Foresight - Markets

Climate Progress Dashboard shows further improvement, but the pace of change remains too slow

An improvement in electric car sales in China moves the dial on our progress dashboard the right way, but higher investment in oil is a setback.

13/05/2019

Andrew Howard

Andrew Howard

Head of Sustainable Research, ESG

Entering the second quarter of 2019, Schroders’ Climate Progress Dashboard points to a long run temperature rise around 3.8°C. Although the direction of travel remains positive, the pace is pedestrian relative to the sprint needed to meet the commitments leaders made in Paris to limit temperature rises to 2°C. Containing temperature rises to that “safe” level implies a lot more disruption in the years and decades ahead.

The Climate Progress Dashboard provides a bird’s eye view of the speed and scale of climate action across the spectrum of areas that will drive decarbonisation. Schroders created the dashboard to provide our analysts, fund managers and clients with an objective measure of the pace of climate action, helping them to navigate a challenge that will have a dramatic impact on financial markets, but which is too often dominated by sound bites, emotion and rhetoric.

As has been consistently the case since we started tracking climate indicators through this dashboard, last quarter saw both positive and negative moves.  As has also been true, the positive changes won out, pushing the long run temperature implied by the range of measures we examine down to 3.8°C, from 3.9°C three months ago.

On the positive side, electric vehicles move ahead

A sharp rise in electric car sales during Q1 was the biggest driver of the improvement. In January, global sales almost doubled, driven largely by China, where sales almost tripled compared to the previous year and plug-in electric cars reached almost 5% of passenger vehicle sales.  Electrifying transport is not a solution to climate change in itself, but insofar as passenger cars contribute around one-tenth of global greenhouse gas (GHG) emissions, electrifying that fleet – and investing in clean energy to power it – is an important step toward decarbonisation.  The example is a microcosm of the web of changes that climate action demands, and highlights the importance of looking across a wide range of indicators to track climate action. 

Buoyed by a strong start to the year, electric car sales have risen by around 80% compared to the first quarter of last year.  That pace looks unlikely to be sustained, not least as the industry’s largest market, China, has recently cut subsidies on new cars and announced plans to phase them out entirely by 2020.  However, growth in the industry remains impressive and so far at least has accelerated; during 2012-2016 the global market grew by 53% annually, by 58% in 2017, 65% in 2018 and 80% in Q1.  That strong start puts global electric vehicle sales on a pathway toward the penetration levels consistent with a long run temperature rise around 2.9°C based on our interpretation of the International Energy Agency’s (IEA) scenario projections. 

Have investors missed the real revolution in electric vehicles?

Two other indicators edged in the right direction during Q1. First, Gallup released its annual survey of the US public, finding that 65% of respondents worry a “great deal” or a “fair amount” about climate change, up from 63% last year.  That move pushed our barometer of public concern, which we view as a precursor to political action, towards tougher action.  Second, several new carbon capture and storage (CCS) projects were added to the Global CCS Institute’s database of projects, perhaps reflecting growing support for investment in that technology to augment rather than substitute efforts in other areas.

On the negative side, energy industry capital investment continues to rise

On the negative side of the ledger, the major headwind lay in the rising capital investment of the global oil & gas sector.  We track the global industry’s capital investment, relative to its assets, using data from Thomson Reuters. The rate of investment, minus the natural rate of decline from existing fields, provides a measure of the extent to which the industry is investing for future growth. The current rate of investment – close to 8% of the industry’s assets, would lead to production growth at the pace needed for a long run temperature rise close to 5°C.

We warned last year that if the upturn in oil prices over the last 18 months poses a challenge to the industry, will producers restrain capital investment as prices and cash flows improve, demonstrating deliberate rather than enforced discipline, or will investment escalate as it has in past cycles?  The jury remains out but significant changes for the industry lie ahead if it is to demonstrate its ability to adapt to a decarbonising world, or even the world policymakers, business and technological changes already paint.

oil price versus web chart

Source: Thomson Reuters, Schroders

Meeting global climate goals is becoming an increasingly disruptive proposition

The National Oceanic and Atmospheric Administration (NOAA) has confirmed that 2018 saw the fourth largest rise in greenhouse gas emissions on record.  Atmospheric concentrations reached 410 parts per million (ppm) in January.  To put that level in context, the baseline level was 280ppm in the late-1800s before widespread industrialisation and 450ppm is level the International Panel on Climate Change (IPCC) estimates will limit expected temperature rises to 2°C. If the atmosphere’s capacity to absorb greenhouse gases without dangerously destabilising temperatures was a filling bathtub, it would be three quarters full and the flow from the tap would be growing. That goal remains in reach but much tougher action is needed, with widespread disruption across global industries.  That change of pace remains elusive, but when it comes, its effects will spread across economies and financial markets.

 

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