Why Is Tackling Climate Change So Difficult?

In the second of a three-part series, leading independent fixed income investment manager, Cameron Hume, looks at the societal implications of climate change.

Chief Investment Officer, Guy Cameron, explains why Cameron Hume’s view on climate change matters: “Climate change is arguably the single most important issue affecting our planet today. As a leading responsible investor, we need ensure we understand the decisions being taken and the reasons behind them if we are to deliver the best service possible to our clients. As an open and transparent organisation, we believe it is important for us to share our research and the thoughts that underline our investment decisions.

“As the consensus around a need to reduce Greenhouse Gas (GHG) emissions as a means of tackling climate change builds, agreement on how we achieve that aim seems as far away as ever.

“Population, GDP (Gross Domestic Product) and energy consumption are the main factors that influence the amount of GHGs a country produces, but altering these factors has huge economic, political and social costs for the country concerned. This is illustrated by the Kaya Identity, a formula developed by famed economist Yoichi Kaya in 1990. 

“The Kaya Identity suggests that GHG emissions could be curbed by any combination of: reducing the use of fossil fuels; reducing the energy intensity of GDP (curtailing construction and transportation activity or possibly global trade); preventing a rise in GDP per capita (choosing to limit economic growth); or by reducing the global population.  

“Taking Ukraine and the UK as a simplistic example, we can see the problems that this raises for countries with vastly different socio-economic profiles. The UK has five times the GDP per capita of Ukraine, and Ukraine is far less efficient in its GDP production. To produce a dollar-equivalent of GDP, the Ukraine uses five times the energy the UK does.  

“If Ukraine was to reform its economy so that it had the same energy efficiency as the UK, this would help to reduce global CO2 emissions. The UK could achieve the same reduction in global emissions by reducing its GDP per capita to equal that of Ukraine. Both options involve significant costs to the country concerned.

“The United Nations Framework Convention on Climate Change (UNFCCC) Secretariat is the body tasked with reaching agreement between nations on how to tackle climate change, and the discussions are held at the Conference of the Parties, better known as COP. COP3 in 1997 saw agreement on the Kyoto Protocol and COP21 in 2015 saw the adoption of the Paris Agreement. Both of these agreements saw the world move closer to agreeing on an emissions trading scheme as way of levelling the playing field across developed and underdeveloped economies with the aim of keeping global temperature at no more than 2oC above pre-industrial levels. However, COP25 in Madrid in December last year, saw a rolling back of previous commitments and a move away from a collective global agreement.

“COP26 will be held in Glasgow in 2021 and much rests on the outcome of the discussions.

“If the world develops a coordinated, timely response to climate risk, then we are likely to reduce emissions by focusing on our use of carbon and the energy intensity of our activities.  If we fail to coordinate, then climate change may cause GDP per capita to fall or the world’s population to decrease – catastrophic real-world consequences.

“2020 has unfurled very differently to the expectations of many, casting international cooperation against a shared problem in a new light. We await COP26 with interest to see if a change in emphasis is apparent as a result of the impact the coronavirus pandemic has had on societies, economies and the climate.”

This is a synopsis of a more detailed document prepared by Guy Cameron. To read the full paper, click here http://www.cameronhume.com/thought/the-societal-implications-of-climate-risk/

To read the first part in this series, The Science of Climate Risk, also written by Guy Cameron, click here http://www.cameronhume.com/thought/the-science-of-climate-risk/