UN Climate Report (& leak) means business & investors need to be ready to decarbonize

Incontrovertible evidence on the science means political action more likely

It’s been a week.

It’s been a week for everyone who works in and around climate change. And people who run businesses and invest money in businesses are thinking hard about what it means for them. In short my conclusion is “if you were getting ready, now it’s time to start moving on decarbonization plans because things are going to move pretty fast.”

The IPCC released it’s sixth assessment report, titled “AR6 Climate Change 2021: The Physical Science Basis” (which sounds strangely like a Star Wars sequel that I would probably not go see). It includes words like “incontrovertible evidence” that humans, and in particularly the use of fossil fuels, are responsible for the warming of the climate. For those in business & finance who don’t follow closely, this is actually the first of three reports - really the science of “what’s happening with the climate, and what’s going to happen in the future based on different things we might do”. The next two chapters are “Impacts, Adaptation & Vulnerabilities” (what’s going to happen to us based on the science) and “Mitigation” (what we should do, based on the impacts and the options we have economically, technically, feasibly).

Short - it’s as bad as anyone thought. We gotta break the fossil fuel habit, or the fires, floods and storms are going to get worse. It’s no worse than anyone who’s been following the science thought, but it’s exactly that bad - and the remaining uncertainty is vanishingly small. New uses of statistical methods have allowed us to say how much worse a particular event is than it might have been absent the impacts of climate change. That’s a big deal. And these recently published results have been reviewed by 156 nations, including those who stood in the way of some less strongly-worded results in prior IPCC reports (like Saudi Arabia, whose understandable desire to keep pumping their only significant resource, oil, may have led them to get some conclusions watered down).

What’s even more stunning, though probably won’t get as much news, is that a group of Spanish scientists leaked a draft copy of the 3rd chapter on mitigation- what we need to do. And the punchline is stunning - we must be past peak global GHG emissions within 4 years or we cannot feasibly (forget economically) reach a warming scenario of 1.5 or possibly even 2 degrees. The report that is ultimately released may be watered down some through the process of all nations agreeing to it - but the leakers wanted to show what the initial working group thought was the right path.

Is the political will there to act as quickly as that? It sure doesn’t look like it today. But voters around the world are concerned, getting more concerned rapidly, and beginning to make this a foreground issue. Is there such a thing as a “single issue decarbonization voter” yet? Probably not, and politicians are trying to tread a delicate path. The Biden administration’s call on OPEC to pump more oil in order to keep prices down at the pump during a recovery seem a bit at odds with their strongly stated desire to set the US (and the world) on a path to net zero by 2050.

The implications for business leaders and investors seem clear enough to me. Decarbonization is going to happen. If it happens sooner, it is more likely to happen in an orderly and predictable fashion. If it happens later, it is more likely to be disorderly, fast, and hence immensely costly. Business leaders who are not planning for the decarbonization of their supply chain, and evaluating which scenario they prefer are treading a dangerous path. Some may prefer to stay out of the fray of calling directly for rapid action to address decarbonization through consistent policy that is demonstrably able to meet the US climate commitments. But many are now waking up to the idea that this is going to happen, and far better for them to be planning for and involved with the calls for how this happens.

Being aggressive in climate policies will not be easy or painless. We are still a fair ways away from “the only thing we have to fear is fear itself”, victory gardens, and scrap metal drives. But after this weeks report, some aspects of austerity (at least in the carbon-intensive domains) seem less impossible. A path of both decarbonization & prosperity & equability still seems within reach, if business leaders lean harder on politicians to create level playing fields for a rapid path to decarbonization. A clean electricity standard (or really a CEPP or “clean electricity payment plan”1) remains in the budget reconciliation bill, and is a good first step. It has teeth, and if you make, buy, or sell electricity it is going to change things for you substantially. There’s other pieces on R&D, a lifeline for nuclear, EV charging, and lots of noise about how aggressive tailpipe emissions standards will be. All important decarbonization policy. But I don’t expect it will stop there (and in fact it can’t, if we are to meet our carbon commitments).

But it is increasingly likely that similar paths to rapid decarbonization will occur in sector after sector (energy & transportation being the most carbon intensive and hence the first on the docket), and as the science gets more clear I’d expect policy to become more, not less, stringent. I do hope for all of our sake that the policies we see are efficient & predictable. But the longer we wait, the more likely they are to be more effective than efficient, and the path to be chaotic. Get ready to move fast, and have a plan for how to win. And if you can help put weight on the side of sooner and more predictable vs. later and chaotic, please do.

1

My friends from the energy world reassure me that there’s no reason to believe that a CEPP is less stringent, effective or efficient than a CES, and it has the advantage that it is less regressive - because it’s paid for through the federal tax system which is progressive. A CES would have likely run through electricity rates, which would be more economically efficient, but those least able to afford it would have been hit the most.