Climate Change Opportunities
This
article appeared in ASX Investor Update January 2010.
Understand
climate change basics - and likely share winners and losers.
By Victor Bivell,
Eco Investor
Understanding
climate change and the effect it can have on a share portfolio is important,
and not difficult despite much terminology and jargon. Common phrases
such as greenhouse gases, global warming, climate change, emissions trading
scheme, carbon pollution, carbon tax and others are really quite easy
to understand.
Armed with
this knowledge, investors can work out how government policy on climate
change might affect their share portfolio, including which shares may
suffer and which may benefit.
The Greenhouse
Effect
The starting
point for understanding climate change is the so-called Greenhouse Effect.
Among the gases that naturally make up earth's atmosphere are small amounts
of what are called greenhouse gases. The main ones are water vapour, carbon
dioxide or CO2, methane and some others. They are called greenhouse gases
because they can absorb parts of the sun's radiation and then emit it,
which can keep the earth warmer than it would be otherwise.
The problem
is, since the Industrial Revolution mankind has been burning very large
amounts of fossil fuels, such as coal, oil and gas. These contain carbon
which for millions of years was stored safely underground. When burned
they emit greenhouse gases, particularly carbon dioxide, and this is increasing
the amount of greenhouse gases in the atmosphere. For example, the level
of carbon dioxide in the atmosphere before the Industrial Revolution was
about 280 parts per million, but is now around 387 parts per million and
rising.
Other human
activities that can increase the level of greenhouse gases are land clearing,
grazing large populations of animals such as cows and sheep, and the use
of fertilizers, rubbish tips and some chemicals.
Global
warming
Having more
gases in the atmosphere that can absorb the sun's radiation is leading
to global warming - the earth becomes hotter than it would be if the atmosphere
contained only the naturally occurring greenhouse gases. The additional
warming caused by these man-made or man-released greenhouse gases is called
anthropogenic warming.
The average
warming over the past 100 years has been measured at a little under 1
degree Celsius. But this is an average and variations are greater in different
parts of the world. The Australian Government says that since 1910 Australia's
average temperature has risen by about 1ºC.
Some countries
may prefer a little more warmth, but the problem is that as the earth
warms it can change climate patterns, and some of these changes may have
huge consequences.
The biggest
concern is that global warming may significantly melt some of the world's
stores of frozen water, such as the huge ice caps at the North Pole and
Antarctica, snow on mountain ranges, and glaciers. As the ice melts, or
fails to form, the additional water will end up in the world's oceans
and raise sea levels. A world-leading authority, the Intergovernmental
Panel on Climate Change, says that in recent years sea levels have been
rising at about three millimetres per year.
Over the coming
decades and century, rising sea levels and related events such as higher
tides and storm surges may flood many low-lying coastal areas around the
world, including some cities, towns, villages and suburbs. This could
lead to loss of life, property, farmland, beaches, infrastructure and
the mass displacement of people.
Global warming
could also have far-reaching consequences for animals and plants, and
the natural environment on land and in the oceans.
Climate
change
Global warming
can also lead to more extreme weather events. In Australia, the Government
believes we can expect up to 20 per cent more months of drought, up to
25 per cent more days with very high or extreme fire danger, and increases
in storm surges and other severe weather events. "Our industries
and urban centres face ongoing water limitations. Our economy, including
food production and agriculture, is under threat," it says.
Climate change
has the potential to affect everyone and all sectors of the economy.
To avoid or
mitigate such massive disruptions, governments around the world are looking
at ways to reduce mankind's emissions of greenhouse gases. The main methods
available are emissions trading schemes and/or carbon taxes, combined
with renewable energy technologies, energy efficiency measures, improved
agricultural practices, and other innovations.
Emissions
trading schemes
An emissions
trading scheme (ETS) is also known as a cap and trade scheme. Here, the
government puts a limit, or cap, on how much greenhouse gas can be released
into the atmosphere each year. Emitters then have to buy a permit for
each tonne they emit, and can choose to spend their money on permits or
technologies that will reduce their emissions.
The ETS proposed
by the Australian Government is called the Carbon Pollution Reduction
Scheme (CPRS). The name makes it clear that releasing carbon dioxide into
the atmosphere can have dangerous consequences.
Introducing
an emissions trading scheme is not easy, because much of the world's economy,
including Australia's, depends on fossil fuels, on land clearing, on agriculture
and grazing, and on other activities that produce greenhouse gases. We
rely on oil for transport, fuel and chemicals; on coal and gas for electricity
and to make steel and cement; on great herds of cows and sheep for food
and wool; on land clearing to open more farmland.
This dependence
is called the carbon economy. The challenge for the world is to make the
transition to a low carbon economy, and to do it as quickly as possible.
A low carbon economy and your share portfolio
The transition
to a low carbon economy, whether by an emissions trading scheme, carbon
tax or other means, will have dramatic implications for many companies
listed on ASX. There are likely to be winners and losers.
For some, their
cost of doing business will rise. These are likely to be the providers
of fossil fuels, in the coal and oil sectors. Although gas is also a fossil
fuel, it emits half the carbon dioxide of coal and is seen as a 'transition
fuel'. On balance, it should be a net winner.
Also at risk
are the many big users of fossil fuels, such as the steel, aluminium and
cement industries, the transport and freight sectors, and companies that
export to countries that do not have an ETS, carbon tax or other carbon
penalty. The insurance sector is concerned about the likelihood of more
extreme weather events.
The low carbon
economy will also create opportunities for sectors and companies that
can help reduce or manage greenhouse gas emissions. Among these should
be the providers of renewable energies, providers of low carbon energies,
and providers of energy efficiency technologies and services.
Other winners
should be companies that can improve agricultural practices, reduce the
need for land clearing, and assist others to manage their greenhouse gas
emissions.
About the
author:
Victor Bivell
is the editor of Eco Investor Magazine.
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