- Rising climate damages
A first key element is that climate damages did not stop in 2017 and even reached some new records. For example, the National Oceanic and Atmospheric administration has reported total damage from natural disasters reached USD 306 bn in the United States in 2017, thus reaching their highest level for one year. The cost of Hurricane Harvey alone was no less than USD 125 bn. In Australia, 2017 was the third-hottest year according to the weather bureau. In Europe, August was the month of a significant heatwave that struck south-east France, Italy and Croatia, with climate change making such events four times more likely according to the World Weather Attribution (WWA) group. Moreover, it is estimated that 30% of the world’s population is now living in areas that face heatwave risks, based on potentially deadly temperatures at least 20 days a year, and this could reach 48% by 2100. The Lancet showed how particularly exposed older people can be to this threat. Natural disasters in developing countries often receive less media coverage, even though their effects are often more devastating; just to mention one example, flooding in India, Bangladesh and Nepal resulted in the deaths of 1,200 people and affected 40 million people this year. This is no small matter for insurers or for development banks and other financial institutions that finance climate adaptation measures.
- Emissions still growing
Our second key takeaway is the continuation of the increase in global carbon emissions. Despite the claims to curb them, they are estimated to rise by 2% in 2017, in part due to increased coal use in China. We started 2018 with only about 19 years of carbon budget (i.e. the time left until we exceed the IPCC’s 2°C carbon budget if our emissions stay as they are now), which is very short given the structural issues at stake. This carries obvious uncertainties for investors. Will this translate into growing risks of unexpected political shifts in how we address climate issues, or in growing exposure to negative climate impacts (which also carry economic consequences)? And what about the opportunities in terms of financing the energy transition? Investors have an important role to play given the massive investment needs at stake. However, the needs will themselves depend on whether we actually curb emissions or not.
- Uncertainties of the U.S. climate policies
A notable upset also came this year with Trump’s wish to withdraw the U.S. from the Paris Climate Agreement. Although the door was officially left open to re-engaging if the terms improved for the country – and even if U.S. states have also some decision power –, this is clearly a blow to international negotiations. As a reminder, the United States accounted for an estimated 13% of global GHG emissions in 2017. A question rising is however the medium-term impact on other countries, potentially strengthening their mobilisation. If environmental requirements are to diverge even further in the future, this may increase the probability for a European border carbon tax to be created for example, as mentioned in September by French President Macron with a goal to ensure European manufacturers are not exposed to unfair competition. Such a scenario remains uncertain today, but risk analysis should also consider the potential impacts of such non-linear events.
- China’s launch of the world’s largest carbon trading scheme
At the same time, carbon price initiatives continued to develop in 2017. This year saw in particular China’s introduction of the world’s largest carbon-trading scheme (covering no less than 1,700 fossil fuel power plants and about 6% of global GHG emissions). Does this confirm a significant move of China towards an ambitious energy transition? Although the country continues to rely significantly on coal, this is a real question with geopolitical and market implications as well. One thing is for sure, with about 26% of global emissions in 2017 the role of China is essential.
- Carbon issues gaining traction in financial markets
Lastly, we do have to mention recent evolutions in how investors are currently shifting to take more and more into account carbon and climate issues in their decisions. In France, the 2015 French Energy Transition law (Article 173) was the first piece of legislation to introduce mandatory climate reporting requirements for institutional investors, and the first deadline for reports was in June 2017. This corresponds to a much broader context of rising expectations on the integration of carbon and climate-related issues in investors’ risk analysis and disclosure (just see the TCFD Recommendations Report published in June or the work conducted by the HLEG at the EU level). These expectations are also extending beyond financial institutions to cover other corporates as well.
All of these elements are important not only for 2017. 2018 will again be a key year in this period that constantly intertwines great needs, uncertainties and hopes. Stay tuned with us to continue looking at the 341 remaining days of 2018!
Guillaume Emin, Project Manager