Lack of transparent disclosure has been an aggravation since my days as an international equity analyst. In my experience, there is only one solution to this aggravation: research. (Occasionally a sharp stick poked at the company directors worked.) The following was prompted by attendance at the ASrIA conference in Hong Kong in September 2011. The challenge to learn as much about the environmental sector in one week for three reasons: (1) How quickly may a director and officer become “reasonably” informed? (2) Do directors and officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how? This is what I learnt….. The series runs sequentially over various subjects.
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Peak Carbon
So far I have researched the Peak Oil theory and its implications for Directors and Officers. Next for carbon, about which there seems to be substantial material.
At first it appeared, that Governments had stepped in on measuring and pricing carbon, because that’s what governments do – act in the face of market failure. So one could assume that carbon pollution is a problem for the commons; that private cost has now become public, as with the GFC and the debt of financial and quasi government institutions.
At first it appeared, that Governments had stepped in on measuring and pricing carbon, because that’s what governments do – act in the face of market failure. So one could assume that carbon pollution is a problem for the commons; that private cost has now become public, as with the GFC and the debt of financial and quasi government institutions.
However, as every Director and Officer should be aware today, governments are, through regulation and legislation, handing the cost of carbon right back to the companies that produce it. If you are a Director or an Officer, understanding your carbon cost is as important as understanding all your other expenses.
It is obvious to say that pulling the strategic levers on revenues and costs is critical for optimising returns for your shareholders, competing with others, and delivering value to customers. And carbon is a cost price you do not control; it is (or eventually will be) a market cost with all the volatility that implies. As a pre-run to market pricing of carbon, some governments are pricing your carbon footprint for you. Which at least has the benefit of being equal for your competitors as well. As markets takeover, that will change. Your ability to manage the cost of carbon will depend on the quality of the staff you employ to do so. Many a company over the decades that relied on volatile market prices for hedging its goods or supplies has come undone (think gold, currency, etc) and crashed and burned. Carbon prices in the Euro have already been extremely volatile as well. [i]
So far I have learned it is a long term cost issue. From where we are today, it would take about 100 years for carbon dioxide (CO2) to disappear [to sustainable levels] from the atmosphere if emissions stopped completely.[ii]
The current science from probably the most credible sources, state that for all of human history until about 200 years ago, our atmosphere contained 275 parts per million (ppm) of CO2. When the carbon problem first became apparent, scientists put a cap before real problems occurred at 550 ppm, then this dropped quickly to 450 ppm. But propelled by the news of accelerating ecological impacts in the most sensitive areas such as the Artic, now, not forecast, some of the world's leading climate scientists have now revised the highest safe cap level of CO2to 350 ppm. [iii] [iv]
US Department of Commerce, Earth System Research Laboratory reports that the level of carbon dioxide in the atmosphere at September 2011 was 392 ppm (mean monthly).[v]
Anyone can do the math, including the shareholders and customers of the companies headed by Directors and Officers. This is not a problem for the future, we are already up to our necks in it.
Of course, there’s more. Carbon is only one of the destructive greenhouse gases. The long lived greenhouse gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), halocarbons and sulphur hexafluoride (SF6).[vi] ;
Officially, climate policy targets for greenhouse gases (“GHG” as opposed to just carbon above) were aiming to cap emissions at around 450 ppm, which would theoretically prevent global average temperatures rising beyond a ‘safe’ 2C degrees. The first problem is that we are long passed the danger point. In mid-2005, the Intergovernmental Panel on Climate Change (IPCC) confirmed that the total atmospheric concentration of GHG, was already 455 ppm. This implies that we are already well on course to surpass 2C degrees.[vii]
In controversial research released in late October 2011, it is reported that warming over land in the last 50 years has risen by 0.911C degrees[viii]. I am going to call that 1C degree, that is, we are already at the half way point to the “safe” 2C degrees increase in warming. The report is apparently controversial because it also highlights that the warming has plateaued for the last decade, after rising in a straight line before. However, there is no controversy over the number, and peaks troughs and plateaus is a common pattern so there can be no suggestion that the present plateau won’t start rising again.
What happens with a 2C degrees increase and beyond is catastrophic climate changes, with probable destructive loops feeding into the GHG in the atmosphere. Not only will there be unstable weather patterns; increased floods and droughts; but melting ice increase volcanic activity, giving rise to even more tsunamis[ix] and disruption to commerce through ash clouds.
So whether it is carbon alone, or collectively greenhouse gases, we are already past the tipping point. For Directors and Officers, it is now, not next year, or the next generation.
Arguments against Peak Carbon
So the governments are fixing this problem, right?. Well no, you will have to.
Although governments agreed in Cancun in December 2010 to try to hold the increase in average global temperatures below 2C۫ degrees this century, current commitments remain insufficient. As a result, the world will warm by 2C۫ by 2050, and in some projections by as early as 2024.[x] This would have severe implications for agricultural yields, as well as water availability, with greater incidence of extreme events such as droughts and floods.[xi]
GHG emissions are the largest and fastest-growing component of the global economy’s ‘ecological footprint’ – and according to a report for the PRI investor alliance, these emissions generated an external damage costs of US$4.5 trillion in 2008, some 7.5% of global GDP; this external cost is projected to rise to over 12% of global GDP by 2050.[xii] But this latter relies on HSBC’s Global Economic analysts self-confessed “rosy” expectations of the size of GDP in 2050.
By way of comparison, the IMF reports that the GFC cost $2.8 trillion in early 2010. Lost jobs in the tens of millions are not included.
So, just as a rule of thumb, it could be argued in the last decade the damage has been US$45 trillion from GHG. And growing. So this is like the equivalent of two GFCs every year forever, but this time every company is involved.
I wanted to be able to suggest an against argument for the consequences for Peak Carbon/GHG, but I couldn’t find one. Can you?
Well that’s not true. The Tea Party in the US, ably represented by a US Senator (who I understand is going to be the Republican Head of the Department of Energy when elected), said words to the effect “the world will end when God wants it to, and not before” about climate change. I’d suggest that could be Plan B. Of course, there is also the Federal Opposition in Australia, widely referred to as the teaparty.com.au. They are called the Opposition, because they appear to oppose everything; good and bad.
Strategies’ Peak Carbon
So we are already up to our necks in it, and it is likely to have severe consequences according to the HSBC Report referred to above, increased severity and incidences of extreme weather patterns; heightening of issues relating to food security; disruption to water security for agriculture, industry and human consumption; and without doubt severe geopolitical upheavals.
Directors and Officers may consider this only applies to long tail businesses, such as insurance companies, pension fund managers, big scale infrastructure for commodities extraction. However what if the 2C degree increase and its timing is wrong?? What if it is earlier?? And the cascading environmental backlash occurs on your watch?
And those long tail businesses are in trouble, if my reading of the recent Carbon Tracker report is correct.[xiii] They report that the global carbon budget for 2000-2050 is 886 GtCO2[xiv]. In the first decade alone we have used 321Gt CO2 already, or 36%. This allows only 141 GtCO2 for each of the next four decades. That is a big drop from 321 GtCO2.
They then report that all known fossil fuel reserves are 2,795 GtCO2 (65% coal, oil 22% and gas 13%). Three times the aforementioned budget. And for Directors and Officers, this becomes even more alarming (especially to an ex global equity analyst) when the top 100 listed coal, oil and gas companies are reported to have reserves on their balance sheet of ~745 GtCO2. They go on to say “if the 2C degree target is rigorously applied, then up to 80% of declared reserves owned by these companies …..are subject to impairment.” Thank goodness I am not the auditor or Director and Officer signing off on those balance sheets as true and fair. This report makes clear the systemic risk from understanding more about Directors and Officers near term risks.
Talk about a slow paced GFC, it is starting to look like a train.
As a Director or Officer do you actually know what your carbon or greenhouse footprint is? What part of the US$4.5 trillion cost in 2008 was it? Have you imbedded carbon reserves in your balance sheet that should be written down? Do you know what the carbon footprint is of your primary suppliers? Of your products? You may think you know, but could your company stand an audit let alone a class action?
There is nothing found in researching this subject that suggests it is possible to isolate and attribute specific carbon emissions back to a single carbon issuer. I may be wrong. However intuitively the technology must be available to effectively DNA a carbon emission and slate it home to a particular company. Just like an oil spill. What then, now that governments (and people) are increasingly calling to account companies who cause damage?
How much? Don’t know? As a Director or Officer, you will have to do the numbers.
Here’s what Nasa's Goddard Institute for Space Studies said in 2008:
James Hansen told Congress on Monday that the world has long passed the "dangerous level" for greenhouse gases in the atmosphere and needs to get back to 1988 levels. He said Earth's atmosphere can only stay this loaded with man-made carbon dioxide for a couple more decades without changes such as mass extinction, ecosystem collapse and dramatic sea level rises. "We're toast if we don't get on a very different path," Hansen, director of the Goddard Institute of Space Sciences who is sometimes called the godfather of global warming science, told The Associated Press. "This is the last chance."[xv]
[i] Graph of the LEBA EUO carbon market http://www.investmenttools.com/futures/energy/carbon.htm
[ii] http://www.guardian.co.uk/environment/2010/nov/24/un-greenhouse-gases
[iii] http://www.350.org/about/science
[iv] Remember This: 350 parts per million By Bill McKibben, Washington Post, Friday, December 28, 2007 http://www.washingtonpost.com/wp-dyn/content/article/2007/12/27/AR2007122701942.html
[v] US Department of Commerce, National Oceanic & Atmospheric Administration, NOAA Research at http://www.esrl.noaa.gov/gmd/ccgg/trends/
[vi] Intergovernmental Panel on Climate Change, the IPCC, calls on the world’s leading scientists to assess thousands of papers and produce an overview. See at: http://ipcc.ch/publications_and_data/ar4/wg1/en/ch2s2-es.html
[vii] http://blogs.independent.co.uk/2010/11/24/avoiding-catastrophe/
[viii] The Economist, The Heat is On, October 22, 2011. Quoting a paper by the Berkeley Earth Surface Temperature Group currently under peer review.
[ix] FT.Com Magazine, October 15/16 2011; Prepare for natural disasters. Pilita Clark
[x] Too Close for Comfort, December 2009
[xi] HSBC Global Research have published an excellent report on their views of the global economy in 2050. They have considered many of the issues in this paper, and suggest that either the technology or capacity for the world to continue growing is presently available, albeit not in sufficient quantities. It also, the paraphrase suggests that its forecasts are relying on most of the people doing most of the right things to counter theses risks on a timely basis. We disagree with this outlook, and they provide no evidence that it has occurred in the past as proof it will occur in the next less than 40 years. The excellent report is available on http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=ej73gSSJVj&n=282364.PDF
[xii] Ibid http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=ej73gSSJVj&n=282364.PDF
[xiii] Carbon Tracker. Unburnable Carbon – Are the World’s Financial Markets Carrying a Carbon Bubble. 2011
[xiv] Based on a report by Potsdam Institute.
[xv] http://www.cbsnews.com/stories/2008/06/24/tech/main4204994.shtml
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