Global investment bank HSBC says the world is hurtling towards a “Peak Planet” scenario where the global carbon budget from 2000 to 2050 is consumed well before 2030.
To address this, a peak in greenhouse emissions will need to be achieved as a matter or urgency, and by 2020 at the latest. “This is a tough task – but not impossible in our view,” it writes. “There is a growing recognition of the severity of the situation … and we believe that ambition is about to pick up again.”
In an analysis on climate change politics and the business case for action, HSBC economists say the focus is now on five key economies to break that nexus between economic growth and emissions – in fact to double the rate of decoupling.
This so-called Carbon 5 comprises China, Russia, India, the EU and the US, and HSBC says these countries need to cut the carbon emitted per unit of GDP by between 3 and 5 per cent per annum by 2020, beyond existing efforts.
It points to five reasons why this might be achievable, despite the apparent stalemate in international talks.
First, it notes that awareness of the severity of climate impacts is rising, and public opinion is shifting, particularly in the US. It says improving economic confidence and falling clean tech costs will assist the process, and it expects an increase in policy activism in the next three years after the recent plateau.
“Ultimately, climate change is like a chronic disease, where the problem accumulates over time. If we are to avoid unmanageable disruptions to the global economy, governments have agreed that we need to keep the rise in global temperatures below 2°C,” HSBC says.
“What they haven’t agreed, however, is the likelihood of hitting this target. This will be a core part of the negotiations that are now underway for an international climate agreement by the end of 2015.”
HSBC says there are different views of carbon budgets for the global economy, depending on differing views of risk, and where investors can generate returns.
The most commonly cited assessment is Malte Meinshausen’s 2009 evaluation that to have an 80 per cent chance staying below 2°C, the global carbon budget is around 886 gigatonnes of CO2 equivalent from 2000-2050. A riskier 50:50 scenario increases the budget substantially to 1440Gt (see chart above). But by the end of 2011, 420Gt had already been consumed.
HSBC says that with annual emissions from energy alone running at over 31Gt, the budget for the 80% scenario would de depleted by 2026, and by 2039 for the 50/50 chance.
This means that without large-scale deployment of carbon capture and storage, between two-thirds and four-fifths of current reserves cannot be commercialised in a 2°C world, and global emissions need to peak before 2020. The International Energy Agency, it notes, says global CO2 emissions from energy need to peak by 2017. “The contradiction between global carbon budgets and fossil fuel reserves is gaining increasing attention,” it says.
Is this target impossible? Nearly, but not quite, says HSBC. It says major European economies – France, Germany and the UK – peaked their emissions of greenhouse gases in the 1970s, and have each cut their emissions by more than 30 per cent as a result of oil price shocks and a structural shift away from coal for economic and environmental reasons. (see chart below)
The challenge is the emerging world. And while the historical peaks in carbon emissions in the industrialised world nearly all occurred without any input from climate policy, that is no longer an option in the emerging world.
Hence the focus on the Carbon 5. HSBC says that there is clearly growing awareness of the severity of climate change impacts, because it is already being felt, and a growing public opinion that is supportive of action.
The economics are also aligning – with major fossil fuel importers reducing subsidies for oil and coal. Importantly, as the costs of fossil fuels mount, costs for clean technologies are falling substantially.
It uses this graph above to show the declining costs of clean technologies, which are falling rapidly, apart from nuclear which is showing a “negative learning curve”. The total cost of ownership of LED lamps will be competitive with compact fluorescents in the YS by 2016.
“All in all, this means that the world can deliver more climate improvement for less. These cost improvements are a boon for the macro-economics of climate action, but over-supply in key sectors have been tough for investors. “
Furthermore, consumption is also being reduced. This graph (below) illustrates the decline in traffic volumes, and auto vendors are increasingly focused on the “total cost of ownership”. China is also implementing tougher environmental standards.
Finally, HSBC says climate policy, which has stagnated since 2010, will return to political, public and media attention. This will be helped by the release of the IPCC reports, beginning this September.
HSBC says there will be a “bundle of drivers” that will increase the focus on low-carbon growth – and an explicit focus on cutting carbon will be only one element among many. The most important factors will be changing economic structure, energy substitution via efficiency and lower carbon supply, efforts to reduce local air pollution, water stress, as well as carbon regulation and pricing.