Here at the United Nations Climate Change Conference in Cancun, policy makers are negotiating along a knife’s edge between agreeing to lay the foundations for a future climate deal, or definitively burying the only global regulation on climate change, the Kyoto Protocol. A failure at this summit could delay regulations for several years. And, absent the prospect of regulations, many businesses would argue that there is no material driver for them to act now on reducing their contribution to the global stock of greenhouse gases. I beg to differ, here’s why:
1) Climate change science is unequivocal. Atmospheric carbon dioxide (CO2) levels have risen by almost 40% since the Industrial Revolution, after several hundred thousand years of remaining within a constant range. CO2 creates a greenhouse effect, so an increase in its atmospheric concentration causes the Earth’s average temperature to increase. Methane, another greenhouse gas, has also risen steeply since industrialization, compounding the impact of higher CO2 concentrations. Evidence clearly shows that in tandem with greenhouse gas concentrations, temperature has steadily risen over the past century.
2) The warming trend will continue but the extent of its impacts is uncertain. Forecasts by the world’s leading scientific institutions suggest increases from a small but still potentially harmful rise of 1 to 2 degrees Celsius to a potentially disastrous level of +6 to +10 degrees Celsius by 2100. A warmer atmosphere melts glaciers and land based ice, making sea levels rise. A warmer atmosphere is also more energetic and holds more water, changing the patterns and likelihood of storms, floods, and other extreme events.
3) Using uncertainty as the reason for inaction is unsound. You can argue that since the range of potential future impacts is so uncertain, the need to act is not quite there. Against that rationale, consider that since costs will likely rise at an accelerating rate at the tail of the probability curve, a wider uncertainty range implies a greater risk, and thus a greater expected value of the costs.
4) Vested interests have likely skewed the perception of reality. Challenging the vested interests of industries with high stakes in greenhouse gas generating assets was always going to be difficult. On the other hand, scientists are conservatives by training (“never overstate your findings”) and not naturally aggressive defenders of arguments. Those with an interest to lobby against the science and the regulations are more determined, largely better funded and are expert PR managers. Just remind yourself of what happened with the tobacco industry over the last 20 years.
5) Doing something now will be worth every penny. Consider the mathematical reality: the expected value of a very small chance of an infinite loss is infinite. So, what is the cost of improving your CO2 performance even in the unlikely case that the impact of rising CO2 emissions turns out to be minimal? Those costs should be weighed against direct and indirect benefits to your organisation which could include new business streams, energy security, reduced regulatory risk, enhanced efficiency, reduced attrition, or greater client satisfaction. These are especially true for energy intensive companies investing in assets with 30-40 year life spans, a time horizon over which we are very likely to see much more material signs of climate change, and the regulations that those will likely prompt. But other sectors would also benefit, as future consumer mindsets will evolve along with the evidence of climate change.
Acting now will position you in an early leadership role in an area that will inevitably become important. Conversely, the costs of not acting if climate change turns out to be catastrophic will dwarf those of taking early action: at the very extreme end of the distribution they could possibly be life threatening. Change is hard. Most companies are comfortable operating in the status quo. Climate change demands radical change. It was never going to be easy.
My thoughts are inspired by a letter written by hedge fund manager, Jeremy Grantham.