One year after Schroders launched the Climate Progress Dashboard, we take a look at the advances made in curbing global temperature rises.
The Climate Progress Dashboard was created to help Schroders’ analysts, fund managers and clients track climate action. Meeting global leaders’ commitments to limit temperature rises to 2°C will require action across a range of areas, by a range of stakeholders.
The dashboard plots the long-run rise in temperatures implied by efforts in each area, providing a bird’s eye view of the speed and scale of climate action across the spectrum of areas that will need to change. It provides a more complete view than any indicator in isolation.
When we launched it a year ago, the Climate Progress Dashboard pointed to a 4.1 degree temperature rise. Since then, it has fallen slightly to 4 degrees. Indicators are moving in the right direction, and there are reasons for optimism looking at individual indicators, but it is also clear that far faster action is needed and far more disruption lies ahead.
Stepping back to review the last twelve months, the chart below plots the changes in the temperature rises implied by each indicator since first publication. While moves in the wrong direction (toward higher temperatures) equal the number pointing to improvements, there are reasons for optimism in the overall picture.
Source: Schroders Climate Progress Dashboard. Note: compares the absolute change in temperature rise implied by each indicator, comparing the most recent values to those published when we introduced the dashboard. The terms in the chart are explained here.
On the negative side, in January we highlighted a global slowdown in financial flows into climate solutions such as clean energy. Yet despite setbacks in the US, where the political backdrop is doing little to encourage investment, other regions seem committed to promoting action. For example, the European Union (EU) has unveiled a package of new policy proposals aimed at mobilising capital markets to help meet the €180 billion annual investment in climate solutions it targets.
Fossil fuel production also rose further than more ambitious climate scenarios implied. After falling for the previous three years, global coal production rose in 2017, according to the most recent BP Statistical Review. Political ambition also saw a setback over the last year, though we note that the revision was affected by methodology changes in its calculation.
On the positive side, average global carbon prices have more than doubled since the middle of last year, following reforms announced to the EU Emissions Trading Scheme. China’s plans for a nationwide carbon trading scheme, also announced in late 2017, adds to our confidence that more widespread and material carbon prices will provide impetus for further action.
While fossil fuel production rose more quickly than environmental groups hoped, there is some encouragement from declining investment in that industry. Tracking capital investment and where it is made - relative to the industry’s current assets - helps us gauge the pace of future demand growth. Amid lower prices and pressure on the industry to show restraint, investment in new capacity has fallen in recent years. The test of that resolve will become clearer in coming quarters, as the traditional stimulus of higher oil prices feeds into decision making.
Finally, continued rapid growth in both electric vehicle sales and renewable energy capacity highlight the pace of change in those technologies, where declining costs are redefining economics in power generation and road transport. The World Economic Forum has concluded that renewable energy is already lower cost than fossil fuels in over 30 countries and will be cheaper globally by 2020. Electric vehicles similarly benefit from rapid cost declines, which autonomous driving will accelerate. In short, technology advances in key areas are driving change even without tougher political intervention.
In summary, the 2018 scorecard shows a mixed picture, with a small move in the right direction overall. However, we believe the overall picture is a little more positive than the headline figure suggests. In particular, growing use of electric vehicles and clean energy technologies underline the falling reliance on politicians to drive climate action, which given their limited impact to date should prove positive.
In this annual update, we have introduced some changes to the dashboard. Under the “Entrenched Industry” category, we have created new categories for “Fossil Fuel Production” and “Fossil Fuel Reserves”.
The first combines global production of oil, gas & coal, based on the energy content of each hydrocarbon, and replaces two measures we used previously examining oil & gas and coal production separately. While the data behind the calculations is the same, we think looking at the aggregate provides a clearer picture of the state of progress. Meeting long-term emission reduction goals requires a decline in consumption of all three fuels, and the mix of those fuels used in International Energy Agency (IEA) projections for different climate scenarios is somewhat arbitrary.
The dashboard showed coal production – which has dropped close to 1% per annum over the last five years – almost in line with the IEA’s 2 degree scenario. On the other hand, oil and gas production – which has risen at twice that pace – pointed to a far higher temperature rise. Insofar as both outcomes depend on the IEA’s assumptions over the future fuel mix, looking at the combination provides a picture that is less sensitive to the vagaries of IEA modelling. The new, combined measure points to a 5.6 degree temperature rise, which is unchanged from the value implied by considering the fuels separately.
The new Fossil Fuel Reserves measure gauges the pace of increase in new fossil fuel reserves. It compares the volume of fossil fuel reserves added annually to the long-term pace of demand growth in each temperature scenario. It’s well understood that the volume of fossil reserves discovered already far exceeds the amount which could be burnt while meeting global leaders’ commitments to keep temperature rises under 2 degrees.
As a result, exploration spending to grow reserves more quickly than demand will rise points to over-optimism by the industry. We calculate the temperature rise implied by reserve growth by comparing the level of new reserves added to long run fossil fuel demand growth in each temperature scenario. Currently, that analysis implies fossil fuel reserves are growing at a pace consistent with a 4.6 degree long run temperature rise.