. They could face large losses as a result. But so could the banks that lend to them, the insurers that underwrite them and the asset managers that invest in them.”

True enough, but the actual recognition of losses on stranded assets depends on resolution of many uncertainties regarding the economic viability of renewable energy (e.g., utility scale battery storage, grid control technologies, pricing regulations, etc.) that still seem very unlikely to happen within the next five years.

“A 2040 vision for the US power industry: Evaluating two decarbonization scenarios”, by Clune et al from McKinsey

SURPRISE
“This article focuses specifically on PJM, the United States’ largest single power system4 in generation. By comparing its current emission trajectory with a hypothetical deep-decarbonization scenario, we show just how important PJM is to the effort to cut CO2 emissions in the United States…

“The difference between the two scenarios is stark. Under the first, or status quo, scenario, renewable power grows relatively slowly, and the overall capacity of fossil-fuel-fired power doesn’t change much, though the composition does, as lower-cost natural gas displaces coal…

“Under the hypothetical deep-decarbonization scenario—one that could occur if state and national governments decide to take much more aggressive action on greenhouse-gas emissions—the grid shifts much more quickly toward renewable power, particularly the use of onshore wind…

“There is also significant investment in flexibility—the capabilities required to manage the intermittent output of renewable power. Coal all but disappears, given the limitations on emissions placed on the system. As a result, by 2040, emissions from the power sector decline 95 percent.

“The transition is costly, however, requiring an estimated additional $193 billion in investment over 20 years…

“In both scenarios, power companies build new gas-fired power plants. But in deep decarbonization, much less new capacity is installed (38 gigawatts compared with 68 gigawatts), and average utilization—the percentage of time the power plant is actually in use—falls from roughly 50 percent to 25 percent.

“At such low utilization, revenues would fall, impairing the economic sustainability of much of the natural-gas industry.

“It bears remembering, though, that gas plants can do more than provide power. Specifically, they can ramp production up and down quickly to balance the intermittent generation from renewable power.

“As renewable generation grows—something that happens in both scenarios—this capability will be critical to ensure reliability. If gas plants are to be economically viable in a deep decarbonization scenario, new market structures may be needed to pay the industry for this flexibility in load balancing, even as natural gas’s contribution to power generation declines.”

“Climate Risk and Response”, by the McKinsey Global Institute

SURPRISE

This analysis focuses “on understanding the nature and extent of physical risk from a changing climate over the next three decades, exploring physical risk as it is the basis of both transition and liability risks.
McKinsey “estimates inherent physical risk, absent adaptation and mitigation, to dimension the magnitude of the challenge…

“The socioeconomic impacts of climate change will likely be nonlinear as system thresholds are breached and have knock-on effects. Most of the past increase in direct impact from hazards has come from greater exposure to hazards versus increases in their mean and tail intensity. In the future, hazard intensification will likely assume a greater role…
“Financial markets could bring forward risk recognition in affected regions, with consequences for capital allocation and insurance. Greater understanding of climate risk could make long-duration borrowing unavailable, impact insurance cost and availability, and reduce terminal values. This could trigger capital reallocation and asset repricing…

“Financial markets could bring forward risk recognition in affected regions, with consequences for capital allocation and insurance. Greater understanding of climate risk could make long-duration borrowing unavailable, impact insurance cost and availability, and reduce terminal values. This could trigger capital reallocation and asset repricing…

“Our research suggests an increase in global agricultural yield volatility that skews toward worse outcomes. For example, by 2050, the annual probability of a greater than 10 percent reduction in yields for wheat, corn, soy, and rice in a given year is projected to increase from 6 to 18 percent. The annual probability of a greater than 10 percent increase in yield in a given year is expected to rise from 1 percent to 6 percent.

“These trends are not uniform across countries and, importantly, some could see improved agricultural yields, while others could suffer negative impacts. For example, the average breadbasket region of Europe and Russia is expected to experience a 4 percent increase in average yields by 2050”.

“Offshore forecast fears blow through European wind farms”, by Nathalie Thomas in the FT 5Jan20

SURPRISE

“Two wind effects are known as ‘wake’ and ‘blockage’. The wake effect describes how wind slows after hitting a turbine, affecting those situated further downstream. Blockage is where wind slows down as it approaches a turbine…

‘Both effects have long been recognised by the renewables industry their scope and complexity have been underestimated.
“It has long been understood that there is an “individual” blockage effect for every single turbine but researchers have now identified a “global” blockage effect that is greater than the sum of the individual effects.

“This arises from individual turbine losses also affecting neighbouring turbines…As more offshore wind farms are built, there could be higher wake effects from neighbouring wind farms.”

“Macro Financial Aspects of Climate Change”, by Feyen et al from the World Bank

SURPRISE

This paper examines the interaction between macro-financial and climate-related risks. It brings together different strands of the literature on climate-related risks and how these relate to macro-financial management and risks.

“Physical impacts of climate change as well as the transition toward a resilient low-carbon economy pose significant challenges for macro-financial management, as they can damage the balance sheets of governments, households, firms, and financial institutions due to the adverse and possibly abrupt impacts on investment and economic growth, fiscal revenue and expenditure, debt sustainability, and the valuation of financial assets.

“In turn, macro-financial risks translate into weakened resilience to physical climate risks and constrained capacity for climate adaptation and mitigation efforts. The paper finds that many countries face the “double jeopardy” of simultaneous elevated climate-related and macro-financial risks.”

“How Populism Will Heat Up the Climate Fight”, by Philip Stephens in the 22Jan20 FT

SURPRISE

“The success of the populist movements that have destabilised Europe’s ancien regimes is rooted in a perception, more than half-true, that those near the bottom of the pile were burdened with bailing out the elites responsible for the financial crisis. The left-behinds rather than the bankers bore the brunt of austerity. Now think about cutting carbon emissions. The same group — low earners living in provincial towns and villages — are first in the line of fire”.

“China, Not America, Will Decide the Fate of the Planet”, by Gideon Rachan in the 27Jan20 FT

“If you look at the numbers — as opposed to the theatre — it becomes clear that the battle to control climate change now depends much more on what happens in China than in America. According to the Union of Concerned Scientists, China now accounts for 29 per cent of global carbon dioxide emissions generation — compared with 16 per cent for the US, about 10 per cent for the EU and 7 per cent for India…

"The bad news for the planet is that the continued growth of the Chinese and Indian middle classes will increase demands for cars, electricity, meat and foreign travel, all of which will generate more greenhouse gases…China’s coal addiction and authoritarian system mean that it will struggle to provide a global lead on the climate.”

“Japan Races to Build New Coal-Burning Power Plants, Despite the Climate Risks”, New York Times 3Feb20

SUPRRISE

“It is one unintended consequence of the Fukushima nuclear disaster almost a decade ago, which forced Japan to all but close its nuclear power program. Japan now plans to build as many as 22 new coal-burning power plants — one of the dirtiest sources of electricity — at 17 different sites in the next five years, just at a time when the world needs to slash carbon dioxide emissions to fight global warming… Together the 22 power plants would emit almost as much carbon dioxide annually as all the passenger cars sold each year in the United States.”

“Modeling migration patterns in the USA under sea level rise”, by Robinson et al

“Sea level rise in the United States will lead to large scale migration in the future…The effects of sea level rise are pervasive, expanding beyond coastal areas via increased migration, and disproportionately affecting some areas of the United States…

“In the United States alone, 123.3 million people, or 39% of the total population, lived in coastal counties in 2010, with a predicted 8% increase by the year 2020 [By the year 2100, a projected 13.1 million people in the United States alone would be living on land that will be considered flooded with a SLR of 6 feet (1.8 m).”

“Sunny with a Chance of Curtailment: Operating the US Grid with Very High Levels of Solar Photovoltaics”, by Frew et al

“The total annual solar penetration for the United States in 2017 was about 1.9%, with rapid declines in solar photovoltaic (PV) and energy storage costs, futures with PV penetrations approaching or exceeding 50% of total annual US generation are becoming conceivable. [However], the operational merits of such a national-scale system have not been evaluated sufficiently.”

The authors “analyze the operational impacts of a future US power system with very high annual levels of PV (>50%) with storage.”

The authors “find that, with appropriate changes to grid operation, 55% PV penetration could be achieved in 2050 while ensuring resource adequacy, addressing net-load variability, and providing sufficient operating reserves.

“However, typical grid operation with 55% PV would look very different from how the grid operates today. It would include very high instantaneous penetration of nonsynchronous (inverter-based) generators, net-load ramp rates, and curtailment, as well as many hours of zero energy prices…These changes would require new ways of thinking about the role of curtailed energy, along with new market designs and compensation mechanisms for sources of energy that have no variable costs.”

“A Simple Plan for Modernizing the Power Grid”, by Dean et al from BCG

“Modernizing a grid is a tough challenge…Since the beginning of 2018, at least five major utilities across the US have had grid modernization plans rejected by regulators because the proposals lacked a clear rationale for upgrading or failed to explain the benefits for the customer. Even when proposals gain regulatory approval, however, companies often struggle with the sheer complexity of the transformation required.

“For utilities that get it right, the benefits to the customer and company are considerable. Get it wrong, though, and the danger of falling further behind in a rapidly evolving energy landscape is significant.”

“Deployment of Deep Decarbonization Technologies: Proceedings of a Workshop”, by the National Academies of Sciences

“Many decarbonization discussions begin and end with the technologies, themselves… Various technical solutions for carbon dioxide removal were discussed, but they require vast inputs of energy (direct air capture) or land (natural carbon sink solutions).

For many decarbonization technologies, deployment at scale will require transformation of the operations of entire sectors, including rebuilding infrastructure, redefining business models, retrofitting or replacing manufacturing processes, discovering new supply chains, developing new product designs, and retraining the workforce…

“Decarbonization of the economy will require large, up-front capital expenditures, and many sectors have so far struggled to attract the required level of investment due to regulatory uncertainty and non-fully depreciated assets that result in carbon dioxide emissions…

“Policy changes that lead to investment in decarbonization technologies can result in stranded assets and thus can raise equity issues for the owners of those assets. Above all else, regulatory certainty is necessary to lower risk and attract investors to the market place, and without a reliable return-on-investment, investors often stay on the sidelines.”

“Can a Growing World be Fed When the Climate is Changing?” By Dietz and Lanz

The authors study “the capacity to meet food demand under conditions of climate change, economic and population growth…[using] a model of the global economy structurally estimated on the period 1960 to 2015. The model integrates several features necessary to study the problem, including an explicit agriculture sector, endogenous fertility, directed technical change and fossil/renewable energy.”

The authors “develop a structural economic model to study how world food demand can be met under conditions of climate change, economic and population growth.”

They find that “macro-economic adjustments like crop land expansion and increased R&D have reduced climate damages substantially, but not wholly…

“The global agricultural land area, as measured by arable land and permanent crops, has grown more slowly and there are indications that it may not expand much further over the course of this century. Historical research suggests global cropland roughly doubled in each of the 19th and 20th centuries. Between 1960 and 2015 it grew by about 15 percent, with the expansion concentrated in places such as tropical developing countries. This did not constrain global food production, however…

"The value of global food production more than tripled from 1961 to 2011, corresponding to a growth rate of about 2.3 percent. This reflects significant productivity gains…[However, more recently some analyses have] reported a slowdown of agricultural productivity growth…

“In a nutshell, world population and GDP have expanded significantly, albeit at a decreasing rate. Agricultural productivity has so far more than kept up with this growth, resulting in declining relative food prices and undernourishment, but a slowdown of productivity growth is raising concerns about the capacity of agriculture to keep pace…

“The pessimistic, Neo-Malthusian view emphasizes limits to the availability of natural resources that are essential inputs to agriculture, especially under climate change.

"The optimistic view focuses on technological progress in agriculture and substitution away from finite natural resources, enabling farmers and the agricultural system to adapt.”

“Democracies are Ill-Suited to Deal with Climate Change”, by the Financial Times’ Ed Luce

“If images of Sydney enshrouded in smoke, or Napa Valley in flames, cannot arouse the voter’s imagination, what will? Those hoping the world’s wealthiest countries will take more of a lead on climate change must confront three hard truths.

“The first is that politicians struggle to look beyond the electoral cycle. The second obstacle to climate change action is uncertainty. It is impossible to establish that any single disaster is entirely man-made…The third obstacle is — how to put it? — human nature. Few people want to confront a massive problem when there are petty scores to settle.”

“A 3C World Is Now Business as Usual”, by the Breakthrough Institute

“The world is on a path to warm to around 3C above pre-industrial levels by 2100 under policies and commitments currently in place. This is a far cry from the 1.5C and 2C targets enshrined in the Paris agreements, but is also well short of the 4C to 5C warming in many “business as usual” baseline scenarios that continue to be widely used…

“Uncertainties surround this projection, of course. For one, there are uncertainties in the sensitivity of the climate to rising atmospheric greenhouse gas concentrations that mean emissions expected to produce warming of around 3C could result in warming as little as 1.9C or as much as 4.4C. And future emissions trajectories are themselves highly uncertain.”

"China ramps up coal power in face of emissions efforts", FT 19Nov19

“China is set to add new coal-fired power plants equivalent to the EU’s entire capacity, as the world’s biggest energy consumer ignores global pressure to rein in carbon emissions in its bid to boost a slowing economy. Across the country, 148GW of coal-fired plants are either being built or are about to begin construction… The current capacity of the entire EU coal fleet is 149 GW [and 256 GW in the US].”

“Climate change: how China moved from leader to laggard”, FT 24Nov19

“Chinese investment in clean energy is plummeting — down from $76bn during the first half of 2017, to $29bn during the first half of this year…
“The highest political priority in China is trying to stabilise the economy,” says Kevin Tu, an energy economist who previously led the China desk at the IEA. “Anything else, including environmental protection, especially climate change, will have to make some room for these political priorities.”

“Climate Tipping Points: Too Risky to Bet Against” by Lenton et al See also, “Tipping elements and climate–economic shocks: Pathways toward integrated assessment”, by Kopp et al

“Politicians, economists and even some natural scientists have tended to assume that tipping points [largescale discontinuities] in the Earth system — such as the loss of the Amazon rainforest or the West Antarctic ice sheet — are of low probability and little understood. Yet evidence is mounting that these events could be more likely than was thought, have high impacts and are interconnected across different biophysical systems, potentially committing the world to long-term irreversible changes.”

The authors conclude that, “ff tipping points are looking more likely, then…warming must be limited to 1.5 degrees Celsius, which requires an emergency response.” However, the authors also note that there is considerable uncertainty associated with their analysis:

“Researchers need to improve their understanding of these observed changes in major ecosystems, as well as where future tipping points might lie…

To address these issues, we need models that capture a richer suite of couplings and feedbacks in the Earth system, and we need more data — present and past — and better ways to use them. Improving the ability of models to capture known past abrupt climate changes and ‘hothouse’ climate states should increase confidence in their ability to forecast these.”

“A New World: The Geopolitics of the Energy Transformation” by The International Renewable Energy Agency

“The accelerating deployment of renewables has set in motion a global energy transformation that will have profound geopolitical consequences. Just as fossil fuels have shaped the geopolitical map over the last two centuries, the energy transformation will alter the global distribution of power, relations between states, the risk of conflict, and the social, economic and environmental drivers of geopolitical instability…

“The world that will emerge from the renewable energy transition will be very different from the one that was built on a foundation of fossil fuels. Global power structures and arrangements will change in many ways and the dynamics of relationships within states will also be transformed. Power will become more decentralized and diffused. The influence of some states, such as China, will grow because they have invested heavily in renewable technologies and built up their capacity to take advantage of the opportunities they create. By contrast, states that rely heavily on fossil fuel exports and do not adapt to the energy transition will face risks and lose influence.”

“Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature”, by Krogstrup and Oman from the IMF

“More research is needed on the most effective policy mix for climate change mitigation, and the role of climate mitigation in the overall policy framework. While some macroeconomic and financial tools are clearly desirable and complementary, others may substitute for each other, giving rise to trade-offs. The literature is scarce on the desirable package of [policy] measures to address climate mitigation.”

“Climate change: shades of green run across political spectrum”, FT 1Dec19 See also, “US Public Views on Climate and Clean Energy”, by Pew Research, November 2019

“Climate change strategies are taking shape not so much because of radical activist pressure but because societies — that is to say more voters, employees and citizens — want something to be done… The politics of climate change in Europe are evolving. Radical right parties, that once scorned environmentalism as a cosmopolitan delusion, are changing their tune — partly because younger supporters believe in climate change.”

“The Production Gap: The discrepancy between countries’ planned fossil fuel production and global production levels consistent with limiting warming to 1.5°C or 2°C” by the UN Environmental Programme

SURPRISE
“This report is the first assessment of countries' plans and outlooks for fossil fuel production, and what is needed to align this production with climate objectives… Governments are planning to produce about 50% more fossil fuels by 2030 than would be consistent with a 2°C pathway and 120% more than would be consistent with a 1.5°C pathway.”

“Modeling Uncertainty in Integrated Assessment of Climate Change: A Multi-Model Comparison”, by Gillingham et al

Surprise
“A central issue in the economics of climate change is understanding the vast array of uncertainties and synthesizing them in a way useful to policymakers…

This study “examines model and parametric uncertainties for population, total factor productivity, and climate sensitivity. It estimates the probability distributions of key output variables, including CO2 concentrations, temperature, damages, and social cost of carbon (SCC). One key finding is that parametric uncertainty is more important than uncertainty in model structure”…

“The outcome distributions reveal that in most cases, the uncertainty in total factor productivity has a much greater influence on outcomes than the uncertainty about population or climate sensitivity.”

As we have previously noted, future productivity growth will have a critical impact in all the issue areas we cover.

As the impact of climate change on food security is perhaps the most important macro threat, we found this draft chapter of particularly interest.

“Observed climate change is already affecting food security through increasing temperatures, changing precipitation patterns, and greater frequency of some extreme events…Increasing temperatures are affecting agricultural productivity in higher latitudes, raising yields of some crops (maize, cotton, wheat, sugar beets), while yields of others (maize, wheat, barley) are declining in lower-latitude regions”…

“Food security will be increasingly affected by projected future climate change… global crop and economic models projected a 1% to 29% cereal price increase in 2050 due to climate change… Given increasing extreme events and interconnectedness, risks of food system disruptions are growing…[However], many practices can be optimised and scaled up to advance adaptation throughout the food system.”

“International Energy Outlook 2019” by the US Energy Information Administration

Commenting on this report on 19Oct19, the FT’s Nick Butler called it “a sobering analysis and should be read as a serious warning… The EIA report paints a picture of the world to 2050, on the basis of current policy, reasonable expectations of economic and population growth across the world and limited incremental gains in technology. It does not provide a forecast but rather a projection of how the world is likely to look in 30 years…

“A few headlines tell the story and expose the crucial unresolved challenge… Total energy consumption rises by almost 50 percent… Demand for hydrocarbons also continues to grow, however. In 30 years’ time almost 70 percent of total energy supplies will still be accounted for by oil, natural gas and coal collectively, against almost 30 percent from renewables”…

“Coal remains the largest single source of energy for industry globally. Even in 2050 it accounts for a quarter of all energy consumption. India’s use of coal is set to soar…

“Perhaps most telling of all, the report gives a picture of two very different worlds. On the one hand, in the developed OECD countries energy demand in volume terms — thanks to efficiency gains, minimal population growth and public policy — is static to falling and the supply is getting progressively cleaner. On the other hand, in the rapidly growing Asian economies, population increases and the desire to escape poverty are pushing up both demand and emissions. The two worlds can coexist in economic terms, but the global environment is singular and pays no heed to political boundaries… The EIA’s projection is rational, but shows an inherently unsustainable future. The trends it describes are a recipe for serious global warming and climate instability.”

“Climate Change, Inequality, and Human Migration”, by Burzynskia et al

Surprise
This analysis quantifies a critical uncertainty related to the potential impact of climate change, which may “intensify poverty and income inequality creating favorable conditions for urbanization and migration from low- to high-latitude countries. Encompassing slow and fast-onset mechanisms, our projections suggest that climate change will induce the voluntary and forced displacement of 100 to 160 million workers (200 to 300 million climate migrants of all ages) over the course of the 21st century. However, under current migration laws and policies, forcibly displaced people predominantly relocate within their country and merely 20% of climate migrants opt for long-haul migration to OECD countries. If climate change induces generalized and persistent conflicts over resources in regions at risk, we project significantly larger cross-border flows in the future.”

“New Elevation Data Triple Estimates Of Global Vulnerability To Sea-Level Rise And Coastal Flooding”, by Kulp and Strauss

Surprise
“Driven by climate change, global mean sea level rose 11–16 cm in the twentieth century. Even with sharp, immediate cuts to carbon emissions, it could rise another 0.5m this century. Under higher emissions scenarios, the twenty first century rise may approach or in the extremes exceed 2m in the case of early-onset Antarctic ice sheet instability. Translating sea-level projections into potential exposure of population is critical for coastal planning and for assessing the benefits of climate mitigation, as well as the costs of failure to act…

“We show that 190 million people (150–250 M, 90% Confidence Interval) currently occupy global land below projected high tide lines for 2100 under low carbon emissions, up from 110M today. These figures triple [valued calculated using previous and less accurate technology]. Under high emissions, up to 630M people live on land below projected annual flood levels for 2100, versus roughly 250M at present.”

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.”

SURPRISE

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.

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.”

New Intergovernmental Panel on Climate Change (IPCC) Report Issued, 8 October 2018

SURPRISE.

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.

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

SURPRISE.

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.”

“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.