Time to consider sustainable policy for sustainability

Time to consider sustainable policy for sustainability

By November 1, 2021Climate Risk, News

In this blog post we will consider several aspects of decarbonisation which will need to be addressed by policymakers around the world. Our objective here is to illustrate key challenges on the road to net zero, but in doing so we are not endorsing any particular set of policies or actions.

The scientific community’s warnings

As the COP 26 meeting begins, governments and business across the world are redoubling efforts to decarbonise, with many committing to net zero at various points in the next several decades (2050 is the key target). Action is being motivated by increasingly strong warnings from the scientific community; the IPCC 6th Assessment Working Group 1 Report’s Summary for Policymakers includes a series of Headline Statements that include:

  • “It is unequivocal that human influence has warmed the atmosphere, ocean and land.”
  • “The scale of recent changes across the climate system…are unprecedented over many centuries to many thousands of years.”
  • “Human-induced climate change is already affecting many weather and climate extremes in every region across the globe.”
  • “With further global warming, every region is projected to increasingly experience concurrent and multiple changes in climatic impact-drivers.”
  • “From a physical science perspective, limiting human-induced global warming to a specific level requires limiting cumulative CO2 emissions, reaching at least net zero CO2 emissions, along with strong reductions in other greenhouse gas emissions.”

Statements like these from the IPCC are accompanied by dire warnings from other experts about the consequences of not reducing the level of greenhouse gas emissions, including rising temperatures and sea-levels, more varied and extreme weather, decreased biodiversity, and declining GDP, all of which have far-reaching implications for society

Disruptive decarbonisation

However, while making commitments to net zero is important, so is planning on how to achieve it without triggering widespread economic disruption and the likely political backlash which would follow, particularly since the benefits of lower emissions on extreme weather will only appear gradually while transition issues such as price shocks for energy may happen relatively suddenly. It is easy to imagine, for example, declining investment in fossil fuels and reduced supply of gas and oil potentially pushing up energy prices and inflation, creating affordability pressures on households and firms.

The world is already seeing widespread challenges with supply chains and energy supplies as we recover from the COVID-19 pandemic.

In the UK, for example, where 85% of homes are reliant on gas for central heating, there has been a 400% rise in gas prices during 2021. This marked increase is attributable to a combination of factors including a cold winter, an inability to replenish energy stores due to COVID-19 impacts, and calmer weather which reduced wind-power electricity. The shift towards electric vehicles is another example of a large scale socio-economic disruption which is already underway, with the extent of this disruption heavily dependent on how manufacturers continue to support, or not, the supply of spare parts for legacy internal combustion engine vehicles.

Source: BBC, from Bloomberg

While the current issues are not primarily due to decarbonisation, they are a stark illustration for policymakers of the disruption which could occur in future without a well-planned transition. We note that even the most optimistic scenario will be complicated by “baked in” global warming, or the warming attributable to the amount of greenhouse gasses already in the atmosphere, which will require additional investment in adaptation or expenditures on rebuilding property damaged by increasingly extreme weather. Click here to read the Actuaries Institute’s latest Climate Index release on extreme weather.

We remind readers of three key considerations in the pathway to achieving a decarbonised society: enacting policy measures that are equitable, achieving an orderly replacement of fossil fuels with lower emissions alternatives, and ensuring the standard of living in developing countries can be increased without large scale emissions.

Key considerations for an orderly transition

First, there is no question that replacing the key sources of energy in modern economies over a relatively short time horizon is likely to lead to disruptions such as:

  • Loss of jobs in high emission industries.
  • Decline in the viability of certain communities and economic sectors.
  • Limits being placed on development to preserve biodiversity.

This reality has led many to call for a “just transition”, where governments enact policies to protect various affected groups as we switch to more sustainable economies. This could involve investments in retraining workers or focusing government support for sustainable industries in communities facing the loss of jobs in emissions intensive industries. A good example of this is Germany’s plan to protect coal workers from job losses.

Second, with regard to an orderly replacement of fossil fuels, in its 16 October 2021 edition the Economist magazine wrote:

“The [current energy] panic is a reminder that modern life needs abundant energy: without it, bills become unaffordable, homes freeze and businesses stall. The panic has also exposed deeper problems as the world shifts to a cleaner energy system, including inadequate investment in renewables and some transition fossil fuels, rising geopolitical risks and flimsy safety buffers in power markets. Without rapid reforms there will be more energy crises and, perhaps, a popular revolt against climate policies.”

Achieving orderly decarbonisation may require some near-term strategic investment in fossil fuel infrastructure simply to maintain the stability of the system, despite the overarching desire to stop all activity in fossil fuels as quickly as possible.

Third, developing countries need a path to sustainable prosperity. While the G-20 currently accounts for 75% of emissions, according to the Climate Transparency Report 2021, as the rest of the world develops it must follow a different path than the high emissions one taken by the current G-20. Some countries may struggle with the requisite investments, which is why the United Nations has been pushing for the world to meet commitments of $100 billion per year in climate finance initiatives for developing countries (see the UN report here). We also note that vulnerable populations in many developing countries will also require expenditure on adaptation measures to combat rising seas, droughts, heat stress, and extreme weather.

Sustaining sustainability

Despite the alarming warnings in the IPCC 6th Assessment and the challenges outlined in this blog post, there are grounds for optimism that the world can achieve net zero, avoid the more extreme warming scenarios, and do so without social disruption. The pace of technological innovation is accelerating (anyone remember using a Blackberry 15 years ago?), and there is much reason to hope that investments in decarbonising the global economy can lead to prosperity and rising living standards.

However, achieving that goal will be challenging, requiring more than setting net zero targets, divestment of fossil fuel assets, and shutting down coal fired power as quickly as possible. Rather, a more holistic approach is needed, including a strong focus on transitional impacts (such as retraining workers), investing in protecting communities from the impacts of climate change, and funding projects in developing countries. We must achieve both a sustainable future and a sustainable pathway to getting there.

Rade Musulin

Ph +61 2 8252 3444
Mobile +61 434 470 018
rade.musulin@finity.com.au

Sharanjit Paddam

Ph +61 2 8252 3300
Mobile +61 439 499 414
sharanjit.paddam@finity.com.au