Investment Insights

Schroders Climate Dashboard points to four degree rise — despite increase in carbon prices

The latest update to the Schroders Climate Progress Dashboard implies the current pace of change, across the measures we track, will lead to long-run temperatures rises of around four degrees Celsius.

19/10/2018

Global temperatures are on course to rise by 4 degrees above pre-Industrial Revolution levels, according to the latest reading from the Schroders Climate Progress Dashboard.

The analysis follows the Intergovernmental Panel on Climate Change's warning on 6 October that “rapid and far-reaching” change will be needed to meet the climate commitments global leaders have made.

The Schroders Climate Progress Dashboard was launched in 2017 in the UK and is designed to give investors an insight into the progress governments and industries are making towards meeting the two degree temperature rise target set by the Paris Agreement in 2015.

The dashboard ­— updated quarterly — identifies the long-term temperature rise the world is most likely to face, according to indicators spanning politics, business, technological progress and energy. All 12 indicators identified by Schroders as key drivers and controls of climate change still point to significantly higher temperature rises.

The dashboard findings explained

Andrew Howard, Head of Sustainable Research at Schroders, explains why the current level of action continues to point to long-run temperature rises:

“We introduced the Climate Progress Dashboard to help our analysts, fund managers and clients track climate action. Climate change is an unavoidable investment challenge – temperatures will rise or economies and industries will be reshaped. Tracking the scale and pace of change is therefore vital to managing the investment risks it presents. 

“Our analysis points to a long-run temperature rise of around 4°C. The apparently modest difference between two and four degrees is dramatic in practical terms. Scientific studies have estimated that the tangible implications of a four degree rise would include:

  • Global crop yields would fall 30-40% below current levels, on average
  • Up to 300 million people would be affected by coastal flooding
  • One third of the world’s population would face water shortages
  • Global economic losses could build to $23 trillion over the next 80 years; equal to permanent damage three or four times the scale of the 2008 Global Financial Crisis, and continuing to escalate.

“Even those estimates are fraught with uncertainty. There is no historical precedent on which to draw and no one is quite sure how rising concentrations of greenhouse gases will affect temperatures or physical damage. 

“We believe policymakers recognise that threat and will respond more strongly than they have to date. Improving economics for many clean technologies are driving adoption even without policy action. We expect (and hope) that the next few years will see tougher action, prompting a resetting of market expectations and a repricing of the future winners and losers from climate action,” Howard says.

Why carbon prices are a bright spark

Global leaders have an opportunity to demonstrate their commitment at the upcoming Katowice Climate Change Conference (COP 24) in December. The likelihood of dramatic announcements seems low; preparation has been limited and publicity muted, in contrast to the noise that has preceded past breakthrough announcements.

However, markets have provided a stronger signal more recently. The most material change to the dashboard over the last quarter stems from rising carbon prices in both Europe and the US. 

In Europe, the price of carbon credits has risen from €15 a tonne to over €20/t since the middle of the year, reaching more than €25/t in mid-September. That level has not been seen since 2009. The rise has pushed the temperature increase implied by carbon pricing in isolation from 4.1 degrees to 3.4 degrees over the last three months. The blue line reflects European carbon prices relative to a US equivalent in yellow.

The rise – which began a year ago – stems from the European Union’s changes to its Emissions Trading Scheme.  Those changes go a long way to reversing the excess supply of credits, tightening that market and giving teeth to the intended purpose of incentivising efficiencies and investment in clean technologies. 

There is much further to go. We estimate prices will need to rise as far as $100/t to meet long-term emissions reduction targets. Carbon pricing also represents just one step towards real change on climate action.

As ever, for every two steps forward there is a step backward.  Last quarter, we highlighted the importance of continued discipline in capital investment across the oil and gas industry, another of our measures.  As prices rise, it tempts growth-focused producers into opening their wallets.

Quarterly financial data from that industry highlights the risk: the industry's capital investment implies long-term production growth is now slightly higher than a year ago. Discipline has not capitulated, and the headwind to overall progress is smaller than the tailwind from rising carbon prices, but investment discipline lies at the heart of fossil fuel producers’ ability to decarbonise, and will be a key focus going forward.  

On the overall state of play, steps toward climate action are moving in the right direction, albeit at a stroll rather than the sprint which will be needed.

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