Climate change is back on the global agenda, with debate in the corridors at Davos given fresh impetus by U.S. President Barack Obama and U.N. Secretary-General Ban Ki-moon both highlighting it as top priority this week.
Yet business leaders are still struggling to find the economic incentives to change current practices.
The World Economic Forum (WEF) has not held back in its own assessment of the dangers, with former Mexican president Felipe Calderon warning of “a climate crisis with potentially devastating impacts on the global economy.”
Christine Lagarde, managing director of the International Monetary Fund, summed it up for any Davos doubters: “Unless we take action on climate change, future generations will be roasted, toasted, fried and grilled.”
There is a disconnect, however, between increasing evidence of extreme weather – from Superstorm Sandy in the United States in October to record heat in Australia this month – and the limited response from politicians and businesses.
In some cases the clash is stark, as highlighted on Friday when Greenpeace activists shut down a Shell gas station near the WEF meeting in protest at oil drilling in the Arctic that is made easier by a warmer world.
Many companies tout the opportunities presented by a shift to a low-carbon economy, yet the reality is that the continuing economic crisis has discouraged businesses and governments from developing a truly long-term view.
The rapid growth in shale gas – a greener alternative to coal when it is burned, although not when it leaks into the atmosphere – has also made renewables comparatively less attractive, adding to the challenge.
LACK OF URGENCY
The result is that while global investment in renewables is rising, the world still needs to spend $700 billion each year to curb its addiction to fossil fuels, according to a study issued by the WEF this week.
“There is a clear lack of urgency in the climate debate,” said Greenpeace Executive Director Kumi Naidoo. “Big business is holding us back.”
Business, in turn, complains that the failure of governments to provide a clear regulatory framework limits its ability to plan for the future.
After past failures, governments aim to work out a new U.N. plan to address climate change in 2015 but it will only enter into force from 2020.
“Climate change is a long-term issue and it is not clear how it is going to play out or what the returns are going to be,” said PricewaterhouseCoopers International Chairman Dennis Nally. “So CEOs have to measure how this investment stacks up vis-a-vis other opportunities that can generate clearer returns.”
In practice, only a quarter of CEOs surveyed by PwC said they planned to raise investment in climate risks as cash is rationed and allocated to projects with the most obvious near-term commercial returns.
That doesn’t mean CEOs are not worried, according Fred Krupp, president of the Environmental Defense Fund, who said virtually every corporation was affected to some degree.
“There was mostly silence on climate change for the last two years at Davos,” Krupp said. “But that has changed. The U.S. drought, especially, has grabbed people’s attention here in Davos because that has had a real effect on prices.”
Also chiming with business leaders is Obama’s argument that the United States cannot afford economically to fall behind in a global clean energy race dominated by countries like China, South Korea and Germany.
“The U.S. has to be among the leaders in this global discussion, so it is a positive development,” Andrew Liveris, CEO of Dow Chemical, said of Obama’s inauguration speech, in which he made climate change a priority for his second term.
RECORD LOW CARBON PRICES
U.N. chief Ban Ki-moon came to Davos with a similar message, saying he was very encouraged by Obama’s speech, while warning that climate change was approaching “much, much faster than one would expect.”
For investors, however, the climate issue remains hard to assess, as shown when the price of European permits to emit carbon fell this week to a new low below 3 euros a ton, providing minimal incentive for industry to change behavior.
Analysts estimate prices need to be between €20 and €50 [$27 and $67] to make utilities switch to lower-carbon generation.
The question is, when might that carbon risk turn and start to undermine the value of companies heavily reliant on fossil fuels?
The International Energy Agency warned last month that the world will burn around 1.2 billion more tons of coal per year by 2017 than it does today – equal to the current coal consumption of Russia and the United States combined.
And an analysis by Ecofys for Greenpeace, presented at Davos, found that just 14 carbon-intensive projects worldwide are set to increase global CO2 emissions by 20 percent, or 6 gigatons. They range from coal expansion in Asia to the tar sands of Canada.
When completed, these projects promise to lock in “catastrophic” global warming, according to Greenpeace.