IPCC Report Issues ‘Last Call’ to Start Journey to +1.5°C

Summary

• The Intergovernmental Panel on Climate Change states bluntly that immediate cuts in emissions are essential to have any chance of limiting global warming to 2°C.
• Across 3,675 pages, it lays out different global warming scenarios and offers a now-familiar menu of policy solutions.
• In a nod to reality, the IPCC report stresses any steps to cut emissions will make a difference.

Market Implications

• The clean energy ETFs that we track have yet to perform, and we doubt the IPCC report will stimulate fresh demand – that will await a significant influx of government money that seems unlikely to happen soon.
• The better investment for now may be infrastructure and construction companies that will have to rebuild as new climate disasters hit.

Introduction

The Intergovernmental Panel on Climate Change (IPCC) has released its latest report – all of 3,675 pages. You cannot help but wonder how much emissions were spent in the effort to educate people about the dangers of global warming. You might laugh or shake your head, but this is hardly a trivial matter –all the effort to date has not moved the needle much. This chart from the report pretty much says it all:

Currently, the world is producing over 55 gigatons (GT) of carbon and carbon-equivalent emissions annually. For all the high-minded commitments and actions that some 195 countries have made so far, we are on track to produce 60 gigatons by 2050.

But, to have a chance of limiting global warming to 2°C, we must ideally cut emissions to 40 GT by 2030 and 20 GT by 2050. The limit for +1.5°C is much lower at 30 GT and 10 GT by 2030 and 2050, respectively.

For the record, those 2030 targets are the easy part. They involve ending fossil fuel power plants, switching to mostly electric transportation, insulating buildings and the like. These could be achieved with current technology – all that is needed is money and will. The 2050 targets will be far more difficult. They will entail changing energy intensive industrial processes, aviation, ocean shipping, and developing safe nuclear power – problems that don’t have practical solutions today.

The report plainly states that ‘unless there are immediate and deep emissions cuts across all sectors, 1.5°C is beyond reach.’

Nothing new there:  That was the message last year at COP26 in Glasgow. Since then, China has allowed its steel industry to extend its peak emissions goal by five years to 2030. The US has been unable to enact legislation that would commit $555bn to try to achieve emissions targets consistent with 2°C, let alone the 1.5°C goal. When the world’s economic leaders set that kind of example, it is little surprise many smaller countries have not met their pledges to limit emissions.

There is some good news, however. Emissions have been rising more slowly in recent years than previously. In the US, renewables account for 12.6% of energy consumption and 19.8% of electricity generation, according to the Energy Information Administration. In the EU these statistics are considerably higher, at 20% and 38%, respectively. But clearly, in the general scheme of things, these are baby steps.

But even baby steps count. If the IPCC report is despairing of hitting even the 2°C goal, it stresses that any steps to limit or cut emissions will make a difference.

Traditional Infrastructure May Benefit From Climate Disasters

We have recommended various clean energy ETFs that invest in battery makers and associated raw materials miners (LIT and BATT), solar energy (TAN), and wind power (FAN). We expect they will benefit as significant government investment starts to flow. We doubt the IPCC report will do much to fire them up – unless Congress somehow decides to act. We stress this is an intermediate-term trade.

The more immediate opportunity probably lies with infrastructure and construction companies that will rebuild after climate-related disasters happen. We continue to think PAVE, IFRA and PKB ETFs are attractive investments.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)