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December 04, 2014 at 08:20 PM
The recent surprise announcement of a climate agreement between the U.S. and China has been in the works for some time. Savvy investors should be aware of the potential opportunities and pitfalls it presents.
The agreement not only sets ambitious goals for reductions in greenhouse gas (GHG) emissions but also for collaboration between the two countries on clean energy research and development and the promotion of trade in green goods.
China’s conspicuous foray into the arena could bring other countries on board at or before the Paris climate summit next year. In fact, it’s already affected the G20 meeting in Brisbane, Australia. Prime Minister Tony Abbott attempted to keep the topic of climate change off the agenda completely—and failed embarrassingly.
The two weeks of UN climate negotiations kicking off this week in Lima, Peru could experience the same effect. Diplomats are hopeful for the first time in a generation that something meaningful will occur after November’s bad news from a UN climate report. It warned industrialized nations they were falling far short of emissions reductions needed to keep the global temperature from rising more than 2 degrees Centigrade above preindustrial levels, the goal leaders had set some time back.
Officials have gone on the record saying that even U.S.-China agreement won’t cut global GHG emissions sufficiently by 2030 to achieve the 2-degree goal. Still, optimism surrounding the agreement is expected to spur other countries with large pollution records—such as India, Russia, Brazil and Japan—to make their own pledges more ambitious.
There’s certainly room for improvement. Encouraging new developments in solar, wind, energy storage and other technologies could spark a revolution in opportunities—not just for protection of the earth’s climate but also for investors looking for new fields of endeavor.
David Richardson, managing director of Impax Asset Management, which focuses on opportunities created by the scarcity of natural resources and increasing demand for cleaner, more efficient products and services, said the most immediate effect of the agreement would likely be to “foster a global agreement in the Paris Climate Summit” next year. In addition, “we think it gives a strong drive to the rest of the countries to set targets, given that the U.S., EU and China have set internal goals.”
“From a policy perspective, [the agreement will] lead to a global tax on carbon at some point. It’s hard to know when that might happen, but if nations are going to set GHG emission targets, one of best ways to stimulate that eventuality is a market mechanism to reduce carbon intensities of economies and economic growth,” Richardson said.
A carbon tax leads to two separate factors that affect the markets. First, the tax on carbon has “implications for high-carbon emitters and industries, with fossil fuels being an easy example. Our view is, there is now a risk premium on fossil fuels that didn’t exist in the past,” Richardson said.
Then there’s “stimulus for low-carbon energy and energy efficiency, and businesses involved in those markets,” he said. Impax, has done a lot of work “over the last 16 years to see what those investment opportunities are in the low-carbon energy framework.” In addition, “we’ve also done some work with FTSE in classifying the investable universe for these slots.”
Energy efficiency subsectors investors should watch are “the power network—the grid—and improving both its efficiency as well as being able to accommodate a much more distributed form of energy; rather than large coal plants, a wide array of solar and wind,” Richardson said. Industrial energy efficiency is also a good opportunity, especially in Asia, where energy input costs are so much higher that money will be spent to reduce energy costs in manufacturing firms.
