Carbon costs at $1,056 a ton?
A recent research paper from the US National Bureau of Economic Research (May 2024) should trigger plenty of useful disputes but may end up shaking up valuations badly once its full impact sinks into financial market minds.
Through more granular metrics of temperature shocks (defined as +/- 0.1°C to 0.3°C…) and of local economic impacts, it purports to track the fact that such temperature shocks are actually ‘locally’ devastating: 3 to 4 times worse in terms of economic impact than suggested by the research hitherto conducted at a more macro level.
Mssrs. Bilal and Känzig research (http://www.nber.org/papers/w32450) found that ‘a 1°C rise in global temperature lowers world GDP by 12% at peak. Second, we use our reduced -form results to estimate structural damage functions in a simple neoclassical growth model. We find that climate change leads to a present value welfare loss of 31% and a Social Cost of Carbon (SCC) of $1,056 per ton of carbon dioxide (tCO2)’.
Earlier research stopped at a 1% to 3% trimming of GDP as the price to pay for a 1°C rise in global temperature while the EU carbon price is hovering between €60 and €90/t, at some distance from the admittedly-hard-to-compute ‘social cost of carbon ‘ (akin to a long term comprehensive measure of the cost of a marginal ton of carbon).
Should the markets care?
Yes, as a 30% drop in the present value of welfare cannot really be dodged by investors. A constant feature of the investment community is that everyone will be a smarter investor able to avoid the pitfalls of a (faster) warming planet. That cannot be and amounts to a denial of a hugely complex issue. Corporates know that and are deeply worried by the additional transparency required from them through the CSRD regulation. It is simply fiendishly difficult to provide an intellectually honest comprehensive picture of interlocked issues.
European regulations to drive issuers and investors toward a greener path are hideously complex even though they barely scratch the surface of the complexity of adapting to a new order. AlphaValue has stressed repeatedly that global warming and greening up answers are a case of falling ROCEs and sharply rising Waccs, plus deflationary consequences. In short debt holders are more likely to navigate a brave new greener world order (including shocks to democracy) than equity holders.
Of course there is no benefit in acting early and many benefits in playing the ostrich rather than the proverbial messenger. Thanks to Mssrs. Bilal and Käntzig for shaking up that tree though.
In a recent review of the surge in the cost of natural catastrophes (largely related to global warming consequences), AlphaValue mentioned sectors that provide a theoretical hedge:
- Reinsurance (rather than insurance) as it is an oligopoly that can charge for scarce AAA capital.
- Pharmas as temperature shocks amount to as many health shocks.
- Construction materials as global warming/Nat Cats are a reconstruction effort on top of better building requirements.
The reverse side of this coin are all the sectors with substantial physical assets, say industry and retail at large.
Through more granular metrics of temperature shocks (defined as +/- 0.1°C to 0.3°C…) and of local economic impacts, it purports to track the fact that such temperature shocks are actually ‘locally’ devastating: 3 to 4 times worse in terms of economic impact than suggested by the research hitherto conducted at a more macro level.
Mssrs. Bilal and Känzig research (http://www.nber.org/papers/w32450) found that ‘a 1°C rise in global temperature lowers world GDP by 12% at peak. Second, we use our reduced -form results to estimate structural damage functions in a simple neoclassical growth model. We find that climate change leads to a present value welfare loss of 31% and a Social Cost of Carbon (SCC) of $1,056 per ton of carbon dioxide (tCO2)’.
Earlier research stopped at a 1% to 3% trimming of GDP as the price to pay for a 1°C rise in global temperature while the EU carbon price is hovering between €60 and €90/t, at some distance from the admittedly-hard-to-compute ‘social cost of carbon ‘ (akin to a long term comprehensive measure of the cost of a marginal ton of carbon).
Should the markets care?
Yes, as a 30% drop in the present value of welfare cannot really be dodged by investors. A constant feature of the investment community is that everyone will be a smarter investor able to avoid the pitfalls of a (faster) warming planet. That cannot be and amounts to a denial of a hugely complex issue. Corporates know that and are deeply worried by the additional transparency required from them through the CSRD regulation. It is simply fiendishly difficult to provide an intellectually honest comprehensive picture of interlocked issues.
European regulations to drive issuers and investors toward a greener path are hideously complex even though they barely scratch the surface of the complexity of adapting to a new order. AlphaValue has stressed repeatedly that global warming and greening up answers are a case of falling ROCEs and sharply rising Waccs, plus deflationary consequences. In short debt holders are more likely to navigate a brave new greener world order (including shocks to democracy) than equity holders.
Of course there is no benefit in acting early and many benefits in playing the ostrich rather than the proverbial messenger. Thanks to Mssrs. Bilal and Käntzig for shaking up that tree though.
In a recent review of the surge in the cost of natural catastrophes (largely related to global warming consequences), AlphaValue mentioned sectors that provide a theoretical hedge:
- Reinsurance (rather than insurance) as it is an oligopoly that can charge for scarce AAA capital.
- Pharmas as temperature shocks amount to as many health shocks.
- Construction materials as global warming/Nat Cats are a reconstruction effort on top of better building requirements.
The reverse side of this coin are all the sectors with substantial physical assets, say industry and retail at large.
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