Wealth Creation and the New Energy Economy

Looking at the markets from a 30,000 foot level, some interesting shifts are occurring. And yet they are almost completely under the radar screen. While many in the oil and gas industry make comments that the renewable energy markets are not sufficiently mature for the world to transition, it is interesting to note that that may not be the case at all. A recent report issued by Bloomberg New Energy Finance makes some interesting prognostications. Bloomberg states:

“By 2030, the world’s power mix will have transformed: from today’s system with two-thirds fossil fuels to one with over half from zero-emission energy sources. Renewables will command over 60% of the 5,579GW of new capacity and 65% of the $7.7 trillion of power investment.”

And that is without much shift in current policy to incentivize renewable production. If countries were to get serious about climate change, these figures could presumably be accelerated. In fact, Bloomberg states that most of this global growth will be driven by economics rather than policy. Costs are falling quickly and the financial markets are becoming more comfortable with the investment profiles. That means that we don’t have to rely completely on political will. But even in this arena, all is not lost.

The World Bank issued a report on global carbon pricing in May, 2014 which stated:

“Today, 39 national and 23 sub-national jurisdictions – responsible for almost a quarter of the global greenhouse gas emissions – have implemented or are scheduled to implement carbon pricing instruments, including emissions trading schemes and taxes, building the momentum for a bottom-up approach to climate action.”

Further, and perhaps even more interesting, in spite of a lack of bipartisan leadership in the US on the issue of climate change and pricing carbon, the capital markets are nevertheless imputing what amounts to a carbon tax on companies who are emitting greenhouse gases. KPMG, one of the largest accounting firms in the US, found that the markets are discounting corporate valuations at the rate of ~ $28/ton of carbon emitted. Clearly this figure needs to be higher but it is a start. KPMG states:

“Although federal regulation has yet to be adopted, our results suggest that the capital markets are already anticipating the effects of the costs of carbon emissions on firm value…These results are consistent with the argument that the capital markets impound both carbon emissions and the act of voluntary disclosure of this information in their firm valuations.”

And it doesn’t stop there. Standard&Poor’s, one of the preeminent ratings agencies has recently warned:

“Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness, in most cases negatively.”

That equates to a wake up call for governments worldwide. In addition, Farmers Insurance in early 2014 brought nine class action law suits against municipalities near Chicago for not preparing adequately for climate related events. Farmers stated:

“Farmers is asking to be reimbursed for the claims it paid to homeowners who sometimes saw geysers of sewage ruin basement walls, floors and furniture.”

In the lawsuits, the company claimed it paid policyholders for lost income, evacuations and other damages related to declining property values. While the suits were later dropped, this was clearly the proverbial shot across the bow by the insurance industry making the point that they will not single handedly carry the burden for climate related events. Nor should they. It could also open the door for the industry to bring suits against corporations that are large emitters of greenhouse gases, i. e. oil and gas firms, thereby effecting a Clash of the Titans.

In short, there appears to be an underlying current which is gathering momentum. But perhaps most importantly, all of this is laying the groundwork for significant new opportunities in wealth creation. Examining climate change through this more expansive lens seems infinitely more palatable than the hollow rhetoric of “less is more”. Indeed, opportunities probably have never been greater.