Today’s global economy is driven by carbon-based fossil fuels – coal, oil and gas. These are used for transportation and to produce most of the world’s electricity and petrochemicals. However, the world is already in transition to a low-carbon economy, driven by two major factors: climate change and technical development.
The last four years were the warmest years since systematic record-keeping began in the 19th century. There is a need to reduce the impact of this climate change, which is being exacerbated by greenhouse gas (GHG) emissions, largely from fossil fuel use.
In many, but not all, countries the tide of sentiment is already turning against coal, which is the most emissions-intensive fossil fuel, contributing almost 30% of global GHG emissions. However, a lot more needs to be achieved, as the world has already warmed by an average of just over 1°C since pre-industrial times, and is on track to warm by just over 3°C by 2100 if the current level of emissions reduction pledges is achieved. This compares to the aim of the 2015 Paris Agreement of keeping global temperature rise this century to well below 2°C above pre-industrial levels, and to pursue efforts to limit the temperature increase even further to 1,5°C.
Global climate policy is moving slowly but relentlessly, with the Paris Agreement setting the rules but not the extent of emissions reduction: however, many companies, cities and US States are setting their own quicker pace.
Then there is the rising public awareness of climate change and mass protests for action, particularly in Europe. Such protests may not happen in China, but its modernisation target calls for fundamental improvements of environmental quality, necessitating an energy revolution to slowdown the growth of energy consumption and to phase out fossil fuel use.
Technical development is accelerating, in materials science, energy, digitalisation, connectivity and computer processing power. In many counties, including South Africa, electricity from solar and wind sources now has less than half the generation cost of coal and nuclear generation.
Technical innovation is leading to the advent of electric vehicles – at the expense of the oil industry. Electric vehicles use 25% of the energy of a petrol- or diesel-driven vehicle. Their batteries can be used to store surplus solar energy during the day, for use at night in domestic and commercial installations. A bonus is that if renewable (solar, wind, hydro or biomass) or nuclear power is used, there are no GHG emissions.
Smart electrical grids are destroying the traditional electrical supply industry, in which supply must continuously follow demand. Instead, smart meters and smart appliances are used to smooth out the peaks and troughs of demand; batteries are used to storage excess energy and higher tariffs are imposed during periods of peak demand.
A fourth industrial revolution(4IR) is underway, following on from:
4IR is being driven by:
4IR is moving fast and exponentially rather than linearly. It is not going to be just another useful notion that we must manage or incorporate into our lives, it’s going to be the most disruptive thing we will see.
It is fusing the physical, digital and biological worlds, and is impacting all disciplines, economies, and industries. It is reshaping the nature of work – on the one hand by automating work and robotising jobs, on the other hand by releasing skilled people from the more tedious aspects of work, allowing them to focus on using their skills.
The low-carbon future economy: When?
Global policy development on emissions reduction is progressing only slowly. However, there is increasing awareness of the problems of climate change, which has led to the development of carbon pricing – that is putting a price on GHG emissions. National schemes either implemented or scheduled to be implemented currently cover about 20% of global GHG emissions.
Most importantly, the transition is being driven by technology development. With all the uncertainties – including the impact of climate change, the pace of technical development, public perceptions and development of global carbon policy – the low-carbon future might arrive as early as 2040, or as late as the end of the century. But arrive it will.
What are the risks in getting through the transition?
Because the world is not moving quickly enough, physical impacts are inevitable from changed weather patterns – heat waves, floods and droughts. Countries, companies and communities will have to adapt to new conditions.
Companies need to worry about reputational risk – are they perceived to be doing enough to facilitate the transition, be this directly in their own operations or in the case of a bank, indirectly through their loans to emissions-intensive operations? This could extend to liability risk – there are hundreds of current climate-related cases around the world.
Companies also need to worry about market risk. Will a demand for their current products or services even exist in a low-carbon economy? Regulatory risk arises from policy actions to constrain adverse effects of climate change, such as carbon pricing, or to promote adaptation. Further transition risks arise for companies by moving too quickly, or too slowly, relative to their markets and customers.
Task Force on Climate-related Financial Disclosures (TCFD)
The transition to a low-carbon economy requires significant and, in some cases, disruptive changes across economic sectors and industries in the near term. There are implications for the global financial system, especially in terms of avoiding financial dislocations and sudden losses in asset values. Given such concerns, the G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board (FSB) to review how the financial sector can take account of climate-related issues.
The TCFD was established by the FSB to develop voluntary, consistent financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding the climate-related risks and opportunities of individual companies. Recommendations were issued in June 2017.
TCFD is being said by the JSE and the Banking Association of SA to be the next significant development in financial reporting. It is already supported by more than 500 multi-national and South African companies, and the recommendations are incorporated in the Carbon Disclosure Project questionnaire. The question has now become not whether to manage climate risk, but how to do it.
South Africa and the transition
South Africa is in a very difficult position on climate change. It has a GHG emission intensive economy, largely because of its dependence on coal.
Its emissions reduction pledge to the global community, under the UN Paris Agreement of 2015, is deemed to be inadequate – if all countries had the same low level of ambition as SA, the average global temperature would be 4°C warmer in 2100 (compared to the currently projected 3°C).
The SA government is planning to introduce carbon taxation in 2019, and carbon budgeting in 2021.
SA is very vulnerable to the physical effects of climate change. Even with an 3°C average global rise, the SA interior is projected to rise over 6°C – which is more than the average temperature difference between Johannesburg (16°C on a 24-hour 365-day basis) and Durban (21°C). Adaptation is going to be key.
What can a company do to manage the transition?
First and foremost, a company must be constantly aware of what is happening on climate change and technological innovation; the various political, regulatory and technical responses; and the amplifying factors such as public perception, and fossil fuel divestment campaigns. This is an existential business sustainability risk, not a “compliance” or an “environmental” issue with a focus on physical impacts.
It should identify all the relevant business sustainability risks and incorporate them in its risk governance process. The TCFD framework is a useful tool for this. Opportunities are always much more difficult to identify than risks. But if a company does not find new opportunities, it risks its business being disrupted by others. A company should at minimum report its GHG emissions and reduction plans annually to the Carbon Disclosure Project (CDP). This is a good basic framework for managing current and future emissions.
In the light of the many uncertainties, forecasting how the future world and business environment will look is futile. A company should rather generate some plausible scenarios which cover the range of possible outcomes. This indeed is one of the recommendations of the TCFD. Many companies are now adopting the TCFD scenario and other recommendations.
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Source: EE plublishers