Climate emergency mobilisation:
The role of the market and business
Given the dominance of markets in the global economy, the only way we are likely to deliver a climate emergency driven transformation in time, is large scale economic and market shifts. Not left alone, but guided by the state as covered in the previous section.
The scale of the change required inevitably means whole industries and companies will be eliminated and whole new ones created. In an economic and market sense, this is not difficult and in fact the evidence suggests it happens on a regular basis. The technology sector is full of examples of both the scale and how fast this can happen, even in a normal market process.
The challenge in this case – especially in the transition from here to emergency mode - will be the political resistance of powerful incumbents who have been and will continue to argue for bail outs, the socialising of losses and a slower pace of change. We will also see investors argue against the losses they will make. This is why the state will need to be strong - and supported in being so by the public as well as by the companies and investors that stand to gain.
The losers in this process will no doubt cry foul. They will argue that the ‘sudden change’ that will now be imposed by policy makers is unacceptable and ‘completely unexpected’. This is of course clearly not true. Investors and companies have known for 30 years, especially the past 15, that this transformation was both inevitable and necessary. Carbon risk has long been well understood and debated across the business and investment community. Those in the market that voluntarily ignored risk should wear the resulting losses. This is how markets should operate, but in this case it is also critical because the alternative of bailing them out will use precious state and market financial resources needed for the transformation process.
One of the drivers of this strength of resolve by the state, could ironically be the global financial system, who will be judging the level of exposure of governments to a myriad of financial impacts from climate change. As well as new costs like incentives and social transitions, these financial losses might include:
Expensive physical damage to infrastructure from sea level rise and flooding;
Relocation or defensive measures on coastal housing;
The collapse of key tourism draws, like the Great Barrier Reef and Venice;
The loss of tax revenue from industries like oil and coal.
If the state gets this wrong, it could risk their ability to borrow money – which will in turn be a critical success factor in a climate emergency. Consider this view from Standard and Poors on climate change and sovereign risk.
“Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness, in most cases negatively. The impact on creditworthiness will probably be felt through various channels, including economic growth, external performance, and public finances.”
There will be little room for corporate welfare.
It is hard to imagine such a level of political boldness when the incumbents have so dominated the debate and effectively delayed action for decades. However, we now have a very different context and we need to change many of our assumptions.
There has been a very strong focus in the climate debate about the power and influence of the fossil fuel sector. This power is likely to rapidly fade, not because of a great change at the political level but because of the evidence of economic history during major market transformations.
The evidence – and the focus of the Paul Gilding’s research at the University of Cambridge – suggests that incumbents rarely transform or innovate in times of disruption. They are far more often just replaced, after a period of accelerating decline. This will most likely be the case with the oil and gas industry who have long talked about becoming energy companies but will mostly fail to do so and either disappear or shrink to irrelevance.
Once this future becomes clear in the market place, it is likely their political influence will fade and be replaced by the winners in the market transformation then underway. There will after all be as many, if not more winners than there are losers. Critically in market terms, the winners are not going to be conceptual winners decades in the future but winners in a relatively short, investable time frame and therefore able to attract significant capital.
That’s because the transformation to a negative carbon economy - especially when underpinned by urgent government action - will create massive wealth, employment and opportunity.
While the debate, driven by the incumbent industries has naturally focused on the cost of change and the resulting economic losses, the reality of a Climate Emergency response is that it is likely to be economically very beneficial. It is also likely that this benefit will be widely distributed across sectors, people and countries.
There will be an enormous amount of money freed up by the transition away from fossil fuels. Money that can instead be spent by consumers and governments on creating new industries. Consider for example that according to the IMF we spend an extraordinary 6.3% of global GDP on fossil fuel subsidies – estimated in 2015 to total $4.7 trillion.
Then consider that to deliver a Climate Emergency mobilisation we need to transform the transport and energy sectors, creating huge growth for new players and new business models. In stock market terms we can get a flavour for what’s on offer to savvy investors and entrepreneurs by the following. The value of just the listed fossil fuel companies is over $4 trillion. For reference this is roughly the same as the market value of the worlds 10 largest technology companies.
Then we can add on the value of the unlisted state own oil and gas companies, the coal and gas based utility companies and the global auto industry - all of which are facing disruptive transformational change already today which will rapidly accelerate.
This disruption thereby opens up many trillions of dollars in value for investors, new players and the smarter incumbents who are able to transform. The consumer’s needs or their willingness to pay won’t change for energy, transport or other outcomes those industries deliver. The question is who will provide it and profit from it. Tesla is just one small example of disruptor which is winning today.
This is just the energy side of the process, where the size of the total prize is quite mind boggling. After that we can add in the transformation of food and agriculture, construction, cities and many other sectors.
If they are to be successful however, the many winners and potential winners – both companies and investors - will need to make their voices loud to support the Climate Emergency and drown out those who resist. We see this emerging today with the widespread corporate support for a price on carbon.
Taking all this into account, a Climate Emergency mobilisation might just trigger the greatest economic opportunity in human history.