Economics & Growth | ESG & Climate Change
Summary
- This is the first instalment in a series on global warming and climate change.
- We review basic facts about how the global environment and climate have changed since the Industrial Revolution.
- Geological history over the past 500 million years reveals a clear link between GHG levels (particularly carbon) and global temperatures.
- Global GHG levels soared in recent decades and are far higher than the previous 800,000 years. Global temperatures are about 1°C higher than preindustrial levels. Sea levels have risen 25cm.
- Future instalments explore how these changes are impacting the climate, economies and markets.
Market Implications
- Governments and companies are beginning to respond to observed changes to date.
- Whatever their views about climate change, investors must understand these developments and how they may affect economies and markets.
Everyone knows the weather has changed over the past few decades. We see hotter summers, more storms, extensive wildfires in California and Australia, and shorter winters. Former president Donald Trump arguably won one election and lost another because voters disagreed on (among other things) whether these changes fall within normal weather variation or reflect broader and more permanent climate change due to manmade greenhouse gas (GHG) emissions.
But few are waiting to find out. Exxon shareholders recently elected two new board members who pledged to reduce the company’s reliance on fossil fuels. Companies worldwide are facing increasing pressure from activist investors to improve the ‘E’ in their environmental, social and governance (ESG) scores. And policymakers are trying to set policies to limit global warming to 1.5°C over preindustrial levels, or at least well below 2°C. President Joe Biden has announced a goal of halving GHG emissions by 2030.
Whatever their personal beliefs, investors must start factoring in whether and how these actions and goals may affect the overall economy and investment opportunities and risks across countries, sectors and companies.
This is the first in a series of articles about the investment implications of climate change and the policies evolving to address it. Our purpose is less to opine on the causes of climate change or whether it is real, but more to think through the implications of how climate change and related debate and policies may impact the environment, society, economies and markets.
In this instalment, we dig into the science – and controversy – over climate change. Much confusing information exists that makes it easy for extremists on both sides of the debate to argue their cases. Our focus here is on the facts that we know today, from the geological record and what has happened in recent decades.
Where Did 1.5°C Come From?
Scientists have warned of rising temperatures and global warming at least since the 1970s. It has been a growing social issue for the past 30 years, yet concerns escalated significantly during the early 2000s.
The idea of setting a 1.5°C limit on temperature increase relative to preindustrial levels first surfaced in 2008. Then, many countries were settling on a goal of 2°C. Yet a group of small island states, believing the higher limit would be devastating for them, strongly argued for the lower limit. At the Copenhagen Climate Change Conference in 2009, delegates settled on the 2°C goal, saying 1.5°C was unrealistic. At the time, the temperature had increased about 0.6°C since preindustrial times.
By 2015, when Paris United Nations Climate Change Conference was held, sentiment had shifted. Delegates agreed to try for 1.5°C, but in any case, well below 2°C.
The Intergovernmental Panel on Climate Change (IPCC) formalized this in 2018. The IPCC reviewed existing climate science and presented several scenarios of temperature increases and possible consequences. Among its influential recommendations, it said that to limit the temperature increase to 1.5°C, GHG emissions must fall 45% by 2030 and to net zero by 2050. By then, the temperature increase was approaching 1°C.
Greenhouse Gases and Global Warming
The mechanics of global warming are straightforward. The sun provides radiant energy. Energy not absorbed by land or water is radiated back into space. GHGs in the atmosphere absorb some of the Earth’s radiation and reflect it back to Earth, warming the atmosphere. The more GHGs, the more potential warming. And a decline in GHGs causes global cooling. Were there no GHGs, the Earth’s temperature would fall to -20°C/-4°F.
The primary GHGs are carbon dioxide (80%), methane (10%), nitrous oxide (7%) and various fluorinated gases (3%). Water vapor also acts as a GHG. Together they amount to about 1% of the atmosphere. Excluding water vapor, the other GHGs amount to a scant 0.0433% of the atmosphere or about 433 parts per million (ppm). Below, we use ‘carbon’ or related terms to refer to carbon as a specific GHG[1] and ‘GHG’ for greenhouse gases except water vapour.
The Geological Record Is Revealing
Since the Industrial Revolution began in 1750, the volume of atmospheric CO2 has risen from 280ppm to 415ppm, or about 48%. About half of this happened since 1980. It seems extraordinary that such tiny trace amounts could so profoundly impact the climate, but the historical record is compelling.
Over the past 800,000 years, atmospheric CO2 ranged from about 180ppm to 300ppm (Chart 1). During eight downcycles, global temperatures fell about 6-8°C relative to the preindustrial 18th century and caused eight ice ages. During the interglacial periods, temperatures rose to about 0-4°C. (Temperatures are expressed relative to preindustrial temperatures, or 1750-1800.)
Wobbles in the Earth’s orbit and axis that affected how much sunlight hit higher latitudes appear to have caused the fluctuations in temperatures and carbon levels. With more sunlight, the oceans warmed and released carbon into the atmosphere. With less sunlight, the oceans cooled and absorbed atmospheric carbon, bringing on ice ages.
The last time carbon dioxide was at present levels was about 3.3 million years ago. The Earth was about 3-4°C warmer then. The polar caps were minor, and sea levels were 15-25m higher. But this is hardly a prologue for what awaits us: the Earth at that time was in a long-term cooling trend that would lead to a series of ice ages 2.5 million years later (Chart 2).
During the preceding 500 million years, carbon levels ranged from about 500ppm to 2,000ppm (Chart 3). Global temperatures fluctuated with these changes but were generally 5-12°C hotter. Small wonder that cold-blooded reptiles and dinosaurs thrived during this period – warm-blooded mammals only appeared about 180 million years ago, during one of the cooling cycles.
Various factors caused carbon and temperatures to alter across geological time. These include changes in the sun’s intensity, wobbles in the Earth’s orbit, shifting land masses, changes in ocean currents, the development of plants, and volcanic activity.
To summarise, over geological time, changes in global temperature and climate have been closely tied to the atmospheric CO2 level.
Where Are We Today?
Carbon emissions – Carbon emissions have been rising sharply since World War II (Chart 4). Carbon emissions due to human activity – in particular, burning fossil fuels and industrial processes – have risen from about 5 billion metric tons (MT) a year in 1950 to 36 billion MT in 2020.
Actual total emissions in 2020 were considerably higher, at 50 billion MT. Land use, including agriculture, deforestation, and wildfires released an additional 6 billion MT. And other GHGs, primarily methane, contributed 8 billion MT of carbon equivalent.
Like carbon, methane has risen enormously since 1750, from 0.8ppm to 1.8ppm. That is problematic because it is 10 times more potent than carbon as a GHG. However, it dissipates within a decade; carbon can linger in the atmosphere for centuries.
Most of the focus today on controlling GHG is on carbon, for several reasons. It is the dominant GHG; it is easy to measure; and it is potentially the easiest way to reduce GHG emissions. Our discussion below is primarily about carbon.
Natural carbon sinks – plants and oceans – absorb roughly 50-55% of the 42 billion MT of global annual carbon emissions. The rest, about 20 billion MT, enters the atmosphere. 7.8 billion MT of CO2 corresponds to 1ppm. Net carbon emissions are therefore causing atmospheric carbon to rise by about 2.5ppm annually.
Temperature – There is general agreement that global temperatures have risen since the preindustrial era.[2] In the press and various technical documents, the change can be as high as 1.3°C or as low as 0.6°C. This discrepancy makes it easy for climate activists to argue that immediate, drastic action is required to curb GHG emissions. Climate change sceptics, meanwhile, can argue that any warming is happening much slower than climate models predicted so the furore about climate change is vastly overdone. Many climate scientists would say temperatures have risen about 1°C.
The basic answer is that they are all correct. Global temperatures do not rise in a straight line. Major events like El Niño and La Niña can cause temporary spikes and drops in temperatures for a given year (Chart 5a). 2020 was the second-hottest year since measurements started, hitting 1.3°C.
Climate scientists prefer to look at the change over time. A five- and 35-year linear trend relative to the 1880-1920 period shows an increase of about 1-1.1°C.
Scientists may also calculate temperature changes relative to other periods. Per the benchmark in Chart 5b (1950-1980), global temperatures have risen about 0.6°C.
Regarding benchmarks, convention is to use 1880 or an average of the 1880-1900 or 1880-1920 periods because that is when systematic global measurements of air and ocean temperatures started. Some prefer 1750 because that is when the industrial age started. That adds about 0.15°C. But some also use 1951-1980 because temperatures were in a stable range then before lifting off (Chart 5b).
Ocean Heat and Rising Sea Levels – Since 1880, sea levels have risen about 245mm or 9.5in (Chart 6a). About 40% of this occurred since 1980 when GHG emissions accelerated. Over this time, ocean surface temperatures have risen about 0.7°C (Chart 6b).
The reported rise in global temperatures since 1880 is a blend of air and sea temperatures. Normally global temperatures change gradually, and air and ocean temperatures change roughly in line. Yet air temperatures have risen considerably more than sea temperatures since 1980, by about 0.8°C (Chart 6a). The relationship clearly broke down since GHG emissions accelerated in recent decades.
However, the underlying dynamic is still in place. Over time, the ocean will absorb the air temperature rise, increasing sea temperatures until an equilibrium returns. This will lead to more ice melting at the polar caps and ocean water expanding, both of which will contribute to rising global temperatures and sea levels even if GHG concentrations remain at present levels.
Concluding Remarks
We have aimed to lay out basic facts about changes in the global climate system since the industrial age began, particularly the past 40 years.
- The geological record shows a clear relationship between the level of carbon and GHGs in the atmosphere and global temperatures.
- GHG concentrations in the atmosphere have accelerated over the past 75 years, mostly due to manmade activity – in particular burning fossil fuels, industrial processes, and deforestation.
- Global temperatures and sea levels have both risen perceptibly.
- And more extreme weather events seem to have increased in frequency and severity, although the evidence so far is primarily anecdotal.
In future instalments, we explore the implications of these changes so far for the climate and debate on climate change, and what they may mean for economies and markets in coming years.
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We use ‘carbon’, ‘carbon dioxide’ and ‘CO2’ interchangeably throughout this report. Strictly speaking, the GHG is carbon dioxide or CO2. Generally speaking, when people use ‘carbon’ in a GHG context, they mean carbon dioxide, not the element carbon ↑
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Scientists measure global temperature change by taking sea and air temperatures near the surface around the globe. A temperature anomaly is calculated as the difference between the observed temperature and a long-term average. These individual anomalies are aggregated and averaged to come up with an average global temperature change. ↑