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Stern recipe for change

February 1, 2009

To stop the world warming we have to cut our carbon emissions to African levels

It may be crippled and reviled, but Britain’s banking industry is likely to become one of the nation’s key assets in dealing with climate change, according to Lord (Nicholas) Stern.

Speaking at the World Economic Forum in Davos last week, Stern suggested that Britain’s banks and other financial institutions would be an essential element in building the low-carbon infrastructure the country will need if it is to achieve its emission-reduction targets. He also believes such investments could help them rebuild their profits.

“Banking could do very well as Britain moves to a low-carbon economy,” he said. “There will be lots of business opportunities and Britain’s bankers are particularly strong in this area. They have been very creative over all kinds of issues and they could do it again in the financing of green initiatives.”

Stern, former chief economist at the Treasury, is among Britain’s most influential economists. Two years ago he published The Stern Review: The Economics of Climate Change, which described climate change as the “greatest and widest-ranging market failure ever seen”.

It added: “Our actions over the coming few decades could create risks of major disruption to economic and social activity later in this century, and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century.”

For some, the idea that banks might be trusted to help save the country from such threats when they have acted so irresponsibly in their lending might seem odd – but the reality is that they will have to be involved.

“Over the next 10-15 years the world is going to move strongly to low-carbon technologies,” said Stern. “There is going to be a very rapid technological change. Areas like construction, transport and power are going to change particularly fast – and that is going to need huge investment as well as creating many businesses.”

The scale of the challenge to business is huge. At the moment humanity generates the equivalent of about 50 billion tonnes of carbon dioxide a year, roughly equal to eight tonnes for every person on the planet. There is, however, huge variation. Europeans generate 11-14 tonnes per head and Americans about 22 tonnes, while Africans typically generate 1-2 tonnes.

The Intergovernmental Panel on Climate Change has said that the world is already likely to warm by 1.5C thanks to the greenhouse gases emitted so far. It warns that annual emissions must fall to about 20 billion tones by 2050 if there is to be any real chance of keeping global temperature rise below 2C. Since the world’s population will have reached 9-10 billion by this date this equates to carbon-dioxide emissions falling to about two tonnes per head.

Such figures sound simple – but what would limiting our annual emissions to two tonnes per person actually mean for the way we live and work?

Jeremy Oppenheim, global director of climate-change initiatives at McKinsey, the consulting firm, calculates that this translates into 5.5 kg of carbon dioxide per day, and warned in a recent report: “If one had to live on such a carbon budget, one would be forced to choose between a 25-mile car ride, a day of air conditioning, buying two new T-shirts (without driving to the shop), or eating two meals. In short, without a big boost in carbon productivity, stabilising greenhouse-gas emissions would require a huge drop in lifestyle for people in the developed countries and the loss of hope in the Third World for greater prosperity through economic growth.”

Such figures sound like a recipe for despair, but, speaking in Davos last week, Oppenheim backed Stern’s suggestion that they actually represented a huge investment opportunity. He said: “The transition to a low-carbon economy, if done right, has the potential to stimulate economic growth, create jobs and bring benefits to consumers. The ‘costs’ of this transition are in fact investments in new, 21st-century infrastructure that will pay off for generations to come – just as the ‘costs’ of investments in electrification, highways, and the internet paid off with very high returns for the societies that made them in the 20th century.”

Just how big that investment might be was shown in another report from the World Economic Forum calling for annual global investment of £360 billion in green-energy infrastructure including wind, solar power, geothermal energy and biofuels.

Michael Liebreich from London – based New Energy Finance, which advises investors on renewable-energy and low-carbon technology and the carbon markets and who co-wrote the Davos report, said: “Clean-energy opportunities can generate significant economic returns. The report shows that even after a tumultuous 2008, an index of the world’s 90 leading clean-energy companies had a five-year compounded-annualised return of almost 10%, unmatched by the world’s main stock indices.”

What, however, is needed to make investors pour such large sums of money into building the low-carbon power stations, electric vehicles and other green infrastructure that Stern sees as essential?

For Jeroen van der Veer, chief executive of Royal Dutch Shell, one of the world’s largest oil companies, the key is to put a price on carbon-dioxide emissions. Referring to next December’s crucial global-climate talks in Copenhagen, which will try to draw up a global treaty on cutting carbon emissions, he told a Davos audience: “The long-term framework has to include a price for carbon dioxide. There has to be a cost for emitting greenhouse gases.”

Under such a global carbon market each country would be set a target for carbon-dioxide emissions. If it exceeded that target, it would have to buy allowances from a country that had “quota” to spare. If it emitted less than its allowance, it could profit by selling the spare.

In his latest report, Key Elements of a Global Deal on Climate Change, Stern has estimated that, under such a scheme, developing countries could earn up to £70 billion a year from selling unused carbon-dioxide allowances to Europe, America and other advanced economies.

The discussions among business leaders and politicians in Davos last week offered some solutions for global warming, but the hopes they raised still make a stark contrast with the scientific evidence. A recent paper from Professor Kevin Anderson, director of the Tyndall Centre for Climate Change Research, the government’s leading academic research centre, contained a frightening warning.

It said: “The target set for the climate talks was to keep global temperature rises below 2C. At the moment, however, the level of emissions is rising so fast that we are heading for a world that is 4C- 5C warmer than now by 2100. That would be catastrophic for the environment and for humanity. Unless economic growth can be reconciled with unprecedented rates of decarbonisation, it is difficult to foresee anything other than a planned economic recession being compatible with stabilising the climate.”

Stern acknowledges the targets for cutting emissions are ambitious. “It is going to be tough,” he said. “We already have the equivalent of 420 parts per million of carbon dioxide in the air and we will reach 450ppm in eight years. Above that we have only a 50% chance of keeping global-temperature rise below 2C. We have to recognise that the threats are huge, as are the opportunities, and act on them now.”

Captains of industry go green

Sir Terry Leahy, chief executive of Tesco IT is no longer an option for a business to ignore climate change: it must be green to grow. Tesco has set itself challenging targets on carbon emissions, recycling and sustainable ways of working.

We aim to lead by investing millions in technology and by helping our customers to make a big difference.

Tony Hayward, chief executive of BP THE issue of sustainability is naturally on people’s minds in a downturn. But the truth is that for most companies – and certainly at BP – it is something more fundamental. Sustainability is about having a sense of balance, keeping an eye on the long term and on the world we all live in and work in.

Sir Richard Branson, founder of Virgin Group RUNNING a company in a green or sustainable way is now one of the most important factors for a chief executive.

Businesses have a responsibility beyond making profits for their shareholders. At Virgin we gauge how we impact on society and how we can make real and lasting change.

Sir Stuart Rose, chairman of Marks & Spencer I AM delighted that The Sunday Times is launching a green page.

I believe that businesses must take a lead and behave responsibly.

What is more, we will show over this year that good businesses can be profitable ones, making the case for ethical business more compelling than ever.

Andy Cosslett, chief executive of InterContinental Hotels Group THE green agenda is an increasing priority. Research shows that people are looking for hotels that manage their impact on the environment and will seek them out when booking somewhere to stay.

We have now launched a scheme to help our hotels reduce their energy consumption by up to 25%.

Justin King, chief executive of J Saisbury BEING a responsible retailer is part of our heritage and, despite the financial climate, environmental concerns are increasing in importance to our customers. It is essential that we take a long-term view when it comes to making a positive difference to reducing our impact on the environment.

Paul Golby, chief executive of Eon UK COMPANIES such as Eon look at ways to not only keep the country’s lights on but also to ensure energy is affordable, at the same time as combating climate change.

The temptation will always be to make the easy choices, but we cannot afford to do that because future generations won’t thank us.

Steve Holliday, chief executive of National Grid MINIMISING impact on the environment while delivering safe, secure and economic energy supplies is no longer an option, it is now a must.

At National Grid we are cutting our emissions, supporting renewable energy and introducing smart meters to help customers cut down the amount of energy they use.

Sam Laidlaw, chief executive of Centrica IN energy production and supply businesses, we face tremendous challenges in planning for a future in which Britain will need secure low-carbon energy supplies and an improvement in energy efficiency. In the coming years, we will invest billions of pounds in zero-carbon nuclear and renewable generation and new technologies in our British Gas business.

Ed Miliband, secretary of state at the Department of Energy and Climate Change THERE is a sense that the green industry is a jobs niche. But every business needs to be a green business and particularly at this time.

There are big opportunities here as we think about the future of our economy and about how Britain can lead in the industries of the future.

The reality is we will use much more oil

COMBATING climate change and cutting greenhouse-gas emissions may have been high on the agenda during last week’s World Economic Forum but the final message emerging from business leaders remained deeply contradictory,writes Jonathan Leake.

The Davos meeting had been designed with a strong green theme, with leading economists and scientists speaking at a raft of meetings to push the need to cut fossil-fuel use. They were feted and applauded wherever they went, but the economic reality is likely to be very different.

Abdalla Salem El Badri,secretary-general of the Organisation of Petroleum Exporting Countries (Opec), said that, for all the talk of replacing fossil fuels with renewables, his members were planning to increase output by 85% by 2030.

What’s more, he said, Opec’s immediate aim was to push oil prices from $40 a barrel to between $60 and $80 to raise the billions of pounds needed to invest in that extra capacity.

Ilham Aliyev, president of Azerbaijan, announced plans to double his country’s oil production by 2014.

Tony Hayward, group chief executive of BP, also foresaw a sharp increase in fossil-fuel use. He looked forward to Opec achieving its aim of $60–$80 a barrel because this would allow oil companies to exploit new oil reserves such as Canadian tar sands, whose high costs currently make them marginal. Such reserves are, however, also controversial because so much energy is needed to extract them that they generate even more emissions than conventional oil.

Mukesh Ambani, managing director of Reliance Industries in India, said his country was also investing heavily in the hydrocarbon reserves lying off its east coast and would soon be bringing hundreds of thousands of barrels of oil ashore for Indian consumers.

Ambani did add, however, that: “We have to remember that the world has only another 100 years’ worth of oil reserves. We do need to create a bridge to the decarbonised world in an ecologically responsible way.”

The International Energy Agency has said that on current trends total world energy demand will expand by 45% between now and 2030 to meet the twin demands of economic and population growth. Its latest figures show that emissions from fossil fuels are likely to surge from 27 billion tonnes of carbon dioxide a year at the moment to 40 billion tonnes by 2030.

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