Future Energy

Climate Change Affects Beer? Now its getting serious!

Source: Irritated Tulsan blog

The New Scientist reported last week that a Czech climatologist has concluded that higher temperatures are reducing the quality of the Saalz hops found in the region's classic lager beers (see Climate Change Depresses Beer Drinkers, September 13, 2009).  And this effect is being felt in the traditional hop growing regions of Germany and Slovakia as well. 

Warmer air temperatures are blamed for reducing concentrations of alpha acids in the hops - the element that provides the slightly sharp/bitter taste of good lager - since 1954.

And to add insult to injury, in a somewhat dated article, the Australian Broadcast Corporation, reported that the price of beer is likely to rise as some sources of malt barley are lost to changing temperatures and water shortages (see Scientist: Climate Change to Impact Beer Production, April 8, 2008 and Climate Change Will Impact Beer Production: Scientist, CTV.ca, April 8, 2008).

Reducing U.S. Greenhouse Gas Emissions

McKinsey is a Bit More Optimistic Than the Energy Industry Lobby

In recent days, McKinsey & Company, in partnership with the Conference Board, released the results of a study examining the potential for the U.S. to reduce its emissions of greenhouse gases.  Entitled Reducing U.S. Greenhouse Gas Emissions: How Much and At What Cost?, the results are based on the work of a research team that included industry experts, academics and NGO's.

The study is important because of what it says about the impact of climate change policies that will be required to begin addressing concerns for the effects of global warming.  My conclusion from reading the McKinsey analysis is that the road we seem likely to go down, to policies and legislation that address the issue, will be managable and may even bring certain economic benefits.

Overall, the study found that:

"The United States could reduce greenhouse gas emissions in 2030 by 3.0 to 4.5 gigatons of CO2e using tested approaches and high-potential emerging technologies.  These reductions would involve pursuing a wide array of abatement optionsavailable at marginal costs less than $50 per ton, with the average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency.  Achieveing these reductions to the lowest cost to the economy, however, will require strong, coordinated, economy-wide action that begins in the near future."

The potential reduction would equal approximately 31% to 46% of projected 2030 U.S. greenhouse gas emissions (2005 emissions were 7.2 gigatons while projected 2030 emissions are expected to be 9.7 gigatons). 

The research team reportedly looked at 250 different options, many of which are identified in a very good figure outlining the expected 2030 mid-range abatement curve (see Exhibit B, page xiii).  By far the biggest proportion of opportunities identified were related to energy efficiency in the transportation, residdential, commercial and industrial sectors.  Other energy related options included 'natural gas and petroleum systems management', biomass and wind power development and carbon capture and storage in association with coal-fired power.

The Executive Summary concludes with a positive statement that is significant contrast to the various industry association fears voiced in the Wall Street Journal's Energy Roundup blog yesterday. McKinsey's concluding statement was:

"Creating comprehensive approaches will be challenging: they will need to combine durable policies and a slate of strong near-term actions that mobilize economic sectors and geographies across the U.S.  The pursuit of GHG abatement, however, will undoubtedly stimulate new businesses and economic opportunities not covered by our cost-focused analysis."

Contrast that with the Edison Electric Institute's comments that the Climate Security Bill just passed by a Sernate Committee (which would lead to some of the approaches examined by McKinsey):

"would undermine America's economic security, force consumers and industry to pay significantly higher energy prices and discourage investment in cleaner-energy technologies." 

Or the American Petroleum Institute's comments that the proposed energy bill would "wipe out 5 million jobs and knock off 4% of the U.S. gross national product through 2030".

My bet is with McKinsey's analysis.

Bali Climate Meetings Key to Energy Future

          

Effective Global Climate Policies Could 'Set The Table' for Sustainable Energy Developers

The UN Framework Convention on Climate Change (UNFCCC) talks in Bali, Indonesia this week and next are the latest symptom of the growing concern globally for the effects of Climate Change (Pew Centre, a U.S. Foundation provides some good background on the Bali meetings, here). 

These concerns resulted in the Kyoto Protocol, negotiated under the auspices of the UNFCCC in 1997.  And despite the problems with that treaty, officials, Environmental and other NGO's, industry representatives and others are at it again.  Over the next two weeks, officials will try to layout a roadmap for developing the an agree for action beyond 2012.

Concerns for climate change or global warming are one of the strongest drivers for the transition to a more sustainable energy future.  The outcome in Bali will have a significant and long lasting influence on the environment for developing sustainable energy in the years to come.

With that in mind, I thought you might find a it useful if I was to pull together a brief summary of press commentary on the meetings.

Picking up on what be one of the most important themes of any post-2012 agreement, engaging developing nations such as China and India in any planned action, the Financial Times yesterday included commentary from Indonesia's Minister of Finance and the head of the World Bank group (see Bali Must Bring Developing Nations on Board, December 5th).

The Globe & Mail is today highlighting what may be one of the less savory partnerships emerging from the meetings, Canada, Japan and the U.S. acting in concert to push back against mandatory targets or other kinds of binding commitments, leading some of the ENGO's interviewed to suggest the three are trying to derail any kind of agreement in Bali.  (see Ottawa Gains Key Allies to 'Move Beyond Kyoto', December 6th).  The Globe & Mail notes that:

"Japan and Canada have dominated the 'Fossil of the Day awards' - sarcastic prizes given everyday by environmentalists to the worst-performing nation at the Bali conference."

On a more positive note, The Australian reports that Australia's new Prime Minister, Kevin Rudd,  has told Chinese Premier Wen Jiobao that he "is willing to act as an intermediary between China and the developed world", helping to bridge the gap on cutting greenhouse gases (see Rudd to Bridge China-West Climate Gap, December 6th).  This comes after Australia's about-face at the strt of the meetings where it commited to signing the Kyoto Protocol.

Picking up on the theme I started with, i.e. the climate change meetings will have a significant influence on the development climate for sustainable energy, I came across a somewhat dated commentary in Greentech Media that talks about the challenge facing alternative or 'green' energy providers if concerns for climate change are to be addressed (see In Depth: Can Technology Save the World?, September 4th, 2007).

Shifting focus to the fate of climate policy discussions in the U.S. - the big prize for carbon market investors when that country moves to address greenhous gas emissions - the Baltimore Sun reports that the U.S. Climate Security Act has passed in the Senate Committee on Environment & Public Works (see Historic Climate Bill Gets Yes Vote in Committtee, December 5th).  The bill would put in place a national cap and trade system for greenhouse gas emissions.  My understanding is that while the Bill has little chance of passing into law, it will play a significant role in setting the template for a post-Bush U.S. response to climate change.

In response to the Senate Committee's agreement, the Wall Street Journal Energy Round-up blog, has already identified a wave of apocalyptic economic predictions form the likes of the Edison Electric Institute, American Petroleum Institute and others (see Running the Numbers Game, Dec 5th).  I assume that the real debate is only just getting started.

Developing effective global policy is a complex, difficult business.  As the above clippings suggest this seems to be particularly true for climate change.  While I understand the complexity, I can only hope that the participants in Bali (and Washington) understand the urgency and the impacts that are already occuring and push on to develop effective policy now when there is a chance for cost-efficient implementation.  Developing a sustainable energy future demands good, consistant policy and incentives.

The alternative is to wait until the need for action is overwhelming and the likely response knee-jerk and costly. 

If the saner course happens, it looks like the current government in Ottawa has already chosen to not be a part.

Banks Focus On Climate Change Investing

With lessons for the rest of us

Late last week, Deutsche Asset Management (DeAM), a division of the Deutsche Bank, became the most recent global financial institution to issue a climate change research omnibus report.  Like earlier efforts by other institutions, the Bank’s report, Investing in Climate Change: An Asset Management Perspective, is as much about signalling their competency to manage the emerging risk/opportunity elephant that is climate change as it is about investment research.  Release of the report coincided with their announcement that DeAM had hired a lead climate change strategist, Mark Fulton, and formed a five person Climate Change Investment Committee.

Giving a look forward, the Bank’s Global Head of Asset Management, Kevin Parker, states:

Our specific strategies seek to invest in industries and companies that are involved in both the mitigation of, and the adaptation to, climate change.  In mitigation, we look at industries that are in the energy efficiency and clean technology fields.  In adaptation, we search for companies that work on adjusting to climate change.

Interestingly, the Bank examines different strategies and concludes that a diversified portfolio which includes a broad universe of companies exposed to climate change offers lower risk and volatility than a “pure play” that concentrates on investing in a narrower field of generally small cap, focused companies (e.g. clean-tech).

Earlier this year, Citigroup, Lehman Brothers and UBS each provided similar takes on climate change and the investment opportunities it creates.  Lehman Brothers report, The Business of Climate Change: Challenges and Opportunities may be the largest of the research papers, weighing in with 145 pages.  (Neither Citigroup’s report, Climatic Consequences: Investment Implications of a Changing Climate, nor the UBS report, Climate Change: Beyond Whether appears to be available to non-clients.)

During 2006, Toronto’s Sprott Asset Management provided research that examined the implications of abrupt climate change (see Investment Implications of Abrupt Climatic Change).   The U.K.’s Carbon Trust also introduced two research efforts intended primarily to educate the institutional investment community (see Climate Change & Equity Valuations, and Climate Change and Shareholder Value).

All of these papers are similar in providing a brief summary of the science and emerging policy of climate change, identification of key themes or drivers and a broad brush review of the respective investment strategies.   Where they differed was in the level of detail given in their recommendations.  Citigroup’s report appears to advance the theme furthest, going so far as to name 74 companies in 21 sectors that the authors believe to be well-positioned to capture the opportunities climate change will bring. 

If I had to recommend one paper to read, it would probably be The Business of Climate Change: Challenges and Opportunities, prepared by Lehman Bros.  It’s the longest but also the most readable of the reports I've had access to.   

(JPMorgan doesn’t appear to offer an omnibus report on climate change, but has established JPMorgan Climate Change Research as a sub-section of its Global Corporate Research and appears to be producing a steady stream of publicly accessible reports on specific issues and opportunities related to climate change.)

Lessons for sustainable energy investors

While each of the reports brings the respective institution’s spin to the issues, a number of common themes emerge for investing in sustainable energy.

·         Energy and the energy system that develops in response to climate change policy and regulation are central to all of the investment themes explored by the Banks;

·         While much of the current excitement in energy is focused on renewable energy and clean-tech, i.e. mitigation strategies, the Banks also urge a focus on investment in adaptation (although, most of these relate to companies outside of the energy sector);

·         As might be expected, a key focus is on sustainable energy technologies, including:

o   Renewables;

o   Biofuels;

o   Hydrogen technologies; and

o   Energy efficiency;

·         Emission efficient power generation (nuclear, coal gasification, carbon capture technologies).

None of the insights provided by these banks is particularly new or unexpected.  However, it is informative to have each of the Banks pull their thoughts together in one place and its nice to know what the professionals are thinking.

Transparency and Carbon Risk

Last week, with the assistance of Bill Clinton, the Carbon Disclosure Project (CDP) released its fifth annual report on corporate climate change disclosure. A not-for-profit organization, the CDP approached 2,400 corporations requesting information on their greenhouse gas emissions and the steps they are taking to manage their climate change risks and opportunities. The survey was conducted on behalf of 315 signatory institutional investors representing $41 trillion in assets.

As part of this year’s report, the CDP worked with Innovest to develop the Climate Disclosure Leadership Index (CLI). This index highlights 68 companies distinguished by the quality of their climate change disclosure and compares their carbon exposure, emissions reporting and carbon beta ratings. Included in this select group were four North American energy companies, including Exelon and Entergy (U.S. electrical utilities), ExxonMobil and Suncor (a Canadian oil sands producer).

The CDP is all about pushing corporations to increase their climate change disclosure - increasing their transparency with respect to a key environmental risk.

In the U.S., a group of state pension fund officials and environmental groups are taking a more direct path to the same end. The Washington Post reports that in a petition filed September 18th the group led by CERES is asking the U.S. Securities and Exchange Commission (SEC) to force all public companies to provide investors with more comprehensive information of the expected risks they face with climate change. This move follows on the a multi-year campaign in which social investment organizations have launched repeated shareholder resolutions at the annual general meetings of energy companies pressuring them to provide better disclosure of climate risks and/or develop action plans for addressing climate change.

[It’s worth remembering that efforts to get companies to release carbon risk information are only ten years old. Investors have been seeking accurate financial information from these same companies for upwards of a century and it is only with the heavy hand of regulation that the SEC and its peers in other jurisdictions are able to ensure that public companies routinely provide high quality financial reports (and even with regulation the likes of Enron pop up from time to time).]

While transparency, particularly with respect to environmental risks, is essential for sustainable investing, how much should transparency itself be valued in determining what is sustainable and what is not?

When I ask this question, Suncor comes to mind. Suncor consistently ranks high in sustainability rankings such as those offered by the Dow Jones Sustainability Index or the above noted Climate Disclosure Leadership Index. In part, these high ratings are based on the company’s excellent communications, explicit recognition of its risks and plans to address them. However, at the end of the day Suncor’s primary business is the extraction of oil from Canada’s oil sands. By definition, its principal product has a high carbon content.

For example, in 2005 Suncor reported emissions intensity of 0.44 tonnes CO2 per cubic metre of oil equivalent (tonnes CO2/m3OE). This is certainly better than the average emissions intensity of Canadian bitumen producers (0.52 tonnes CO2/m3OE - based on information from three companies of which one was Suncor) (CAPP Stewardship Report, 2006) but substantially more than the emissions intensity of conventional oil & gas producers.

2005 Emissions Intensity in the Canadian Oil Industry (tonnes CO2/m3OE)

Suncor 0.44
CAPP – Bitumen Mining/Upgrading 0.52
CAPP – Conventional Oil & Gas Production 0.23
Petro-Canada 0.19

Is Suncor a sustainable energy company?