A (very) happy Friday, readers. We have a question for you: What is the best way to fix climate change? Gazillions of ideas are circulating in Washington right now, amid Biden mania. More will circulate next week when the World Economic Forum holds a virtual, not-in-Davos summit. But our top tip is to keep a very close eye on carbon pricing, and accounting systems. Read on:
The biggest news out of Washington this week for Moral Money readers was Joe Biden’s move to rejoin the Paris climate agreement. But there were a number of other very important climate-related actions included in his executive orders that did not get as many headlines.
One noteworthy development is Mr Biden’s plan to re-establish a working group that determines the “social cost of carbon” and other greenhouse gas emissions. This is pretty geeky stuff, but it is worth paying attention because it could soon have a big impact on government policy and the world of sustainable finance.
Put simply, this group, which was disbanded under the Trump administration, is responsible for pricing the damage created by carbon and other greenhouse gas emissions. The numbers the working group comes up with are then used in cost benefit analyses done by government agencies considering new regulation or making new investments.
The reason this is so important is because the government’s internal carbon price is about to rise. Dramatically.
In 2017, the Trump administration unleashed a “surgical strike” on the way these metrics are calculated, said Richard Newell, president of Resources for the Future, an environmental economics think-tank. By using a higher “discount rate” (we’ll explain more in a second) in their calculations and measuring damage only to the US, rather than the world, Trump officials slashed the social cost of carbon from about $42 per tonne to below $6 per tonne.
If the reformed task force goes back to using the same methods it did under President Obama, Mr Newell said that the price would jump up to about $53 per tonne. However, he suspects it may go much higher, thanks to another executive order that calls for the government to modernise its regulatory review process.
As we mentioned above, one of the factors used in these calculations is a “discount rate”, which basically represents the cost of us taking action now to save future generations from inheriting this mess (go deeper with the London School of Economics’ explanation here.)
Mr Newell predicts that the Biden administration could adjust the discount rate to a level that would put the social cost of carbon somewhere around $100 per tonne.
This figure is noteworthy because it would mirror the UN Global Compact’s recommended carbon price for companies. And while corporations typically measure carbon prices differently to the government (by focusing on what it would cost to cut emissions, rather than the monetary value of the damage they create), the numbers being in sync would indicate that they were approaching the right level.
So why does this matter?
This metric is used in setting energy policy such as fuel economy guidelines for automobiles and power plant regulations. It will assuredly lead to much stricter standards.
And given the growing recognition of how “physical climate risks” such as flooding and wildfires affect investors and companies, it could also be factored into financial regulation, according to Mr Newell.
Even though prioritising the social cost of carbon is not meant to establish a baseline for a carbon tax scheme, there are positive knock-on effects for nationwide carbon pricing advocates.
“This is a positive indication for carbon prices,” said Greg Bertelsen, chief executive of the Climate Leadership Council, a bipartisan group advocating for a carbon fee that would fund dividend payments to US households. “We need all sectors of the economy to be working together to find the most readily available emission reductions. And that’s what that price signal provides you.”
The CLC (and others calling for carbon pricing) also received a boost from the influential conservative business group, the US Chamber of Commerce, which officially changed its stance on climate this week and indicated that it would not fight to block a carbon tax.
The fact that Janet Yellen, Mr Biden’s pick for Treasury secretary, is a founding member of the CLC, probably helps its prospects.
Mr Biden’s executive order calls for the working group to provide its final numbers on the social costs of greenhouse gases by January 2022, but has also mandated that they establish an interim number within 30 days, so we will soon see where this is headed. Watch this space for more. (Billy Nauman)
You know the co-worker who gets the attention of the bosses with a big idea pitch — without concrete plans on how to get there? That’s where Prime Minister Boris Johnson is at right now with his November announcement to ban the sales of petrol cars by 2030.
Investors are now circling back with the Johnson government for details about the steps that need to be taken to reach the goal. The UN Principles for Responsible Investment, as well as the Brunel Pension Partnership and BT Pension Scheme Management among others, on Thursday published two letters to Mr Johnson and the Department for Transport, calling for more information.
The City’s financial prowess has a big role to play in achieving the 2030 goal, the letters said. With public budgets under stress, “now is the time to utilise the City of London and private finance to help deliver the ambitious decarbonisation needed”. These avenues include dedicated investment funds, the Charging Infrastructure Investment Fund and the new National Infrastructure Bank.
Additionally, consumers need incentives to buy zero-emission vehicles today, although price parity with petrol cars is not expected until the middle of the decade.
Tax incentives, subsidies and grants are needed “to ensure consumers are not penalised for making sustainable choices”, the investors said.
The Johnson administration should also consider gradually raising the mandate for sales of zero-emission vehicles. This approach should ease the car industry’s transition to total clean car sales.
Global government zeal for clean transport has helped inflate a burgeoning bubble in electric vehicles. Remember to keep track of the frothiness with Alphaville’s EV bubble watcher. (Patrick Temple-West)
As we at Moral Money know all too well, environmental, social and governance buzzwords are all the rage these days. On earnings calls from September to December 2020, FactSet found the highest number of ESG mentions on earnings calls going back at least eight years.
But new research has found the vast majority of corporate ESG enthusiasm is pure lip service. Just 6 per cent of 1,188 board directors at Fortune 100 companies have environmental or governance experience, according to research published this month by New York University professor Tensie Whelan. Very few directors had experience with ethics, transparency, corruption and other material good governance issues, she said. Board directors’ environmental experience tended to stem from previous work in energy or conservation — experience that can be a stretch to link to environmentalism.
There were, however, a handful of Fortune 100 companies with particularly strong ESG board experience. Dow Chemical has three board members with environmental credentials. Amazon recently strengthened its board by adding Indra Nooyi (pictured), former chief executive of PepsiCo. During her tenure, the company focused extensively on ESG risks, Ms Whelan said.
But other companies have some catching up to do. Among them, Insurance provider Liberty Mutual has no board members with climate credentials and drugs distributor McKesson — which has been sued for alleged involvement in the opioids crisis — has no board members with ESG credentials on its board.
One solution could be to tie executive compensation to ESG goals. Companies have started doing this in piecemeal approaches that do not actually change corporate behaviour.
“It tends to focus people when their pay is tied to delivering,” she said. “And if it isn’t, then it sends a signal from the top of the organisation that this is actually not important.” (Patrick Temple-West)
With the inauguration of US President Joe Biden, much of the world is looking to the US for ambitious climate action.
But observers would be smart to look further east. In a conversation with Moral Money’s Gillian Tett, Nadeem Babar, Pakistan’s special assistant to the prime minister on petroleum and chairman of the task force on energy reforms, said that by 2025 more than 50 per cent of electricity in the country would come from renewable resources.
“We are very comfortable that we can meet these targets,” Mr Babar said. “The targets are ambitious, but we can do it . . . [despite] Pakistan being a developing country.”
Forty per cent of Pakistan’s imports are energy-related, namely fossil fuels from Saudi Arabia. These are more expensive than energy from domestic hydroelectric power or solar, which could give Pakistan more incentive to “leapfrog” western countries, he said. (Kristen Talman)
Despite intense favouritism for the coal industry, former president Donald Trump’s efforts failed to deliver. The coal revival never arrived. Ultra-cheap natural gas and surging renewables dominated the electricity sector. Check out the analysis of the US energy landscape for the new Biden administration from our colleagues on Energy Source.
Coal’s liability as a stranded asset gets clearer every day. On Thursday, the mining company Vale said it had struck a deal to buy minority stakes in the Moatize coal complex and a related port and rail project from Japanese trading house Mitsui for an eyebrow-raising sum: $1. Please read the FT’s Neil Hume’s article here.