Climate Shock: The Economic Consequences of a hotter planet

Climate ShocksBook Review: Climate Shock: The Economic Consequences of a hotter planet

Author: Gernot Wagner, Martin L. Weitzman

Publisher: Princeton University

Kindle Price: INR: 996.05, Hard cover price: 1426, Pages 250

Originally published: February 22, 2015

Reviewed by: Jainendra Shandilya, CFA

 

Climate Shock is a scientific and economic analysis of the effect of rising global warming caused by increasing carbon dioxide in the atmosphere. The temperature of earth is gradually rising and by some estimate it may increase by 6 degree Celsius by 2100 and no one exactly knows what the consequences of that will be. One thing is clear, the rising temperature of the globe will lead to higher sea water level, more ice melting at the arctic and hence many more disasters like hurricane Katrina that rocked the coasts of New Orleans in 2005.

Climate shocks keep appearing in one form or the other. The casualty, however, is always humans and the habitations. In the USA, hurricane Sandy killed 147 and displaced 375,000; Irene killed 49 and displaced over 2.3 million. In 2013 in Philippines, typhoon Haiyan killed over 6000 and displaced over 4.0 million people. In 2003 in Europe, summer heat wave killed over 70,000. The list goes on and will probably be on; yet, the message is not being heard loud and clear.

During the pre-industrial times the amount of carbon dioxide in the atmosphere was around 375,000 part per million (ppm), which as of now is close to 400,000 ppm. If the trend of global warming continues, by 2100, the average temperature of the earth’s surface will rise by 3.6 degree Celsius as per the estimate of International Energy Agency (IEA). Camels will once again walk on the territory of Canada as they did some 4.5 million years ago. Climate changes are being caused by individual actions and its effects are being felt by everyone globally. Carbon dioxide, once emitted, remains in the atmosphere and they trap heat, a phenomenon called greenhouse effect. We have lost half of the arctic sea ice by area and three quarters by volume. What does it mean to us? Ice being white in colour reflects the sunlight and hence reduces earth’s temperature. Melted ice, formed into water, start absorbing heat and here lies the problem. Due to ice melting at arctic, the sea level is rising and will rise further because of excess heat absorbed by water caused due to loss of ice. We are in a global bath tub where emissions caused by humans by burning fuel, coal etc. are entering through the faucet. There is, however, a problem. The emissions can’t escape fully as more emissions are entering and clogging the drain. Floods are now more frequent than it used to be few decades earlier. The amount of carbon dioxide had reached 400,000 in the Pliocene – a period over three million years ago and this was not caused by humans, rather by natural variations and that led to average surface temperature being warmer by 1-2.5 degree Celsius than today and sea level rising by over 20 meters. This period also saw Camels in Canada and the days are not very far for the history to repeat. Some of the rising levels of carbon dioxide find themselves in oceans and cause the water to be more acidic. One possible outcome of this is disappearance of many marine organisms – a not very desirable consequence.

What can and should be done to stabilize the level of carbon dioxide in the atmosphere at its present level? One possible solution offered by the authors is geo-engineering. This is not very difficult, though not yet tried. When volcano of Mount Pinatubo erupted, it raised the level of sulphur by putting around 20 million tons of sulphur dioxide in the atmosphere. The rise in sulphur due to this eruption had the effect of reduction of approximately 585 billion tons of carbon dioxide. This had a huge effect in terms of reduction in global warming. Taking cue from this event, the authors advocate spray of sulphur in the atmosphere artificially by humans at the stratosphere. This will lead to reduction of heat as sulphurs reflect back the sunlight falling on it. Solar energy looks promising especially so after the price of solar panels have gone down by 80 percent in the last five years. Thanks to German and the Chinese people whose government took the initiative by providing subsidies to this industry. There has been explosive growth in solar energy production over the decade. In 2000, the world had around 1 giga watt (GW) of solar energy which grew to 140 GW by the end of 2013. The pace of addition of solar energy has been very fast in the last decade.

Proposed solutions, inter-alia, are carbon tax. California has a comprehensive carbon market and so has British Columbia. India has a $1 carbon tax, not much, but a step in the right direction. However, India also gives $45 billion in annual fossil fuel subsidy. The whole world is subsiding fossil fuels at a rate of over $500 billion per year, equivalent to $15 per ton of carbon dioxide emission. Arthur C. Pigou, an economist, identified this problem and estimated that each tons of the carbon dioxide emitted causes economic damage to the planet of about $40, or probably more. We should, therefore, tax fossil fuel at least as much as the damage it is causing to recover the true cost to society.

Various climate protocols have been signed, though not fully implemented, till date. The Montreal protocol was a huge success as it was effective in reducing ozone holes, thanks to DuPont which decided to phases out gases responsible for destroying ozone layers. The Montreal protocol regulated CFCs and HCFCs and hence they were replaced by hydrofluorocarbons (HFCs) by DuPont. The bad thing is HFCs are worse than CFCs and HCFCs in terms of damages they cause to the atmosphere. The good news is HFCs are used in much small quantity, though that should not be the reason to be complacent. The HFCs don’t fall under Montreal; however, it does fall under Kyoto protocol. This is why Montreal is successful and Kyoto is not.

The authors, taking cue from Capital Asset Price Model (CAPM), suggest high risk premium for climate shocks and hence recommends high carbon tax. Why is it that climate change is so important than others ills that the world is facing? One, it has a high probability of permanently damaging the planet; two not much is happening on climate front; third, climate change is not new to planet – evidences are already there with us. A round trip by air from NY to San Francisco leads to increase of one ton of carbon dioxide per person; however, the effect of this is felt by the whole planet as it causes damages to the tune of $40 to the economy, ecosystems and health. Can all individuals, individually, make any difference to this problem? No, feels the authors. Getting all 7 billion people to agree to one thing is difficult; hence, the role of the government is paramount. Individually, however, we may use recycling, bike to go to work, eat less meat or better turn vegetarian and better vote for climate change.

What is the message to the investors in this scenario of rising global temperature? Invest in restoring value of damaged assets caused by hurricanes etc., bet against coal, oil and gas, and invest in solar and wind energy. Remember, timing is very important!

  • JS

 

 

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
This entry was posted in Book Reviews and tagged , , , , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s