What the credit crunch did for climate change
Fighting climate change is never going to be easy, no matter what front you are attacking, whether it is on policy, financing, business action or consumer engagement. So on the fifth anniversary of the credit crunch in the UK, has sustainability and climate change been a winner or a loser?
PwC’s sustainability and climate change team reflects on some of the highs and lows, and the moves that stand out, as the economic outlook shifts to the 'new normal' – a period of several years where growth will be relatively subdued by historic standards.
Overall the credit crunch and subsequent downturn has proved to be an effective greenhouse gas mitigation strategy. The right kind of results, for the wrong reasons.
UK – policy meets reality
The debate on how far and how fast we should reduce emissions, or indeed whether we need to at all, has moved on in the UK. The Climate Change Act introduced the world’s first legally binding carbon budgets in 2008, committing the UK to reduce its greenhouse gas emissions 34% by 2020 and at least 80% by 2050, through a series of five year budgets. Facing a global downturn, a financial sector crisis, and ultimately a double dip recession, the UK government hasn’t flinched from these commitments. If we look behind the numbers, though, we have achieved the right answers for some of the wrong reasons - essentially lower economic activity and lower output cutting energy use and so cutting emissions.
And are we even measuring the right number? Should it be emissions linked to output, or emissions linked to consumption? There is now increasing recognition that we are ‘outsourcing’ emissions to factories in China, South Korea and elsewhere.
Elsewhere, the credit crunch has had a notable impact on government policies for energy. The affordability of low carbon investment has become much more sensitive politically, with countries such as Spain cutting support for renewables in an effort to reduce budget deficits. Despite the uncertainty and court wrangling over the UK’s own FiTs regime, by March 2012, the UK had become one of the few 1GW solar PV markets in the world.
Carbon price – mind the gap
Since its launch in 2005, the EU ETS has courted criticism from many quarters – over generous allocations on the one hand and an unfair burden on EU business on the other. Its prompted much debate on the role of markets in the battle against climate change.
Despite the credit crunch, the scheme remains a central plank of EU climate policy, but in the markets, many traders must look back nostalgically on the 7th August 2007 when carbon traded at €20.05, almost three times today’s price of €7.23. The decline highlights both the strengths and the weaknesses of carbon trading. A growing economy would tend to mean higher carbon prices, and a stronger incentive to invest in low carbon alternatives. But as the recession has bitten, emissions have fallen, driving down the value of carbon and making low carbon investment harder to finance. But the flip side of this is a lower burden of carbon regulation on business during difficult times.
The scale and duration of the downturn, though, is storing up problems for the EU ETS, with a big overhang of surplus allowances. A political fix is needed to get some tension back into the market, if it is going to drive more ambitious action on climate change, but getting agreement on this is proving challenging.
Carbon markets - no holding back
Paradoxically, despite the recession and the knock on impact on the carbon price, trading activity on carbon markets globally has boomed. Since 2007, the value of trading has more than doubled, from $64bn to $176bn, driven largely by volume growth on the EU ETS, and London has been at the heart of this. But can the City sustain its traditional dominance of the carbon market? 2011 saw several reports of key traders and investors scaling back their CDM teams and activity, while the emergence of new markets in Asia and America will surely challenge London’s role. Could airlines, choosing London as their trading hub, be a silver lining to this particular cloud hanging over the City?
Climate finance - little and large?
The onslaught of a global slowdown wasn’t the best time for the climate change community to get out the collecting tin. In many respects, climate change ambitions met political and economic reality in Copenhagen in 2009. Yet the developed world has still committed $30bn to fast start action on climate change and pledged to mobilise US$100 billion per year by 2020, helping to salvage something from the Copenhagen summit.
But to put this in perspective, the fast start funding, for what most people agree is “one of the biggest challenges of our time”, is equivalent to 15% of the value of Greece's most recent bailout ($200bn) and just 4% of the value of the amount originally pledged to the US TARP scheme ($700bn).
Carbon intensity – a dirty bounce back
The last five years haven’t so much loosened carbon emissions’ link to growth, as reinforced its grip. While the GDP of the G7 fell by 0.2% from 2007 to 2011, helping to deliver a small reduction in emissions, the E7 group of emerging nations’ GDP grew by 27.6%, and their emissions raced ahead too. In 2007, E7 emissions surpassed those of the G7 for the first time, and the latest data shows that E7 emissions are 42% greater than those of G7. It was significant that the Durban summit went some way to recognise the need for action on emissions by all countries, not just the developed nations, but the issue of ‘equity’ between developed and developing nations remains a central one in the climate negotiations.
Degrees of risk: 2 + 2
In the early days of the credit crunch, many political and business leaders drew parallels between the climate crisis and the financial crisis, to support the case for swift and radical action on climate change. Five years on, the critical differences between these threats are clearer. The financial crisis hit hard and fast, its effects painfully visible in recent years, while for most of us, at least, the really serious and sustained impacts of climate change will only emerge over decades. But that doesn't mean the problem is any less pressing.
In 2007, the climate policy debate focused on reducing emissions to limit global warming to 2 degrees celsius. That was the threshold of safety beyond which scientists said that we could go into irreversible, dangerous climate change – the kind where you could potentially see the extinction of a quarter of the species on the planet, and that’s before we consider the dire consequences for many of its people. If reaching 2 degrees required a revolution in how we produce and use energy five years ago, we virtually need a daily coup by now. PwC’s Low Carbon Index 2011 illustrated how there was now a 40% gap between the 2 degrees climate goal and emissions targets through to 2020. In 2012, business pretty much as usual, in terms of carbon emissions and climate action, means we are actually on a trajectory to reach something more like 4 degrees Celsius of temperature change towards the latter half of this century. We haven’t had 4 degrees of warming for 40 million years, and when that happened, there was no ice at either pole.
As PwC’s climate specialist Celine Herweijer diplomatically reflected in January post Durban: “This is a serious business.” Some things haven’t changed – credit crunch or not.
Follow the PwC sustainability and climate change team on Twitter @pwcclimateready.
PwC’s annual Low Carbon Economy Index will be released in November 2012, examining G20 and global progress in reducing carbon emissions linked to GDP.