The Most Important Climate Change
How Will Investors React?
By Thomas H. Stoner, Jr. and Peter Backlund
Newsrooms and dinner table talk hum with observations about crazy
weather patterns and natural disasters from Hurricane Sandy to Philippine
typhoons. Scientists blame rising CO2 levels caused by human activities, mainly
energy production and use, and the greenhouse effect. The energy industry is finger-pointing
at the coal sector in a battle over solutions between
nuclear energy, clean-burning natural gas and natural resources like wind and
solar power. Glowing articles on the “fracking revolution” and the rapid rise
of new energy technologies have dominated the financial presses.
Meanwhile, the academic
institutions and government-funded
programs are fueling research on the potential impact of climate change by the
end of the century. There are countless studies on the potential impact of rising CO2 beyond key thresholds calculated by parts per
million in our atmosphere (last year CO2 concentration levels exceeded 400 ppm
for the first time in more than 800,000 years).
In the absence of aggressive actions to limit
are projected to reach about 800 ppm
by the end of the century. The entire world will become much warmer -— heat
waves, severe forest fires, intense rainfall, and floods will be more common, and sea
levels will rise by as much as a meter. The consequence will be both a natural and economic disaster for our
Many are asking what governments around the world will do to avoid such a calamity? Will they ever organize themselves under a Kyoto-style framework to address the problem by putting
a price on carbon through either capping and trading emission allowances or imposing a global tax? The question is a
good one. But the
more important question is, how will investors and businesses respond
to limitations on emissions, or even a likelihood of limitations? And how will they respond when they realize that
climate change itself threatens their operations and future income
Let’s look beyond the emergence of so-called
“impact investors” who are gaining steam in every trading market center, investing in renewable energy or sustainable agriculture. So let’s dismiss
them as another trendy rebranded phenomenon of socially-responsible investing.
Let’s instead focus on the steely-eyed hedge-fund trader with one finger on
the buy button
and one on the sell. Let’s go to the extreme. Imagine a math wizard who graduated from Wharton who trades by day and plays on-line gambling at night just to keep
the adrenalin flowing. How will this new climate data begin to shape his thinking?
Capital Expenditures on oil and coal deposits
Hedge-fund day traders with the capacity to buy and sell securities
nearly instantaneously at a global scale can either add trillions of dollars to our world values by driving up our indexes or take that
value right off the table in a matter of hours. Buying and selling is coordinated by the emergence of a new
worldview; typically one that is backed up by data. These guys love numbers and
they understand accounting principles. What they don’t like are hidden liabilities, which by definition, tend to be larger than what can be seen. Day traders know this and they can run for cover
unlike any other investor.
The Potsdam Institute has a calculation that
traders can easily
grasp. To keep temperature increases from exceeding 2 degrees Celsius, an aspiration already endorsed by many nations, global emissions
between now and 2050 have to stay below 550 GtCO2. The world’s existing fossil fuel reserves represent potential emissions
of about 2700 Gt-CO2.
Much of these reserves are valued as assets by publicly-traded companies. The top 100 listed coal
companies and the top 100 oil and gas companies represent potential emissions of 745 GtCO2. What will happen when investors start
to believe that the majority of these reserves have
to stay in the ground? Or that suppliers can only exploit them by paying for
removal of equivalent quantities of carbon from the atmosphere? Day traders
will hit the sell button and the carbon bubble will pop.
Sea level Rise and Storm Damage
“Super-storm” Sandy in October 2012 was a large and unusual weather event causing massive damages and
focusing media and popular attention on the issue of climate change and
hurricanes. Yet the real lesson is not yet widely appreciated. Sandy’s significance has less to do with the
impact of climate change on hurricane intensity and more to do with the impact
of the slow and steady rise in sea level and what this means for the future habitability of
A recent analysis by scientists
at NCAR and Climate Central indicates the current rate of sea level rise means that what is currently a “100-year” or a “1 in 100
year” flooding event at the Battery in New York City (near Sandy’s “ground zero”) will become a “1 in 15 year”
event by 2050. What is now seen as extreme coastal flooding at that site is
projected to become about six times more likely over the next 3-4 decades, even
in the area continues to grow.
How will this impact the wealth of the area, the profit margins of
developers, insurers, and reinsurers, and the decisions made by those who invest in such activities, including the day trader who owns
an expensive beach house? How will climate change, politics, and economics
interact in this instance? Will insurers be allowed to price risk
appropriately? Can coastal development continue at its currently projected
This is just the tip of the iceberg in considering the value of climate data for the enlightened day trader. Under the surface, how will businesses respond to the day trader? Business may be slow to
react. Businesses don’t usually interact with the
day trader directly. But other investors will see the changing values as
indices change. Bankers will become increasingly concerned about regulatory
risk as local governments seek to impose environmental costs on energy
Venture capitalists will look
beyond the changing tides to find
opportunities for low carbon or zero carbon alternatives. Conventional energy providers
will go from nearly unlimited sources of capital to
exploit their reserves to taxation as depletion allowances are eliminated and
tolls are erected to internalize the costs. Values for conventional energy will
drop to the floor.
By considering the capital markets, we see that it
is the day traders who will act as the gods from Mt. Olympus with the capacity
to cause tragedy or triumph within a single 8-hour trading day. The speed and
significance of their actions will be unparalleled to any action a single government,
or even a collection of governments, might make. But that doesn’t mean governments shouldn’t act.
governments fail to put a price on carbon, it is inevitable that the capital
markets will impose their own penalties. If governments do act, then what we
should expect to see is capital markets quickly adjusting and finding ways to
reward the victors.
Thomas H. Stoner Jr. is the author of Small Change, Big Gains,
Reflections of an Energy Entrepreneur (2013) and the founder of Project Butterfly, a
collaboration among scientists, business leaders, and the global community
dedicated to addressing climate change by uncovering opportunities to
decarbonize economies. For more information please visit: http://projbutterfly.com or www.smallchangebiggains.com
Peter Backlund serves on the board of
directors of Project Butterfly. He is also the former Director of the Integrated
Science Program and External Relations at the
National Center for Atmospheric Research.