Ethos Perspectives
Climate Change
In recent years, the issue of climate change has entered the popular and political imagination with considerable speed. As its cachet grows, so does the intensity of the debate surrounding it. Governments and corporations have started to recognise that the climate issue is both a political and business reality—whether they believe in the science or not.
There is growing consensus in the scientific community that the world must cut emissions by at least 50% of today’s level by 2030, and by 80% or more by 2050, in order to limit global warming to 2°C. For any climate change mitigation programme to have a chance of success, there needs to be concrete and credible measures to stabilise the amount of atmospheric greenhouse gases (GHG) without destroying economic growth.
This issue of Ethos Perspectives examines the key challenges and opportunities exerted by climate change in the political and business realms, as it pertains to (i) improving energy productivity, (ii) pricing carbon to reflect its full social costs, (iii) investments in renewable energy, and (iv) a coordinated global response to climate change.
Improving Energy Productivity
Almost all the blueprints for tackling global warming suggest that energy efficiency will have a big role to play. Unless there is a shift in world energy policies, global energy demand is set to accelerate, putting increasing strain on the world economy and the environment. Accordingly to the McKinsey Global Institute (MGI), energy productivity (the level of output achieved from the energy consumed) is the most cost-effective way to reduce global GHG emissions in the near-term. Capturing the energy productivity opportunity could deliver up to half of the abatement of global GHG required to cap the long-term concentration of GHG in the atmosphere at 450 to 550 ppm necessary to prevent the mean temperature from increasing by more than 2°C.
The economics of investing in energy productivity can be very attractive—with an average internal rate of return of 17%, such investments (relying on existing technology) could generate energy savings of up to US$900 billion annually by 2020. The Intergovernmental Panel on Climate Change also suggests that profitable energy-efficiency investments would allow a less developed country like Pakistan to cut its emissions by almost a third, a middle-developed country like Greece by a quarter, and an advanced country like Britain by more than a fifth.
Despite the attractive yield of these investment opportunities, consumers and businesses have been slow to act, largely due to the existence of energy-market and policy imperfections. These distortions include fuel subsidies which directly discourage the efficient and economical use of energy, the lack of information available to consumers about the kinds of energy efficiency-enhancing choices that are available to them, and agency issues in high-turnover commercial businesses. In addition, much of these investment opportunities lie in developing countries where the high up-front costs coupled with competing demands for the scarce investment dollar have meant that the investment in and adoption of such technologies, where they are needed the most, have barely taken off.
Both the public and private sectors could help overcome these obstacles and facilitate the necessary investments. While regulation could indeed be effective, Amory Lovins (Cofounder, Chairman and Chief Scientist of Rocky Mountain Institute) argues that market forces, not regulation, will play the key role in promoting more energy efficient consumption and low carbon emissions. The private market is much more responsive, powerful and creative than public policy, which will continue to play catch-up. In view of surging energy costs, businesses would also be prodded to embrace energy and resource efficiency and leading energy transformation in their sectors as the key sources of competitive advantage.
What is critical is for regulators to complement the adjustments and innovations made by the market. They should deliver policies which aim to support and not distort current market logic, such as setting energy efficiency standards for appliances and equipment as well as removing subsidies and tax breaks for energy consumption.
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