Isramart : WAKE UP AUSTRALIA: Seize the low-carbon opportunity

Isramart news:
It’s 2015 and the CEO is facing the shareholders at the AGM. The company is reeling under the weight of Chinese competition, rapidly escalating carbon costs and investor attack for being a laggard in the exciting economic transformation to a low carbon economy. The CEO tries to explain the company’s slow response, reminding shareholders that in 2010 he faced regulatory uncertainty, the perceived failure of the Copenhagen conference, debates on the science and an investment community focused on the global recession. The shareholders aren’t buying it and they’re not buying his company’s stock either. They want answers and they want to know how the company missed the obvious signals in 2010?

Wasn’t 2009 the year the world invested more in renewable energy than fossil fuels for the first time? What kind of leader was he in 2010 that he couldn’t see that China was aggressively pursuing low carbon economic advantage and threatened the company’s market? Was he asleep, blind or just incompetent?

So here we are back in the real world of 2010. Copenhagen is clearly considered a failure by most commentators. The debates are fast and furious in Japan, Australia and the USA over how fast and how hard governments need to act on climate change, while the science deniers are dominating media coverage and political debates. Surely any business executive that was worried about climate change in 2009 can now take a breather and get back to dealing with the fall out from the financial crisis?

If you think that, then dream on, and start preparing your resignation speech for 2015 or probably sooner. Unlike most areas of business strategy uncertainty, there is negligible doubt where this one is heading. Picking technologies, consumer preferences and the behaviour of capital markets is as a difficult as ever. But it’s not those things that frame strategy in this area, but science. The science is very clear and the numbers are simple to calculate. The science community has declared, as its starting point, the need to stabilise global warming at no more than two degrees. While many argue even this is too risky for the economy and we should cut much harder, the world’s governments have agreed that two degrees of warming is, for now, the target we will pursue.

Yes, they’re still fighting over who cuts first and by how much, but the science frames the result and policy makers know that, in the end, failure is not an option. They know that, unlike governments and companies, Mother Nature doesn’t negotiate and she doesn’t do bailouts – the laws of physics and biology are set in stone. As the late US Senator Pat Moynihan argued “Everyone is entitled to their own opinion, but not to his own facts”.

So two degrees is the policy makers’ starting line, one endorsed by hundreds of major global corporations late last year in the Copenhagen Communiqué.

What all this means for business is clear in the maths of achieving two degrees. We have to have dramatic reductions in CO2 by 2020 or it just becomes too hard to achieve the target because the later cuts become too steep. It also means, short of some technological miracle in carbon capture and storage, that coal is finished. There is no realistic scenario for CCS being able to deal with carbon emissions at a time and a price that will prevent renewable energy winning the market for clean energy. Observe what Tom Friedman calls “Green China”.

The market will recognise this inevitability before long and mark down coal and other losing technologies accordingly. It means energy will get a lot more expensive in the short to medium term to finance the transition, though I suspect it will then fall again a decade or two out as new technologies go to scale.

The countries and companies most exposed to risk in this transition are those who have a high CO2 emissions/value creation ratio. This means for example Australia and the US at .5 kg of CO2 per $ of GDP (2005 PPP) are very exposed compared to say Germany at .3 kg of CO2/$. It means companies that make equipment or products that are inefficient (e.g. US auto companies) are very exposed compared to those that don’t (e.g. Japanese auto companies). The risk for investors are likewise very clear. As always, the market will shift suddenly when it does and being exposed to the wrong companies well, just remember you were told.

So as you sit back and watch the political debates for their considerable entertainment value, don’t take your eye off the business. Change is coming and when it does it will be like the rising oceans; very hard to stop and very dangerous to stand in the way of.