Climate change Archives - Adaptive Capability

5 January 2021 By David McEwen

Climate Ambition is Rising – What Does it Mean for Your Business?

In December 2020 a virtual meeting of 70 world leaders took place, with many countries including the European Union and UK strengthening their emissions reduction ambitions through new pledges as part of the 5 yearly Paris Climate Agreement ratchet clause. [1] Australia – with a 2030 target that is less than half of what would be consistent with the IPCC’s recommendations to limit temperature rise to 1.5 degrees above the historical average, and with no net-zero commitment – was not invited to present to the forum. [2]

What are the implications for businesses?

It is clear that the world is shifting, at least in terms of policy announcements, towards a downwards emissions trajectory. Emissions peaked in 2019, and though dampened by the Covid-19 pandemic during 2020, are expected to trend upwards in 2021 as economies reopen and more normal travel patterns resume. However, the year has been marked by significant changes of stance and tone in the politics of emissions reduction amongst Australian trading partners that collectively purchase nearly three quarters of our emissions, including the UK, Europe, China, South Korea and Japan. [3] The US Presidential election result will see the incoming Biden team snap back to pre-Trump policies, including re-joining the Paris agreement and announcing a formal net-zero by 2050 target. [4]

In Australia, while there was a slight change in language since the US election, as yet there has been no shift in Federal emissions reduction policy, despite all states and territories now having net-zero policies or legislation. [5] This is cementing Australia’s position as a laggard amongst developed nations, particularly given our extremely high per-capita emissions. [6] This puts most businesses at a distinct disadvantage.

Let’s get physical

From a physical risk perspective, Australia is experiencing national temperature increases significantly above the global average due to the thermodynamics of its large dry landmass, which is on its way to becoming significantly hotter and dryer. The Murray Darling basin, home to much of the country’s agricultural output, has seen river flows has seen an 11% winter rainfall decline over the last two decades and is on its way to a projected 20% decrease in river flows even in a comparatively good case scenario of 2 degrees average global warming. [7]

Throw in higher rates of evaporative soil moisture loss, heat stress on plants; fewer frost days in winter (which are essential for some crops’ growth cycles); and more weather extremes including extreme precipitation events that denude topsoil and take juvenile plants with them, and you have a recipe for lower overall agricultural productivity and much greater output variability. It’s all very well as a wealthy country to say “we’ll just import more in a bad year”, but there is a growing likelihood that, with increasing frequency, multiple growing regions will experience bad years simultaneously. [8]

It’s not just agriculture that is exposed. As unusually intense storms pummelled Australia’s East Coast this week, threatening infrastructure and leading to significant erosion of Byron Bay’s iconic main beach [9] we had a taste of the growing threat of extreme coastal weather, particularly the damage that storm surges propelled by high tides and magnified by even small levels of sea level rise (to date mostly caused by thermal expansion of the heating ocean, but increasingly from melting land ice in polar regions). [10] Climate models project that both tropical cyclones and East Coast Lows, while not necessarily more frequent, are generally likely to be more intense when they do occur. [11]

Indeed, recent analysis by insurance broker Aon found that so-called secondary perils including hail, flood, storms and bushfires (that generate small to mid-sized losses compared with primary perils such as earthquakes and cyclones) have generated over half the global insured losses between 2017 and 2019. All of these phenomena are expected to become more damaging due to climate change. [12]

Globally, economic losses from extreme weather events have increased significantly over the last four decades, partly due to the increasing value of assets built in exposed areas. [13] With multi-metre sea level rise over the long term (beyond 2100) now locked in even if the Paris climate goals are met, and the majority of coral reefs almost certainly devastated by mid-century, billions of dollars of coastal infrastructure (including major roads, ports and airports) and tourism assets is at risk. [14] As such, affordability of insurance is decreasing: following Townsville’s 2019 flooding, premiums rose as much as four-fold. [15]

From Transition to Transformation

Then there are the transitional risks, which could affect companies’ revenues, asset valuations, or costs of doing business. Take the recently floated Dalrymple Bay Coal Terminal, which Queenslanders have an ill timed stake in through the government-owned QIC’s 10% share. Down 25% in its first week, during which the ASX shed just 0.6%. [16] The ASX200 energy sector has significantly under performed the broader Materials Index (covering all resources) over much of the last five years. [17]

While fossil-fuel related electricity and resources assets are currently the most affected, with major managers responsible for trillions of dollars of investment decisions announcing Paris-aligned net-zero mandates for their portfolios, it won’t be long before the malaise spreads to other major users of fossil fuels, particularly in transportation and in turn energy intensive industries such as steel. Just last week a new initiative – Net Zero Asset Managers – was launched with 30 founding signatories, adding to the UN-convened Net-Zero Asset Owner Alliance, launched in September 2019, which now has 33 members. [18] Emissions intensive businesses will come under increasing pressure to adopt transformative business models. Australian businesses may be disadvantaged to the extent our energy system remains fossil fuel dependent.

Unless Australia embraces a net zero 2050 target (along with a coherent plan to get there) – and particularly while it remains the highest per-capita emitter and one of the largest global producers of fossil fuels – exporters are likely to start feeling the pinch. The European Union has proposed a tax on imports from countries whose emissions reduction targets are not Paris-aligned, and one of the top contenders for the head of the OECD is proposing a global roll out of such a scheme. [19]

Most Australian businesses would benefit from policy decisions that accelerate the transformation towards a clean energy system encompassing electricity, transport, industry and agriculture. Economist Ross Garnaut and other analysts predict that a renewable grid would push electricity prices down, in turn lowering operational and transportation costs as vehicle fleets are electrified (or converted to green hydrogen in the case of some heavy transport). [20] As NSW’s recent renewable energy zone auction demonstrated, there is considerable private sector appetite to fund this transition given the superior economics of solar, wind and storage. [21]

Contrary to public perception, Australia’s coal and gas industries are responsible for only about 1% of jobs. [22] Clean and circular services, manufacturing, agriculture, energy and non-fossil resources industries are key to our future economy. Talk to Adaptive Capability today to understand the risks and opportunities of climate change and turbo charge your business.

David McEwen is a Director at Adaptive Capability, providing strategic risk and project management advice to help businesses create and preserve value in the face of climate change. His book, Navigating the Adaptive Economy, was released in 2016. Visit www.adaptiveeconomybook.com.

[1] https://www.theguardian.com/environment/2020/dec/12/world-is-in-danger-of-missing-paris-climate-target-summit-is-warned

[2] https://www.9news.com.au/national/united-nations-pressure-to-declare-climate-emergency-scott-morrison-snubbed-at-climate-ambition-summit/e158f9b6-ea6e-480c-b0f6-1f11e04e2d1a

[3] https://www.ft.com/content/185e5043-fd72-4fef-a05c-f2a5001c7f4b

[4] https://www.bbc.com/news/science-environment-54858638

[5] https://www.theguardian.com/environment/2020/nov/29/scott-morrisons-climate-language-has-shifted-but-actions-speak-louder-than-words

[6] https://www.bbc.com/news/science-environment-55222890

[7] https://www.smh.com.au/politics/federal/stop-fighting-and-start-adapting-to-climate-change-basin-authority-says-20201214-p56nbc.html

[8] https://www.bloomberg.com/news/articles/2020-05-18/climate-change-may-double-the-risk-of-breadbasket-failures

[9] https://www.theguardian.com/australia-news/2020/dec/14/byron-bay-beach-damage-worst-in-a-generation-as-storms-batter-1000km-of-coastline

[10] https://cleantechnica.com/2020/04/23/the-number-of-people-affected-by-floods-will-double-by-2030/

[11] https://climatechange.environment.nsw.gov.au/Impacts-of-climate-change/East-Coast-Lows/Future-East-Coast-Lows

[12] https://www.insurancejournal.com/news/international/2020/09/23/583704.htm

[13] https://www.bankofengland.co.uk/knowledgebank/climate-change-what-are-the-risks-to-financial-stability

[14] https://www.theguardian.com/environment/2020/sep/23/melting-antarctic-ice-will-raise-sea-level-by-25-metres-even-if-paris-climate-goals-are-met-study-finds

[15] https://www.abc.net.au/news/2019-12-21/high-premiums-driving-uninsured-homes-in-northern-australia/11819814

[16] https://www.afr.com/companies/infrastructure/dalrymple-bay-infrastructure-shares-sink-on-first-day-of-trading-20201208-p56lj8

[17] For example, graph in section 3 of this article: https://www.marketmatters.com.au/blog/post/market-matters-weekend-report-sunday-19th-july-2020/

[18] https://www.ipe.com/news/net-zero-asset-manager-initiative-kicks-off-with-30-founding-signatories/10049545.article

[19] https://www.smh.com.au/world/europe/economy-and-ecology-cormann-s-top-oecd-rival-pledges-climate-reform-20201210-p56m75.html

[20] Garnaut, R., Superpower – Australia’s low-carbon opportunity, La Trobe University Press, 2019.

[21] https://reneweconomy.com.au/dubbos-new-renewables-zone-shows-the-path-away-from-fossil-fuels-79082/

[22] https://www.canberratimes.com.au/story/7055572/how-australia-could-move-away-from-fossil-fuels-without-mass-layoffs/

18 November 2020 By David McEwen

Climate Litigation – An Expanding Risk for Business

With compelling evidence that even 1.5 degrees of global warming will mean suffering for millions, climate activism is heading to the courtroom.

Climate activists are on the prowl. Armed with not for profit law firms they are becoming increasingly creative in their attacks on governments and business. During 2020 in Australia alone, there have been dozens of cases lodged, often aimed at halting or challenging government approvals of private sector projects. Indeed, Australia has one of the highest rates of climate litigation outside of the United States. [1]

As legislative compliance avenues have been exhausted, activists have increasingly moved to human rights and common law challenges. A good example of the latter is Sharma et al v. the Minister for the Environment, which invokes the Minister’s duty of care for young people to attempt to prevent approval of a thermal coal mine extension. Another is O’Donnell v. Commonwealth, which alleges that the Australian government has “…breached its duty of disclosure and misled and deceived investors in failing to disclose” climate risks related to its issuance of government bond. And one of the most famous is the Urgenda case in the Netherlands, which has forced the government to significantly up the ante on its emission reduction targets.

Of course, a growing number of fossil fuel firms have been directly sued for their projects’ environmental harm. Not for profit law firms such as the Environmental Defenders Office, Environmental Justice Australia and Equity Generation Lawyers have been busy progressing such cases. This includes a landmark case applying new Queensland Human Rights legislation, challenging the state’s Land Court to reject Clive Palmer’s proposed Waratah coal mine near the Adani Carmichael project in the Galilee Basin.

It’s not just governments facing the brunt of the law. Superannuation funds and banks have found themselves under attack for failing to consider climate risks in their investing and lending activities. Similar to the O’Donnell case, McVeigh v. Retail Employees Superannuation Trust (REST, lodged in 2018) involved a member of the fund challenging the manager on its failure to disclose or address climate risks. In early November it was settled just before court proceedings were due to commence, with REST agreeing to improve its climate risk assessment and disclosure, along with measurement of the emissions intensity of its portfolio and a realignment to achieve carbon neutrality for the fund by 2050. While not creating a legal precedent, the settlement nevertheless sends a clear signal to the influential sector, which controls substantial holdings in all listed companies and can exert its influence to pressure carbon polluting companies to clean up their acts and transition to clean energy alternatives.

And a number of progressive governments have themselves got in on the act, with jurisdictions such as the state of New York suing fossil fuel firms (in this case Exxon Mobil Corporation) for their complicity in misleading their investors with regard to the deleterious impacts of their products on the global climate. Thus far such cases have failed to stick in court.
Conversely, local governments have come under attack from residents when they have attempted to amend development plans to limit coastal developments subject to erosion due to sea level rise. While it’s a natural response from a well heeled owner of waterfront property wanting to avoid value loss or have their , a number of back downs have eroded local governments’ authority to assert prudent controls. In turn this raises risk for purchasers of vulnerable property, while insurance affordability is progressively reduced. As long ago as 2011 the Australian Local Government Association commissioned a report to help councils prepare for this risk.

What has been less common in Australia — thus far — is the practice of companies suing governments (or other companies) on climate grounds. 2014 marked one of the first such examples: filed as a show case and later withdrawn, perhaps as a warning shot above the bows. In it, the Illinois Farmers Insurance Company challenged Cook County (covering greater Chicago) over its failure to implement effective stormwater management capacity in light of increasing extreme inundation events as a result of climate change, which was leading to increased payouts by the insurance company.

The insurance industry has a great deal to lose from climate change as acute physical climate risks in the form of extreme weather events become more intense and/or frequent over time. It is perhaps surprising that insurers have not been more active in pursuing stronger government action on emissions reduction. And the impacts cascade: as insurers retreat from coverage in vulnerable areas (initially by raising premiums), the proportion of under- and un-insured assets increases. Vulnerable property values decrease, resulting in losses for owners when selling. Banks face default risk in the case of asset damage to uninsured properties. Some of the burden passes to government social services, as mortgage holders are forced from their homes.

As the extent of business and individual losses due to climate inaction becomes more apparent, there is likely to be a boom in climate litigation. To the extent that your business is not seen to be taking genuine action to reduce emissions in line with science based plans aligned with the IPCC’s 1.5 degree target, it could be vulnerable. While governments and major emitters associated with the fossil fuel industry will remain the major targets (and are fertile territory given evidence of their long term knowledge and suppression of information about the risks of climate change), other sectors are not immune. Airlines, shipping, steel, cement, petrochemical derivatives and meat based agriculture are amongst industries that could have actions brought against them, particularly as science-aligned emissions reduction targets are legislated by states and countries.

Is your business next? Talk to Adaptive Capability today to understand the risks and opportunities of climate change to your business.

[1] Columbia University’s climate litigation database http://climatecasechart.com/ tracks cases globally.
[2] https://equitygenerationlawyers.com/wp/wp-content/uploads/2020/11/Statement-from-Rest-2-November-2020.pdf
[3] https://www.environment.gov.au/system/files/resources/d9b2f9cf-d7ab-4fa0-ab0e-483036079dc7/files/alga-report.pdf

15 October 2020 By David McEwen

Is hydrogen in buildings the right approach?

83 years after the Hindenburg disaster highlighted the dangers of this highly flammable and explosive gas, hydrogen is now being touted as an energy saviour that will help humanity reduce its greenhouse emissions to avert catastrophic climate change. There’s a lot of talk and a growing investment pot, but not all of it is realistic or beneficial in helping countries achieve net zero decarbonisation targets.

Hydrogen is the lightest gas; colourless, odourless, and an excellent energy carrier: around three times more so than natural gas (methane, a fossil fuel) on a weight for weight basis. When burnt, its only emission is water, with no greenhouse gases or other toxins released.

On the other hand, in terms of energy density (per litre) it is considerably less efficient than natural gas and oil, and it involves a number of technical challenges to handle, store and transport safely and efficiently for different applications. Nevertheless it’s already used at reasonable scale in industry, mainly for applications like fertiliser production and refining petroleum products. Perhaps surprisingly, on many measures hydrogen is considered safer than methane or petrol. [1]

Where Does Hydrogen Come From?

Due to its tendency to bond with other elements, pure hydrogen (H2) is typically not found in abundant quantities either in the atmosphere or underground – it has to be made, using chemical processes that consume energy and, depending on the method, may involve significant greenhouse emissions themselves. And, it’s currently relatively expensive.

Those seeking action on climate change have their hopes pinned on hydrogen produced by splitting water molecules into their component H2 and O parts using electrolysis. Kids can do this at home using two conductors placed in a cup of water and connected to a battery. Bubbles of hydrogen form at the negatively charged cathode, while oxygen collects at the positive anode. Commercial electrolysers are improving rapidly in cost and performance.

If the electricity for the electrolyser is sourced exclusively from a renewable source (such as a wind or solar farm) then the hydrogen is known as “green”: it involves no operational emissions in its production or use. Electrolysers at large scale could provide a valuable demand response solution for the grid, by skimming excess renewable generation, or bespoke wind/solar farms could be established near production sites (see https://asianrehub.com/ for one such example).

(Of course, if processes involved in its transportation and storage create emissions, then it may not be a truly emissions free source. It also consumes a lot of fresh water, but so does the extraction and processing of fossil fuels and their use in electricity production.)

On the other hand, most of the hydrogen produced today comes from a process called steam methane reformation (SMR) using fossil gas; another method involves coal gasification. Both of these approaches produce significant greenhouse emissions.

Some (including the Australian Government in its recently released Technology Roadmap [2]) argue that SMR with carbon capture and storage (CCS) – i.e. trapping and burying the greenhouse emissions deep underground) can produce low emissions hydrogen, referred to as “blue”.

However:

CCS technologies are relatively unproven and in any case do not trap 100% of emissions;
CCS consumes additional energy, which would itself need to be renewably produced; and
the extraction and transportation of the fossil methane to the hydrogen production facility involves significant “fugitive” emissions of methane, a greenhouse gas 86 times more potent than carbon dioxide.

Perhaps they call it “blue” because its emissions reduction outcomes are pretty sad compared to green hydrogen.

What should hydrogen be used for?

Currently, fossil methane (marketed as natural gas) has a wide range of applications including electricity production; vehicle fuels; many industrial processes, including where high heat is required; plus cooking, space and water heating in homes and commercial buildings. Theoretically, green hydrogen could be used for most of these (apart from industrial processes that rely on the specific chemical composition of methane or other hydrocarbons).

Hydrogen in Electricity Production
Does hydrogen have a place in electricity production? Renewable electricity generation supported by batteries and other storage systems can replace most use of gas (and coal) in the grid (much more cost effectively than hydrogen). There is likely to still be a need for dispatchable generation for odd times when wind and solar under-produce for multi-day periods depleting battery and pumped hydro storage capacity. A well designed renewable grid will limit but probably not eliminate those occurrences, and as we’ll see the grid is expected to grow significantly over the next few decades due to electrification. For a fully decarbonised grid, we will likely need green hydrogen turbines (as production costs become competitive) to fully phase out coal and fossil gas generation. For the foreseeable future however, hydrogen is likely to be relatively uncompetitive against fossil methane for such peaking requirements.

Hydrogen in Transport
Transport falls into two camps. The vast majority of personal transport needs will soon be able to be cost effectively met by battery electric vehicles, with hydrogen fuel cells remaining uncompetitive. Given the enormous advances in technology and manufacturing scale, BEVs are expected to be available before mid-decade for the same or lower cost of an equivalently featured internal combustion engine (ICE, i.e. petrol or diesel) car. They will have battery ranges more than equivalent to similarly sized ICE vehicles.

At that point (and assuming fast charging infrastructure matches uptake), only enthusiasts and those in remote parts of the country would buy an ICE vehicle given the much lower running costs of BEVs (charging costs a fraction of filling a tank, and with far fewer moving parts the outlook is bleak for motor mechanics). Charging a national fleet of BEVs is expected to increase grid demand in the order of 20%. [3]

Hydrogen fuel cell personal vehicles could gain a small foothold in remote communities given their ability to carry additional fuel, particularly if sales of ICE vehicles are banned and hydrogen refuelling infrastructure is established.

Conversely, for heavy transport, including buses, trucks, un-electrified trains, and shipping (but perhaps not aircraft), green hydrogen is emerging as a sensible way to go, cost effective given the emergence of a network of refuelling depots and once its cost drops a little more, as it already has with growing scale and experience. The Australian government has set a target of A$2 per kilogram, at which point it is expected to become competitive with liquid transport fuels. According to UNSW research it’s currently in the $4-8 range [4]).

In the case of shipping, green hydrogen converted to ammonia (another fuel that is emissions free when burnt) may be a good substitute for the heavy (and highly polluting) fuel oil that is currently used. Ammonia produced in this way is more energy efficient than current processes and can also be used in other applications such as fertiliser production (currently a major source of emissions associated with agriculture). [5]
Suitable replacements for aviation fuel are more problematic. Battery powered planes may work for short haul commuter flights in the future, but hydrogen’s density issue may prevent it from replacing avgas. Synthetic carbon neutral fuels — which green hydrogen might play a part in manufacture of — may be the solution here.

Hydrogen in Industry
In industry, replacing natural gas and coking coal with hydrogen for a range of high heat applications including major emitters steel and cement offers great potential if the cost of hydrogen falls or carbon pricing is applied to traditional processes.

Why Hydrogen Doesn’t Make Sense In Buildings

For both residential and commercial buildings, replacing fossil methane with renewable hydrogen does not make sense for three key reasons:

1. To be competitive with gas for in-building applications, hydrogen would need to be significantly cheaper than is predicted for the foreseeable future. And that’s with domestic gas prices having climbed in Australia since the emergence of the LNG export market. Even if hydrogen prices reach US$1 per kg, it remains relatively uncompetitive with fossil gas, particularly in the absence of a carbon price. [6]

2. Electric substitutes, generally with superior energy efficiency, can replace gas appliances in both homes and larger buildings. There is no economic case for expensive hydrogen to be used in buildings when electricity is available. As the emissions intensity of electricity generation continues to decrease with greater renewables penetration, neither fossil methane nor hydrogen can compete.

3. Above about 10% concentration, hydrogen in the existing fossil methane transmission network (made of high tensile steel) will make the pipes brittle. While the local distribution network has mostly been replaced with HDPE pipes, which are acceptable for hydrogen use, many appliances in buildings will need to be adapted or replaced to cope with for high concentrations of hydrogen.

The ACT government has already introduced mandates for new subdivisions, resulting in the first intentionally gas-network free suburbs. A number of recent commercial building projects have announced net zero targets, requiring all energy consumed to be fossil free. In such cases, fossil gas has been designed out in favour of all electric building systems and power contracted from renewable generators. This trend is expected to grow rapidly as more companies announce plans to achieve carbon neutrality.

What Future for the Gas Network?

If hydrogen in buildings doesn’t make sense, what is the future for the fossil gas network?

Proponents argue that there is merit in starting to inject “clean” hydrogen into the existing gas network. The NSW Government has set a target of 10% green hydrogen in the network by 2030. Australia’s Chief Scientist, Professor Alan Finkel, believes this early use of hydrogen will allow production to scale up over the decade before “pure” hydrogen applications can be rolled out at scale, providing much needed learning opportunities.[7]

We note, that unless there is a clear signal regarding the future of the gas network (i.e. its path to net zero emissions), blending hydrogen with fossil gas will slow down the uptake of electrification in buildings and lead to investment in gas-based plant that could become stranded assets as policies shift to achieve decarbonisation targets. Since going much beyond 10% concentration of hydrogen will require costly upgrades to transmission and building plant (as well as a material impact on energy prices), it is essential that government policy is resolved to provide investment certainty.

Hydrogen is clearly in our future as a vital part of measures to achieve net zero emissions. A pure hydrogen gas network will be required, but it can be much smaller and more distributed than the current fossil gas grid. Rather than serving millions of buildings, it will only need to connect local hydrogen supply points (of which there will be many given the distribution of renewable energy generation), with connections to industrial and generation users, heavy transport vehicle fuelling stations and export terminals, collectively numbering in the hundreds or thousands.

[1] For example, https://blog.ballard.com/hydrogen-safety-myths
[2]https://www.industry.gov.au/sites/default/files/September%202020/document/first-low-emissions-technology-statement-2020.pdf
[3] https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Electric_Vehicles/ElectricVehicles/Report/c03
[4] https://newsroom.unsw.edu.au/news/science-tech/how-green-hydrogen-can-become-cheap-enough-compete-fossil-fuels
[5] https://arena.gov.au/projects/hydrogen-to-ammonia/
[6] https://reneweconomy.com.au/renewable-hydrogen-to-undercut-gas-on-price-but-not-the-answer-for-transport-99853/
[7] Alan Finkel answering the author’s question at the Australian National University’s Energy Change Institute webinar “Digging deeper into the Technology Investment Roadmap”, 8 October 2020

11 August 2020 By David McEwen

Applying Climate Scenarios – A Balance of Assumptions

TCFD guidelines recommend stress testing the resilience of corporate strategy against different climate scenarios. In practice this is easier said than done.
The Taskforce for Climate-related Financial Disclosures [1], an initiative of the global Financial Stability Board, has established as the de facto global standard for corporate disclosures about the impacts of climate change. While it’s certainly an improvement to have guidelines, one of the more difficult aspects to operationalise is the development and application of future “climate scenarios.”

Another issue is that, while various supra national organisations are beginning to publish descriptions and assumptions for potential scenarios that could be adopted, they tend to deal with impacts at a decidedly macro-economic level: implications for GDP and other high level metrics. Unpacking that into micro-economic implications for a particular company (or even an industry) involves a multiplicity of assumptions.

To make matters worse, the economic modelling makes use of integrated assessment models, which authors of scenarios, such as the Network for Greening the Financial System (a global group of central banks) admit are either producing wide ranges of potential outcomes for a given scenario, or are under-estimating likely impacts, potentially by a wide margin [3]. Both of which makes there usefulness at the corporate coal face somewhat compromised.

So what to do?

Each climate scenario needs to articulate two sets of assumptions across short, medium and long time horizons:

1. What is likely to happen to the climate (physical)?

2. How are governments, consumers, the economy, society, competitors, etc. likely to respond (transition)?

Applying those assumptions can then yield specific risks to a particular organisation. Typically (though not necessarily in a linear fashion), the likelihood and in some cases the impact of physical risks, such as asset damage or supply chain disruption due to extreme weather, will increase over time as global heating and its associated effects worsen. To the extent that countries collectively achieve or don’t achieve the emissions reduction targets inherent in the objectives of the Paris agreement, and within what time frames, will dictate the severity of the physical risk. Projected regional impacts based on climate models have been published over various time horizons and emissions reduction trajectories to inform scenarios.
Transition risks follow a less certain path and are dependent on the collective actions of governments, companies and individuals. The extent to which they affect a particular business (negatively or positively) depends on what that business does, how and where it sources, manufactures and sells its products or services, and what strategies it adopts with regard to climate risk.

However, a company that decides to switch to a low emissions path could be penalised if local government policy and customer sentiment is not aligned, particularly if its products are not cost competitive with incumbent alternatives or close substitutes.

This phenomenon can be seen most clearly with electric vehicles. When charged from renewably generated electricity they have no operational emissions, and no tail pipe pollution. In markets where government and popular opinion have embraced them, such as Sweden, uptake has been rapid despite the initial cost premium and perceived disadvantages such as range anxiety and the time it takes to charge, achieving over a quarter of new car sales by early 2020 [4].

In Australia on the other hand, where governments have actively resisted their uptake and fanned negative consumer sentiment by stressing their disadvantages [5], penetration has been tiny, with less than 0.5% of new car sales being electric models [6].

Defining climate scenarios with sufficent clarity to assess the sensitivity of a particular company’s P&L requires a clear process of considering, documenting and testing a range of macro and micro-economic, government policy and social assumptions (overlaid with regional climate projections relevant to the company’s sourcing, operating and market locations), within a broad scenario definition (such as implications of achieving a global heating limit consistent with the Paris Agreement, or exceeding that).

Suffice to say, whatever assumptions are made will most likely not materialise as expected. However, the strength of the scenario planning exercise is to help the organisation consider contingencies that may fundamentally change its operating environment and its customers’ appetite for its products. The bottom line is that the world is, quite literally, changing. More than ever before, past trends are no guarantee of future conditions.

As such, climate scenario planning should be seen as a process of continuous improvement, not a one off workshop. Leading companies are embedding climate considerations into day to day decision-making, striving to improve the analysis behind their scenario assumptions, and continually assessing the rapid shifts that are taking place.
Talk to Adaptive Capability today to understand the risks and opportunities of climate change to your business.

[1] https://www.fsb-tcfd.org/

[2] https://theicct.org/sites/default/files/publications/Combustion-engine-phase-out-briefing-may11.2020.pdf

[3] https://www.ngfs.net/en

[4] https://cleantechnica.com/2020/03/25/sweden-reaches-26-electric-vehicle-market-share/

[5] https://reneweconomy.com.au/lets-talk-about-electric-vehicles-australias-policies-are-an-embarrassment-35863/

[6] https://www.caradvice.com.au/855020/electric-car-sales-australia-2020/

18 June 2020 By David McEwen

Show your stripes

This isn’t art, it’s data. Each vertical line is a year. Blues are years that were cooler than the average between 1971 and 2000; red is hotter. The darker the colour the further from the mean. The hottest 10 years since records began in the late 1800s have all been in the last 20 years. 2020 has a good chance of setting a new record.

It’s not sunspots or volcanos or the earth’s rotation or whatever else you might want to believe because you watched some denialist crap on YouTube: it’s us. Mainly our use of coal, oil and gas, cement, land clearing and agriculture.

As it gets hotter, the weather becomes more tempestuous, crop harvests and fresh water supplies become less reliable, the seas rise and become more acidic, and ecosystems on which our lives depend collapse. This is all accelerating now.

How to Fix It

We can fix it, given government will to make systemic changes to our economic system. The good news is that the technology is available today, and is already (or soon will be) cheaper than the old ways that have created the problems. There are multi trillion dollaropportunities for business, millions of jobs, and clean air and water to look forward to. Here’s how:

1. A moratorium on new fossil fuel extraction. Any new investment in coal, oil or gas is utterly incompatible with where we need to be. Existing plants will need to be wound down as quickly as later steps can be scaled up.

2. Rapidly scale up renewables and storage. Australia is currently at 21% (of the current grid). We need to get to at least 700%. We have more than enough land, sun, wind and know how; and wind/solar with storage are now cheaper than fossil or nuclear alternatives – we just need the right policy and regulatory settings from government.

3. Use the excess renewable power to electrify everything that can be including transportation, gas use in buildings and industrial processes.

4. Use the rest of the excess to produce green hydrogen, which can be used for heavy transport (including ships and maybe aircraft), to make steel (instead of coking coal), fertiliser, and for other industrial processes that can’t be electrified. There’s also a huge emerging export opportunity to ship clean hydrogen instead of coal and LNG, and even to send power to Indonesia, Singapore and beyond via submarine cables from the NT.

5. Replace cement, plastic and other products with emerging clean alternatives.

6. Adopt regenerative agriculture to trap carbon in soils, improving productivity and water retention and reducing the need for artificial fertilisers. Reduce the livestock herd and introduce feed systems to reduce their methane emissions.

7. Trap and store methane from landfills and wherever else emissions can’t be eliminated. Trapped greenhouse gases can be used as a feedstock for plastics, jet fuel and other chemical uses.

8. Rewild – return land to nature.

To maintain any semblance of a safe climate the world needs to halve greenhouse emissions by 2030 and get to net zero no later than 2050. As a rich nation with almost the highest per capita emissions in the world, and amazing assets to decarbonise, Australia owes it to the world to punch above our weight.

But there are powerful vested interests distorting and diluting this message and fighting to preserve the status quo. The fossil fuel industry has captured Australian politicians (from both major parties) and key media organisations. They are using their super-profits to buy their longevity, while knowingly hastening the end of a habitable planet.

What can you do?

Educate yourself. Start with the IPCC’s 2018 report about the difference between 1.5 and 2 degrees of warming. Read science written by scientists; avoid opinion pieces written by people with vested interests. Understand who funds what you read and watch, and question their motives. Join a group such as Australian Parents for Climate Actionto learn more and connect with the growing community of concerned people.
Engage with your MPs and Senators. Write to them, call them, meet with them. Let them know you expect to see decisive and meaningful emissions reduction to secure your vote.
Engage with your community. Encourage your family, friends and colleagues to become more aware and politically engaged.
Use your money wisely. Switch your super to a fund that does not invest in industries that contribute to climate change (it will probably generate a better return than your old fund – being sustainable pays). Bank with an institution that doesn’t lend to the fossil fuel sector. Switch to a power company that only uses renewable power. Replace ageing gas appliances with efficient electric alternatives. Insulate and draught-proof your home. Put solar on your roof and make your next car electric. You’ll save money and feel great.
Eat less meat and dairy. Even if you’re a committed carnivore, try out the growing range of meat and dairy substitutes. Some are almost indistinguishable from the real thing and prices are falling. If you have the means, plant a veggie garden and compost.
Travel less and think about your choices. Less flying and car use; more terrestrial mass transit, cycling and walking. Value time in nature.
Switch your media to sources that clearly communicate the gravity of the climate crisis.
Buy less stuff. Recognise that your self worth is not bound up in what you have, but about who you are and the actions you take. When you need stuff, think second hand. Repair, gift, or sell what you don’t need.

Please, for your children’s or grand children’s sake; your nieces, nephews or just your friends’ children; we must convince our governments to truly act in the best interests of the voters they were elected to serve.

#ShowYourStripes graphic by Ed Hawkins

22 July 2014 By David McEwen

Climate change: the hefty price of business as usual

The debate is heating up, and yet Australia’s political leaders seem to be missing the real cost of climate change – a former Goldman Sachs heavyweight sheds insight into which parts of the economy will be hit by inaction the hardest.

Where do our major parties really stand?

The political world has become a bit topsy turvy lately. Countries like Canada, previously respected for their environmental leadership, have become international pariahs for promoting exploitation of their tar sands deposits.

And in Australia, as more than one commentator has observed, it’s become impossible to tell up from down as politicians backflip on major reforms.

The Liberals are dumping a free market solution for greenhouse emissions reduction (the carbon tax was legislated to transition to an Emissions Trading Scheme after the initial fixed price period); Labour is opposing a big government solution (the Coalition’s Direct Action scheme); and ironically the Greens are against a rise in the fuel excise tax (which might have sent a pricing signal discouraging the use of high emitting private vehicles).

What’s the cost of discord?

Just as Australia winds back its carbon scheme, a chorus of influential conservatives is dispelling arguments that reducing greenhouse emissions is taxing on the economy.

Hank Paulsen is a commentator to watch. He served as the US Treasury Secretary during the Bush administration and before that, was the head of one of the world’s most successful investment banks – Goldman Sachs. Having recently published a call to action on climate change in the New York Times, he’s teamed up with Republican former mayor of New York Michael Bloomberg and others to produce a report called Risky Business.

Risky Business focuses on the economic impacts of climate change in the US over the remainder of the century and identifies the worrying financial impacts of sticking to a business as usual scenario.

Here’s a quick summary of the Risky Business forecast:

Property damage from coastal inundation in the hundreds of billions of dollars
Decreased labour productivity for outdoor work due to the rise in extremely hot and/or humid days
Ballooning energy costs (partly due to soaring demand for air conditioning)
Stretched healthcare systems
Increased heat-related mortality
Reduced agricultural productivity

Acting now may leave Australia in a better financial position

In fact, not only does a business as usual scenario turn out to have significant costs; a new economic study commissioned by the United Nations has found that a high emissions reduction scenario could transform major economies to zero net greenhouse emissions as soon as 2050 while still maintaining comfortable rates of growth. Australian National University economist Dr Frank Jotzo, a lead author of the forthcoming report, has noted (Sydney Morning Herald 9/7/14) findings that an annual Australian GDP growth rate of around 2.4% could be maintained while making massive emissions reductions to energy, agriculture and other sectors.

And this is where the rhetoric about the economy paying the price of slashing carbon emissions starts to sound more than a little hollow.

Of course studies and predictions come and go and political will is a huge obstacle to be overcome in many countries. However, with notable conservatives questioning the viability of business as usual and growing evidence that the move to a low emissions scenario may not be as economically difficult as it has been portrayed, the mood is beginning to shift.

This shift presents both risks and opportunities for many organisations. To find out how, talk to Adaptive Capability about safe guarding your organisation’s future.