Preparing for a Warmer World
“The best time to plant a tree is 20 years ago. The next best time is now.” Chinese proverb
If planting a tree is a metaphor for taking action on climate change, the old Chinese proverb is wise advice for our present day dilemma. We are, of course, a couple of decades late in taking meaningful steps to transition to the low-carbon economy necessary to safeguard the quality of life and economic prosperity that businesses, governments and individuals strive to achieve and maintain. But just because we should have begun long ago does not mean we should not take action now. Indeed, urgency has been added to necessity, and adaptation has been added to mitigation, as the implications of a warmer world are becoming clearer with each passing year.
As we begin 2013, much about the future of the global economy and the global ecosystem remains uncertain. But thinking back on the progress made and not made in 2012, four things are clearer than ever to me.
1. Our continued reliance on fossil fuels is expanding the carbon gap and taking us into a much warmer future
In December, ExxonMobil published its 2013 Outlook for Energy, scrupulously avoiding any discussion of climate change, and focusing instead on energy supply and demand. The Outlook for Energy is an annual review that ExxonMobil develops for internal investment planning purposes, and then makes available to the public. The 2013 Outlook describes one likely scenario for our energy future, making reasonable assumptions about the trajectories of public policy, technology development, buying behaviors and cost (the scenario is highly aligned with the International Energy Agency’s World Energy Outlook). Here is how 2040 looks to ExxonMobil:
- Overall global energy demand will be about 30% higher than in 2010, with demand growing mainly in non-OECD countries.
- Oil will remain the most widely-used fuel, followed by natural gas which will grow fast and replace coal as the second most used fuel.
- Gains in efficiency through energy-saving practices and technologies will temper demand growth and curb emissions, which will level off around 2030.
- Governments around the world will impose a price on carbon dioxide emissions, averaging $80 per ton in OECD countries in 2040.
No real surprises here, but these conclusions reflect the chasm between “business as usual” and staying below the 2 degrees C threshold for a safe increase in global average temperature. While the consensus of the scientific community is that by 2050 an 80% decrease in carbon emissions from 1990 levels is required, ExxonMobil projects a nearly 60% increase by 2040. Indeed, the IEA World Energy Outlook declares that “emissions in the [most likely scenario] correspond to a long-term average global temperature increase of 3.6 degrees C.”
2. Any UN treaty addressing climate change will be insufficient to drive a transition to a low-carbon economy
Also in December, COP-18 – the latest UN climate change conference – was held in Doha, Qatar. With an unambitious agenda matched by the low ambitions of the international community, the Doha conference made little progress, to no one’s surprise. Delegates agreed to extend the Kyoto Protocol, but were unable to sketch out what a successor agreement – which in any case would not come into effect until 2020 – would look like. The convention also addressed adaptation and the concept of “loss and damage”, in recognition of a reality that is already upon us. The Doha agreement is consistent with the recent history of the UN climate change conferences, and what we can expect in the future – too little, too late.
3. To succeed over the long term, businesses and governments must develop strategies that both reduce greenhouse gas emissions and anticipate a much warmer future
Given the above, we are very likely going to blow past two degrees of warming, and without a change in trajectory will warm four or more degrees by the end of the century, according to a recent World Bank report. How do we cope with that? Governments and businesses alike should take a two-pronged strategy – reducing greenhouse gas emissions to minimize warming even as we move beyond two degrees, and taking action and making investments to prepare for and adapt to the environmental (and social and political and economic) changes that will come with a warmer world. Business strategies should go beyond the basics of carbon footprinting and energy efficiency, to incorporate vulnerability assessments, public policy engagement, product development, supply chain management and carbon pricing in financial models.
4. Changing the economics of energy will drive the transition to a low-carbon economy
The current economics of our energy options encourage – almost mandate – that we continue to extract and consume high-carbon sources of energy. Few people or businesses are willing to pay more for what is seen as a commodity. i.e. a product without quality differentiation. Coal and oil are our primary energy sources because a portion of their costs are externalized, and the technology required to utilize other sources is not yet cost effective. Changing the economics then requires public policy that internalizes the external cost and risk of high carbon energy sources as well as advances in technology. The rapid displacement of coal-fired electricity generation in the US by natural gas is an example of those two forces at work. Improved technology in the form of hydraulic fracturing and horizontal drilling combined with more stringent pollution controls on coal plants to make electricity production by gas cheaper than coal. A price on carbon would drive the transition faster still.
Time to Act
The world economy will transition from one based on high-carbon energy to one based on low-carbon energy, just as we have transitioned from past economic models that were replaced by something better. It will most likely be a gradual transition, not occurring quickly enough to avoid significant global warming and the dramatic changes that will occur as a result. Smart businesses will not only be ready to react to the transition, but will in fact drive it, creating resiliency and long-term competitive advantage in the process.
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