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Morgan Stanley: “Climate Will Be A Key Driver Of Asset Prices In The Months And Years Ahead”

Morgan Stanley: “Climate Will Be A Key Driver Of Asset Prices In The Months And Years Ahead”

“Sunday Start”, authored by Morgan Stanley equity strategist, Jessica Alsford

In three weeks, the world’s leaders will begin to gather in Madrid for the 25th United Nations Climate Change Conference. The intensity of the global climate strikes this year suggests that the proceedings will be scrutinized as never before. But the decisions made, or not made, will also have repercussions for global markets.

We’re transitioning towards a lower carbon economy, albeit at a slower pace than needed to stay within a two degrees Celsius climate scenario (2DS). For companies that can build offshore wind installations, develop electric vehicles and manufacture renewable diesels, we see potential for material earnings growth. In Decarbonisation: The Race to Net Zero, we estimated that more than US$50 trillion of capital will need to be deployed into renewables, EVs, hydrogen, biofuels and carbon capture and storage over the next 30 years, putting US$3-10 trillion of EBIT up for grabs.

Decarbonising electricity is the largest opportunity to reduce carbon emissions, with the power sector responsible for a quarter of global emissions. Strong renewables growth should be achievable given the significant improvements we’ve seen in solar and wind economics. But costs continue to constrain many other clean technologies, including battery storage, green hydrogen, CCS and biofuels.

If governments are serious about halting climate change, some form of stimulus will be needed.

Subsidies have already been key in industries like renewables. In the US, federal subsidies have helped to drive the transition to renewable energy, which rose from 14% of total power generation capacity in 2000 to 24% in 2018.

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Guest Post: Carbon emissions will reach 37 billion tonnes in 2018, a record high

Guest Post: Carbon emissions will reach 37 billion tonnes in 2018, a record high

Pep Canadell, CSIRO; Corinne Le Quéré, University of East Anglia; Glen Peters, Center for International Climate and Environment Research – Oslo; Robbie Andrew, Center for International Climate and Environment Research – Oslo, and Rob Jackson, Stanford University
Carbon dioxide (CO₂) emissions from fossil fuels and industry are projected to rise more than 2% (range 1.8% to 3.7%) in 2018, taking global fossil CO₂ emissions to a new record high of 37.1 billion tonnes.

The strong growth is the second consecutive year of increasing emissions since the 2014-16 period when emissions stabilised, further slowing progress towards the goals of the Paris Agreement that require a peak in greenhouse gas emissions as soon as possible. Strong growth in emissions from the use of coal, oil and natural gas suggests CO₂ emissions are likely to increase further in 2019.

Strong energy demand is behind the rise in emissions growth, which is outpacing the speed at which decarbonisation of the energy system is taking place. Total energy consumption around the world increased by one sixth over the past decade, the result of a growing global middle class and the need to provide electricity to hundreds of millions of people living in poverty. The challenge, then, is for all nations to decarbonise their economies while also satisfying the need for energy, particularly in developing countries where continued growth in energy supply is needed.

These analyses are part of the new annual assessment of the Global Carbon Project (GCP), published today in three separate papers. The GCP brings together scientists who use climate and industrial data from around the world to develop the most comprehensive picture of the Earth’s sources and sinks of greenhouse gases.

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Our energy challenge in 6 eye-popping charts

Our energy challenge in 6 eye-popping charts

Renewable energy is winning and coal is on the skids. Disruption of the fossil fuel industry is well under way, and the global energy system is being decarbonised. We’re right on track, right?

To avoid dramatic climate system tipping points, the world needs to decarbonise very quickly and start drawing down the level of carbon in the atmosphere, because it’s already unsafe. As one dramatic example, in past periods when greenhouse levels were similar to the current level, temperatures were 3–6°C higher and sea levels around 25–40 metres higher than in 1900.

So climate warming is now an existential risk to human civilisation, that is, an adverse outcome that would either annihilate intelligent life or permanently and drastically curtail its potential. It is now too late for incremental, measured steps to protect what we care about. Winning slowly is now the same as losing.

So how are we going with our energy system? It is the predominant source of the dramatic human-caused rise in the level of greenhouse gases, which over the last century has increased 70 percent, from 280 parts per million carbon dioxide equivalent (ppm CO2e) to 480 ppm CO2e.

The question is pertinent, with the Guardian reporting last week, “Rise in global carbon emissions a ‘big step backwards’, says BP” on news that global electricity emissions rose 1.6% in 2017 after flatlining for the previous three years, despite renewable power generation growing by 17% last year, because “strong economic growth led to above-average energy demand, coal use bounced back in China and efficiency gains slowed down, causing emissions to jump”.

And there was this from China:

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