ESG & Institutional Investment

Part 2

Henrique C. Martins

Climate Change Economics

This class is based on the Climate Change Economics webinar available at https://www.aeaweb.org/webcasts/2020/climate-economics-part-1.

Today, we will discuss:

Global Energy Systems and Markets

The idea here is to understand more about the effects of climate change problems, how to create sounding policies globally, and how to create a framework of thinking to tackle environmental issues.

I hope that this class will give you a deeper understanding of the challenges and opportunities presented by the global energy system and help you develop the skills needed to create sound policies and contribute to the global effort to address climate change.

We will not talk much about the S and the G today.

Climate Change Economics

Main takeaways

Energy is critical for growth
Developing countries will grow and will consume more energy
Fossil fuels are expected to meet much of this growth
Fossil fuels are inexpensive
Fossil fuels are abundant

Climate Change Economics

The main issue of discussion today is the Global Energy Challenge (we will understand what is that in a minute). China grew a lot and one reason is inexpensive energy.

Climate Change Economics

The main issue of discussion today is the Global Energy Challenge (we will understand what is that in a minute).

To really tackle E problems, we need to find ways to pursue three goals at the same time:

Access to inexpensive and reliable sources of energy.
How to manage the pollution that comes as the energy is used (so the quality of life does not worsen).
How to manage the CO2 emissions (i.e., Climate Change).

The Global Energy Challenge is how to balance these issues.

Climate Change Economics

Pollution in SP has been higher than recommended for a while.

Climate Change Economics

The traffic is intense everywhere.

Climate Change Economics

Still, public transportation works but only to some extent.

Climate Change Economics

To change that, we need energy. Energy is critical for growth Source

Climate Change Economics

To change that, we need energy. Energy is critical for growth Source

Climate Change Economics

There is a strong correlation between growth and energy consumption.

It is hard to find a single measure but for each 1% in GDP growth, the energy consumption increases around 0.5%

Climate Change Economics

And there are many parts in the world not consuming much energy.

Perhaps most striking, notice the number of countries consuming not much energy. They are mainly developing countries.

If we believe they will grow more rapidly in the future, they will consume more energy.

There is no evidence in data of countries getting rich without consuming energy.

The idea of decoupling energy consumption from growth is actually a thing in some countries.

Still, poor countries are not doing a good job in that area.

Climate Change Economics

The idea of decoupling energy consumption from growth is actually a thing. Source

The UK, Germany, Denmark and Switzerland are some examples of where energy use has remained flat or even declined.

Climate Change Economics

The idea of decoupling energy consumption from growth is actually a thing. Source

There are some projections that are more positive.

Climate Change Economics

The idea of decoupling energy consumption from growth is actually a thing. Source

The decoupling of the rates of economic growth (climbing steadily) and energy demand growth (ascending, but less steeply) will largely be a function of the following four forces:

a steep decline in energy intensity of GDP, primarily the consequence of a continuing shift from industrial to service economies in fast-growing countries such as India and China
a marked increase in energy efficiency, the result of technological improvements and behavioral changes
the rise of electrification, in itself a more efficient way to meet energy needs in many applications
the growing use of renewables—resources that don’t need to be burned to generate power

Climate Change Economics

Demand will grow more rapidly in developing countries, where most of the world’s population lives.

Climate Change Economics

Demand will grow more rapidly in developing countries, especially in east Asia.Source

Climate Change Economics

Developing will grow more than developed countries.

Climate Change Economics

Developing will grow more than developed countries.

Climate Change Economics

In fact, there are very low levels of energy consumption in many parts of the world where many billions of people actually live.

And they are expected to consume more if they want to grow.

To say that they will not consume more is the same to say that they:

will not grow,
will have access to clean energy, technology, etc.
will decouple energy consumption from growth in a way that, even today, richer countries don’t.

Climate Change Economics

Fossil fuels are expected to meet much of this growth.

Climate Change Economics

Fossil fuels are inexpensive. New nucler is the most expensive because they can’t build plants anymore.

Climate Change Economics

Source

Climate Change Economics

Source. Around 60 BRL cents, around 10-12 cents USD. Although Brazil is very “clean”, the cost is about the same.

Climate Change Economics

The takeaway is:

So, if you think that developing countries will grow without using fossil fuels…

…you believe they will pay 2-3 times more for energy.

Climate Change Economics

Fossil fuels will be around for a while. Source.

Climate Change Economics

We keep finding new reserves of fossil fuel.

Climate Change Economics Source

Climate Change Economics

The takeaway is: we have more oil and coal than needed.

We have more than 100 years of fossil fuels yet.
Additionally, we keep finding new fossil fuels for decades.
Oil is basically limitless (at the least for the timeframe of most discussions).

Climate Change Economics

And if you think that tackling the transportation problem is enough, it is not!

Climate Change Economics

So the million dollar question is:

How can we, as a society, tackle the environmental problem in a way that is fair (across countries)?

Answers based on the idea of “everyone should do a part” are not really helpful in the sense that we would never agree on what the responsibilities are.

Consequences

Climate Change

Climate is expected to change.

Climate Change

It is not about 2C higher on an average day. It is about the distribution & variation of the increase. This is where problems are. Limiting to 2C does not really mean much.

Climate Change

Also, most of these days will occur in developing countries (as we will see in a report in a few slides).

Which brings again the question that How can they grow while limiting the effects of pollution and energy use?

Climate Change

Source

Pollution

Not necessary to say that fossil fuels increase pollution…

… that shorten people’s lives.

Pollution Source

Pollution

AQLI

Pollution

Policy

To create sounding policies, we need to understand causal relationships between variables. Only then, we will make progress when drawing social policies.

This is where things can get tricky.

This is where research empirical design plays a role.

To understand the real causal effects of pollution on health, we would need Randomized Control Trials.

And the reason is quite simple, several risk factors are correlated (pollution, poverty, bad nutrition, smoking, etc).
We would need to separate one from another, which is not easy empirically.

Policy

For instance, to answer questions such as

“Does pollution affect life expectancy?”
“Does a 4-day week affect productivity?”
“Does diversity affect performance?”
etc.

Ideally, we would need Randomized Controlled Trials (RCTs).

Policy

This is an experimental design that intends to answer causal questions.

Unfortunately, the current debate almost always ignores these problems.

The current debate is way less technical than it should be.

But to actually find good answers, we need a more technically-grounded debate.

It is kind of our job to improve the debate.

THANK YOU!

Henrique Castro Martins