Perspective on Risk - Nov. 9, 2022 (Climate again)
Background; Not Going To Make It; We Don’t Care; Non-Linear Change; What’s The Diff. Between 1.5 & 2.0°C? Or Higher? Pricing the Risk; Changes Are Inevitable; How to Profit; Good News; Futile Gesture
I hope you are enjoying your fall, as this is likely the coolest fall of the rest of your life.
It’s just pure coincidence that I am sending this during the COP Egypt meeting. The post is based on some new literature I’ve read (so you don’t have to). Sorry to be a broken record, but not seeing much information to refute the consensus hypothesis. Past climate posts are:
Perspective on Risk - Sept. 7, 2022 (Climate)
Perspective on Risk - June 1, 2022 (It’s Too Damn Hot)
Perspectives on Risk - Feb 18, 2022
The cause of climate change is an externality, and these require a collective response to mitigate as the externality producer does not have sufficient incentive to mitigate on their own.
First, Some Background Facts
It is, literally, our fault:
Sixty percent of all historical emissions were produced in the lifetime of the average American, who is 38. Almost 90 percent were produced in the lifetime of our president. The Paris agreement of 2015 established a goal of limiting global temperature rise to 1.5 degrees Celsius. That goal implies a carbon budget. We have already spent 89 percent of it.
Since 1850, when anthropogenic emissions essentially began, the U.S. has produced 509 gigatons of carbon dioxide, according to a recent review by Simon Evans of Carbon Brief. That is by far the most of any nation in the world, a fifth of the total. China has produced the second most, with 284 gigatons, only about half the American total, though it has three times as many people and is often vilified by Americans as the great climate scoundrel. Third is Russia, with 173, followed by Brazil (113), Indonesia (103), Germany (89), India (86), the U.K. (75), Japan (67), and Canada (66).1
We’re Not Going To Make It
Apologies to Twisted Sister for the bad play on words.
We are not going to meet the 1.5 degree Celsius goal. Not just my opinion, that’s what the UN Environment Programme now says Emissions Gap Report 2022
[T]he international community is falling far short of the Paris goals, with no credible pathway to 1.5°C in place.
Policies currently in place point to a 2.8°C temperature rise by the end of the century. Implementation of the current pledges will only reduce this to a 2.4-2.6°C temperature rise by the end of the century, for conditional and unconditional pledges respectively.
And Pretty Much We Don’t Care
Remember Ricky Gervais at the 202 Golden Globe Awards? It was his last time hosting, hilarious, and he really didn’t care anymore.
It doesn’t appear that most people around the world care about climate change either.
Concern about climate change shrinks globally as threat grows, survey shows
Concerns about climate change shrank across the world last year, with fewer than half of those questioned in a new survey believing it posed a “very serious threat” to their countries over the next 20 years.
The source for the article was 2021 The Lloyd's Register Foundation World Risk Poll
Normalized deviance.
Climate Change is a Non-Linear Risk
INFOGRAPHIC: THE DIFFERENCE BETWEEN 1.5 AND 2 DEGREES WARMING
What’s The Difference Between 1.5 & 2.0 degrees Celsius?
A NASA report A Degree of Concern: Why Global Temperatures Matter gives us some idea. I’ve excerpted a few findings below; click through to see all of the findings.
Heat Waves
At 1.5 degrees Celsius warming, about 14 percent of Earth’s population will be exposed to severe heatwaves at least once every five years, while at 2 degrees warming that number jumps to 37 percent. Extreme heatwaves will become widespread at 1.5 degrees Celsius warming.
At Earth’s mid-latitudes, the hottest days will be up to 3 degrees Celsius (5.4 degrees Fahrenheit) hotter at 1.5 degrees Celsius warming and up to 4 degrees Celsius (7.2 degrees Fahrenheit) warmer at 2 degrees Celsius warming.
At 2 degrees Celsius warming, the deadly heatwaves India and Pakistan saw in 2015 may occur annually.
Drought
About 61 million more people in Earth’s urban areas would be exposed to severe drought in a 2-degree Celsius warmer world than at 1.5 degrees warming.
Water Availability
Between 184 and 270 million fewer people are projected to be exposed to increases in water scarcity in 2050 at about 1.5 degrees Celsius warming than at 2 degrees warming. Risks for groundwater depletion are projected to be greater at the higher temperature threshold as well.
Biodiversity
At 1.5 degrees Celsius warming, 6 percent of the insects, 8 percent of the plants and 4 percent of the vertebrates will see their climatically determined geographic range reduced by more than half. At 2 degrees Celsius warming, those numbers jump to 18 percent, 16 percent and 8 percent, respectively.
The consequences of such range changes could be considerable. Take insects, for example. Pollinating insects, such as bees, hoverflies and blowflies that support and maintain terrestrial productivity, including agriculture for human food consumption, have significantly greater geographic ranges at 1.5 degrees Celsius warming than at warming of 2 degrees.
Biome Shifts
The report projects entire ecosystems will transform, with about 13 percent of land areas projected to see their ecosystems shift from one type of biome to another at 2 degrees Celsius warming — about 50 percent more area than at 1.5 degrees warming.
Tundra and boreal forests in Earth’s high latitudes are particularly at risk of degradation and loss, with biome shifts likely in the Arctic and in alpine regions. Limiting warming to 1.5 degrees Celsius instead of 2 degrees is expected to prevent 1.5 to 2.5 million square kilometers (579,000 to 965,000 square miles) of frozen permafrost soils from thawing over centuries, reducing their irreversible loss of stored carbon.
Ocean Temperatures, Acidity, Oxygen Levels
Ocean warming, acidification and more intense storms will cause coral reefs to decline by 70 to 90 percent at 1.5 degrees Celsius warming, becoming all but non-existent at 2 degrees warming.
Food
Yields for such crops as maize, rice, wheat and other cereal crops will be smaller at 2 degrees warming than at 1.5 degrees, especially in sub-Saharan Africa, Southeast Asia and Central and South America. For example, global maize crop yields will be about 5 percent lower at 2 degrees warming.
Rice and wheat will become less nutritious. Projected food availability will be less at 2 degrees Celsius warming than at 1.5 degrees in Southern Africa, the Mediterranean, the Sahel, Central Europe and the Amazon. Seven to 10 percent of rangeland livestock will be lost at about 2 degrees Celsius warming.
What about at Higher Levels, say 3 degrees Celsius?
There’s a paper for that too. Global and regional impacts of climate change at different levels of global temperature increase tries to provide “consistent estimates of global and regional impacts and risks at increases in global mean temperature up to 5°C above pre-industrial levels, for over 30 indicators representing temperature extremes and heatwaves, hydrological change, floods and droughts and proxies for impacts on crop yields.”
The paper provides lots of detailed sensitivities, such as the differences in crop growing days between different agricultural products. Here is a summary from the abstract:
At the global scale, all the impacts that could plausibly be either adverse or beneficial are adverse, and impacts and risks increase with temperature change. For example, the global average chance of a major heatwave increases from 5% in 1981–2010 to 28% at 1.5 °C and 92% at 4 °C, of an agricultural drought increases from 9 to 24% at 1.5 °C and 61% at 4 °C, and of the 50-year return period river flood increases from 2 to 2.4% at 1.5 °C and 5.4% at 4 °C. The chance of a damaging hot spell for maize increases from 5 to 50% at 4 °C, whilst the chance for rice rises from 27 to 46%.
The effects of heat on any one variable look rather linear, but when combined (say shorter growing time and increased probability of a heat wave) may result in non-linear performance.
The Pricing of Climate Risk
A number of papers have begun to examine whether climate risk is priced into various securities. They generally find it is, but I will admit to still being skeptical.
The term structure of carbon premia (BIS)
Our paper explores a carbon premium – the extra yield investors demand to buy bonds issued by firms with more greenhouse gas emissions – in the US corporate bond market. We analyse the carbon premium along two channels. One is the preference channel, under which the premium reflects investors' preference for firms that they perceive as being more environmentally responsible, all else equal. The other is the risk channel, where investors perceive more carbon-intensive firms as more prone to default.
Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies (Federal Reserve)
We provide evidence of decoupling of insurance rates from their underlying risks and identify regulation as a driving force behind this pattern. Rates are least reflective of risk in states we classify as "high friction", i.e. states where regulations appear most restrictive. We identify two sources behind the decoupling. First, in high friction states, rates have not adequately adjusted in response to the growth in losses. Second, insurers have cross-subsidized high friction states by raising rates in low friction states. Our results imply that households in low friction states are disproportionately bearing the risks of households in high friction states.
Is Physical Climate Risk Priced? Evidence from Regional Variation in Exposure to Heat Stress (NBER)
We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal and corporate bonds as well as in equity markets. We find that local exposure to damages related to heat stress equaling 1% of GDP is associated with municipal bond yield spreads that are higher by around 15 basis points per annum (bps), the effect being larger for longer-term, revenue-only and lower-rated bonds, and arising mainly from the expected increase in energy expenditures and decrease in labor productivity. Among S&P 500 companies, one standard deviation increase in exposure to heat stress is associated with yield spreads that are higher by around 40 bps for sub-investment grade corporate bonds, with little effect for investment grade bond spreads, and with conditional expected returns on stocks that are higher by around 45 bps. These results are (i) observed robustly only starting in 2013–15, (ii) mostly absent for physical risks other than exposure to heat stress, and (iii) consistent with the class of macroeconomic models where climate change has a direct and large negative impact on aggregate consumption.
A Hotter Planet Is Already Warping Asset Prices (Bloomberg)
New research led by New York University economist Viral Acharya attempts to measure the extent to which those costs are already reflected in the pricing of stocks, corporate debt and municipal bonds. The researchers found a significant impact from heat stress exposure on all three.
Is Physical Climate Risk Priced? Evidence from Regional Variation in Exposure to Heat Stress (NBER)
We find that local exposure to damages related to heat stress equaling 1% of GDP is associated with municipal bond yield spreads that are higher by around 15 basis points per annum (bps), the effect being larger for longer-term, revenue-only and lower-rated bonds, and arising mainly from the expected increase in energy expenditures and decrease in labor productivity. Among S&P 500 companies, one standard deviation increase in exposure to heat stress is associated with yield spreads that are higher by around 40 bps for sub-investment grade corporate bonds, with little effect for investment grade bond spreads, and with conditional expected returns on stocks that are higher by around 45 bps. These results are (i) observed robustly only starting in 2013–15, (ii) mostly absent for physical risks other than exposure to heat stress, and (iii) consistent with the class of macroeconomic models where climate change has a direct and large negative impact on aggregate consumption.
Some Changes Are Already Inevitable
Major sea-level rise caused by melting of Greenland ice cap is ‘now inevitable’
The research shows the global heating to date will cause an absolute minimum sea-level rise of 27cm (10.6in) from Greenland alone as 110tn tonnes of ice melt.
Risk of death rises as climate change causes nighttime temperatures to climb
Mortality rates from excessively hot nights caused by climate change are predicted to increase up to 60 percent across three countries by the end of the century, according to a new international study.
The percent of the world in severe and extreme droughts has been rising.
And in the US our drought is extending.
During the week of Oct.11, 2022, apx. 82% of the continental US was abnormally dry according the the University of Nebraska-Lincoln’s Drought Mitigation Center
This is the highest percentage since 2000.
We went down to the River
(sorry Bruce)
Earlier this year, we were all talking about how the Rhine and Danube were drying up. Then it hit the Yangtze. Now we can focus on our home, the mighty Colorado and Mississippi river basins.
Colorado River
Colorado River conditions are worsening quicker than expected. Feds prepare to step in. (Denver Post)
Without enough snow this winter, the water level at Lake Powell — the country’s second-largest reservoir — will drop below a critical level by next November, according to a new report from the U.S. Bureau of Reclamation. Below that point, the Glen Canyon Dam will no longer be able to generate electricity and experts worry whether conditions will worsen to the point that the structure will no longer be able to send water downstream at all.
Especially in recent years, the upper-basin states of Colorado, New Mexico, Utah and Wyoming have repeatedly pointed to the lower-basin states of Arizona, California and Nevada as the main source of imbalance within the basin. Arizona and California specifically have been using more water than they’re allotted for years while the upper-basin states have always used less than they’re allowed.
The drought worsened still and the states agreed to more cuts in 2019, including steps to cut California’s water supply, and then again in 2021.
The agreements combined into five tiers of cuts, increasing in severity as Lake Mead sinks lower. To date, three of those tiers have been triggered and Squillace said he anticipates Reclamation to expedite the remaining two, which would save nearly 1.4 million acre-feet.
For context, an acre-foot is a volumetric measurement of water, a year’s worth for two average families of four. That potential 1.4 million acre-feet falls short when held up to the range of 2 million to 4 million acre-feet Reclamation has asked the seven states to save.
Need A Mississippi Lead
More than a third of the rainfall in the US ends up flowing down the Mississippi river. In New Orleans, the Mississippi river is now only 3’ above sea level. Salt water is now moving up the Mississippi from the Gulf. In some places, the Mississippi has dropped below minimum operating levels.
While the Colorado is affecting power, the Mississippi drought is affecting commerce and exports.
The Mississippi River basin produces 92% of the nation’s agricultural exports, 78% of the world’s exports in feed grains and soybeans, and most of the livestock produced nationally (NPS 2017).
One estimate I have found suggests the Mississippi drought will result in $20 billion in damage and economic losses.
The issue is serious enough the White House virtually convened senior government officials and industry leaders in transportation logistics to discuss U.S. government action to address historically low water levels along the Mississippi River.
The CEO of American Commercial Barge Line gives a nice 4 minute summary on CNBC.
It is also affecting drinking water. In Louisiana, the Army Corps is building a 1,500-foot-wide levee to keep salt water out of drinking water.
Increasing heatwave frequency in streams and rivers of the United States (ASLO)
Heatwaves are increasing in frequency, duration, and intensity in ocean, coastal, and lake ecosystems. While positive water temperature trends have been documented in many rivers, heatwaves have not been analyzed. This study examined heatwaves in rivers throughout the United States between 1996 and 2021. Riverine heatwaves increased in frequency over the study period, with the most robust increases occurring in summer and fall, in mid- to high-order streams, and at free-flowing sites and sites above a reservoir. The increase in heatwave frequency was accompanied by an increase in moderate strength heatwaves as well as a doubling of the annual mean total number of heatwave days at a site. Riverine heatwaves were often associated with normal or below-normal discharge conditions and at sites with a mean annual discharge ≤ 250 m3 s−1. These results provide the first assessment of heatwaves in rivers for a large geographic area in the United States.
Why Is Hydroelectricity So Green, and Yet Unfashionable? (IEEE Spectrum)
[H]ydro still matters more than any other form of renewable generation. In 2020, the world’s hydro stations produced 75 percent more electricity than wind and solar combined (4,297 versus 2,447 terawatt-hours) and accounted for 16 percent of all global generation (compared with nuclear electricity’s 10 percent).
[L]arge dams have historically been more reliable, producing power on average about 42% of the time, compared to 25% for wind and 12% for solar, according to BloombergNEF data.
The worst drought in 1,200 years this year in the US West means parched reservoirs can only churn out half of the power they normally supply to California, increasing the risk of rolling blackouts across the state. Nationwide hydro generation fell to 17.06 terrawatt-hours in September and was expected to plummet further in October, according to the Energy Information Administration, the lowest since September 2016.
In Europe, dried-up rivers reduced September hydro generation to the lowest since at least 2015, according to climate think tank Ember.
In Brazil, which typically relies on hydro for more than 60% of its electricity, a drought last year brought the country to the verge of power rationing and forced it to rely on increased imports from neighbors Uruguay and Argentina, or to buy expensive fossil fuels to make up the deficit.
[T]he worst drought in at least 60 years in Sichuan, a province the size of Germany, cut generation by 50% in August just as air-conditioning demand soared to counter a heat wave. Officials had to shut off power to many local factories for nearly two weeks, disrupting supplies for manufacturing giants including Apple Inc. and Tesla Inc.
How To Profit From Climate Change
We can always count on McKinsey, hence: Capturing the climate opportunity in insurance
Insurers have a once-in-a-generation opportunity to address these new forms of volatility—and help catalyze an orderly transition to net-zero emissions—through product and solution innovation.
Identifying and prioritizing climate-focused commercial opportunities
Insuring the net-zero transition
Creating new risk transfer solutions for rising physical risks
Providing adaptation and resilience services
Establishing go-to-market approaches to better source, underwrite, and diversify
Upstream partnerships with asset owners.
Marketplace partnerships that enable portfolio underwriting.
There is ‘Some’ Good News on Climate
The world seems to have broken the link between economic growth and CO2 emissions.
The world can make the transition if we get serious
Unfortunately,
Doing My Part
This year, I am going to undertake a rather futile, entirely symbolic gesture.
Many companies allow their senior executives and Board members to use corporate private aircraft for personal travel. For example, just using my former employer as an example not because they are a particular outlier,
The CMRC has approved the use of ... corporate aircraft and corporate aircraft owned by a third-party vendor by our Chief Executive Officer for personal travel, with an allowance of up to $195,000 per year.2
So my futile gesture will be to file a few resolutions where I am a shareholder simply stating:
The company will not allow executives or board members to use of corporate aircraft for personal travel.
I like to see leadership lead by example.
Wallace-Wells, Climate Reparations, New York Magazine
SCHEDULE 14A INFORMATION from Edgar