Climate Change Demystified

Climate change is surely a ‘hot’ topic these days. But I have really struggled to make sense of the problem and potential outcomes, stuck between esoteric scientific publications (‘stylized radiative forcing pathways’) and unsubstantiated social media posts (‘we’ll all be dead in 12 years’). I hence set out to answer for myself some fundamental questions – what a 2°C warming really means, what the financial impact could be, how I can help, etc. The result is this article, organized under 10 key findings.

1. Climate change is a ‘NOW’ problem!

First, the basics. There is overwhelming scientific evidence that human activity (‘anthropogenic emissions’ in the jargon) has led to a massive increase in the levels of greenhouse gases (GHG) – primarily Carbon dioxide (CO2), but also methane, nitrous oxide and fluorinated industrial gases. These gases cause climate change by trapping heat in the earth’s atmosphere.

Atmospheric CO2 levels hit a record earlier this year (415 ppm if you really must know!). The last time they were this high was 3 million years ago, when sea levels were 20 meters higher! This has already led to a warming of nearly 1°C above pre-industrial levels, accompanied by rising sea levels, acidifying oceans, retreating glaciers and shrinking ice sheets. We are also experiencing more frequent and intense heat waves, droughts, storms and wildfires than historical trends. Climate change is not a future problem – it has already begun!

While the most popular headline is a 1.5 to 2°C warming (the Paris agreement), on current trends we are actually headed to a 3 to 5+ °C range. This does not seem like much, but these are average surface temperatures, and the warming will be double over land. In addition, the effect of increasing temperatures tends to be non-linear, as shown in the table below. 

Most scientists believe that a 2°C rise is the maximum we can safely tolerate, and that ideally we should stay below 1.5°C. This will require us to roughly halve emissions by 2030 and achieve net zero emissions by 2050.

2. We seem to be heading for a train wreck in slow motion.

Despite global agreements over the last three decades to reduce GHG emissions, they have been growing steadily (see chart below). The only blip was during the 2008-9 recession – Wall Street managed to achieve what the UN could not! Ironically, emissions have been growing at a faster clip since the ambitious Paris agreement.

3. A dramatic transformation in production and consumption is required.

Electricity generation from fossil fuels is the largest contributor to emissions (see chart below). Agriculture is a close second, contributing through deforestation, methane emissions from livestock (bovine burps!), and nitrous oxide emissions from fertilizers. Meat production alone, directly and indirectly, accounts for 14% of all GHG emissions. Industry (especially cement, steel and chemicals), transportation and buildings are the other major contributors. 

To stay within safe limits, we need to ‘decarbonize’ energy production and transportation, and reduce the resource-intensity of agriculture and industry. Equally important will be to manage the demand side of the equation through energy conservation and changes in consumption patterns.

4. Viable solutions to keep warming within limits mostly exist or are on the horizon.

Broadly, solutions to tackle climate change fall under one of the following categories:

a. Greener electricity: by replacing fossil fuels with renewable sources for electricity. Renewables (solar, wind, hydro, geothermal etc.) currently account for around 28% of power generation. They are on the verge of becoming cost-competitive with fossil fuels even without subsidies, and have the potential to provide bulk of the power demand. Solar and wind are the most promising, but they have an issue of ‘intermittency’ (the sun does not shine brightly all day, and the wind is not always strong enough), requiring economical grid-scale storage solutions and supplemental low-carbon energy sources. Exciting advancements are happening in both areas – new Lithium-ion batteries, hydrogen fuel cells, cryogenic batteries, next-generation nuclear technology, gravity storage etc.

b. More sustainable agriculture: by afforestation and better land-use practices, wiser use of fertilizers, reduced food waste, and shift to a plant-based diet. A lot of innovation is happening in plant and cell-based (lab-grown) meats, a potential game-changer.

c. Cleaner industrial processes: by material substitution, recycling and improving energy efficiency. Reducing emissions is particularly challenging in industries like cement and steel where the manufacturing process produces CO2 as a byproduct. Until there is a technological breakthrough, the solution is to remove CO2 (see ‘g’).

d. Cleaner transport: by switching to cleaner fuels (electricity/hydrogen); increased use of public transport, telecommuting and car-pooling; and improving fuel efficiency. A quantum shift from internal combustion engines is looming for passenger and commercial vehicles. Aviation and long-haul shipping are tough nuts to crack though; and until there is a technological breakthrough, the solution is to remove CO2 (see ‘g’).

e. Greener buildings: by electrifying heating and cooling systems, smart monitoring of temperature and lighting, improving insulation, and retrofitting buildings for energy efficiency. Improving energy efficiency alone could reduce emissions from buildings by over 40%.

f. Lowering energy and resource use: by reducing consumption and waste, and increasing reuse/recycling.

g. Carbon dioxide removal: by storing excess carbon in natural or artificial sinks. Even if we manage to reduce emissions to zero, we will need to remove the excess CO2 accumulated in the atmosphere (well over 100 billion tons), to keep warming within limits. This requires protecting and enhancing natural sinks like forests and grasslands. Scientists are also exploring genetic modification of plants to enhance their ability to capture carbon. In addition, we will need to deploy ‘negative emissions’ technologies that suck CO2 out of the atmosphere or from smokestacks (carbon capture and storage) and bury it underground or convert it into other products. These technologies, which are still nascent, will be critical for us to meet the Paris commitments.

I am not counting fanciful ideas like Geoengineering, which attempt to reflect the Sun’s heat (by injecting aerosols or using giant mirrors), as they are untested and could have dangerous unintended consequences.

5. Carbon pricing is required to accelerate adoption of these solutions.

A big reason for the limited progress towards emission reduction goals is a lack of economic incentives. I believe the situation will change dramatically only if governments put a price on carbon emissions. There are three possible approaches:

a. Carbon tax: a tax per unit of CO2 emitted or amount of fossil fuel used.

b. Cap-and-trade schemes: that cap the quantity of emissions (‘allowances’) for a firm based on competitive bidding or historical emission levels, and allow firms to trade allowances, thus creating a price for emissions.

c. Regulation/Subsidies: implicit pricing of carbon through regulations like more stringent fuel economy standards, or through subsidies for low-carbon alternatives like renewable energy.

Explicit carbon pricing (preferably through a simple carbon tax), along with appropriate regulation will incentivize businesses and consumers to seek low-carbon sources of energy and optimize energy usage. It will also spur innovation in critical areas like energy storage and carbon capture. Experts recommend starting with a minimum carbon price of $50 per ton (which translates to roughly 50 cents a gallon of gasoline or 1 cent per kilowatt-hour of electricity from a coal-fired power plant), and increasing it significantly over time (in the most aggressive models to over $400 per ton).

6. We also need creative political solutions for a thorny collective action problem.

Climate change creates challenging trade-offs between stakeholders on multiple dimensions:

a. Developed v Emerging: Between developed countries that have contributed to most of the historical GHG emissions, and developing countries whose emissions are rising with living standards, even as they are more vulnerable to the effects of climate change (see charts below).

b. Rich v Poor: Within countries, between the rich, who will have to bear the cost of the transition to a low-carbon economy; and the poor, who are more exposed to the effects of warming.

c. Old v Young: Between current generations that will bear the inconvenience of emissions reduction, and future generations that will face the dangers of climate change (no wonder the likes of Greta Thunberg are protesting!)

This is a collective action problem on a scale that the world has not seen; and requires creativity, stewardship, collaboration and enormous political will to ensure equity and justice. In the absence of this, climate change could increase conflicts within and between countries, and exacerbate the refugee crisis. Small island nations and unstable African countries (which will be hardest hit by warming), along with petro-states (which face huge economic risk) are particularly vulnerable.

 7. Meanwhile, robust adaptation measures are an imperative.

As described earlier, even staying within a 1.5 or 2°C limit will lead to significant disruptions to our ecosystem, making adaptation an imperative, particularly for island nations and coastal cities. Unfortunately, adaptation is not getting the attention it deserves. Here are some risks and adaptation measures that governments will need to be prepared for:

· Sea level rise: building sea walls, relocation of people and infrastructure from low-lying coastal areas

· Food and water scarcity: water conservation, building desalination plants, developing drought-resistant crop varieties

· Natural disasters and pandemics: building more resilient cities and communities, investment in physical and social infrastructure, improving social safety nets

· Biodiversity risk: Migration corridors, expansion of conservation areas

8. Markets have not really priced in climate risks, resulting in a financial time bomb.

Businesses face three types of risks related to climate change:

a. Physical risk: damage to assets or supply chains and productivity losses due to extreme weather events. While most businesses face this risk, real estate, infrastructure, food & beverage, travel & tourism and insurance industries are particularly vulnerable.

b. Transition risk: impact on demand and operating costs due to the transition to a low-carbon economy. This risk is almost existential for the fossil fuel industry. A high enough carbon price could decimate demand and lead to over $2 trillion of ‘stranded’ assets (coal, oil and gas reserves that will become worthless). The valuation of oil companies seems to suggest that investors are ignoring this risk. This risk is also significant for utilities that run dirty power plants, automobile companies that have to manage a shift to electric vehicles, and airlines that may have to deal with a high carbon price. It is also high for financial services firms that have provided capital to companies with high transition risk.

c. Litigation risk: arising from claims against firms that have directly contributed to climate change. This risk is highest for the fossil fuel industry, which faces the threat of class action suits. Firms in other industries like utilities, automobiles, financial services and airlines could also face potential litigation risk.

These risks combined could have serious consequences for individual, company and country balance sheets. I strongly recommend stress testing of asset portfolios for climate risks. (I have already mentally written down my property in a hot, coastal Indian city!)

9. The transformation to a low-carbon future also offers a huge economic opportunity.

It is not all gloom on the economic front. The transition to a low-carbon economy is also a massive opportunity, requiring an estimated $110 trillion in cumulative green energy investments through 2050. This covers electrification, renewables, carbon capture and storage, as well as energy efficiency improvements. I envisage a post-war reconstruction type effort to retrofit our buildings and other infrastructure for a low-carbon era. 

Green could be the new black, and I hope VCs will fund innovative green technologies with the same zeal that they have for frivolous apps!

10. We can still save the planet, and each of us can make a difference.

We face a grim challenge and are running out of time. However, I remain cautiously optimistic that necessity and human ingenuity will provide the impetus for us to end up on the right side of history. More than 60 countries have committed to net zero emissions by 2050, and over 600 major companies have committed to reducing emissions significantly. I am hopeful that many more large countries and companies will join this list soon. I am also confident that we will come up with breakthrough innovations to accelerate the transition to a low-carbon world.

In parallel, we as individuals have a responsibility to act. The average American has an annual carbon footprint of 16.5 tons (the global average is 4.5), which will have to go down to near zero by 2050. While a lot of the reduction should come from supply-side changes like cleaner electricity and greener agriculture, here is a list of things each of us can do on the demand side (some easier, some more challenging):

a. Conserve energy: improve insulation, use energy efficient appliances & LEDs, use smart temperature control, conserve water 

b. Drive less or go electric: telecommute, walk/bike, use public transport, car-pool, switch to electric cars (annual saving 2.5 tons)

c. Fly less or buy offsets: use more videoconferencing, buy carbon offsets when you have to fly (1.5 tons for a coast-to-coast round trip in the US). Toughest one personally, as I need to travel for work and like to travel for vacations!

d. Eat less meat: go vegetarian or switch to alternate meats (annual saving of ~1 ton)

e. Reduce, reuse, recycle: reduce food and other waste, avoid fast fashion, go paperless

f. Support green companies: as consumers and investors

g. Speak out: as professionals, local community members and citizens

As we head for the holidays, I encourage all of us to analyze our individual carbon footprint and come up with specific action plans to reduce it. I will leave you with the powerful words of conservationist Sylvia Earle ...

“What we do right now or fail to do will determine the future, not just for us, but for all life on Earth.”