Climate dashboard points to 4°C rise despite healthy increase in carbon prices
The latest update to our Climate Progress Dashboard implies the current pace of change - across the measures we track - will lead to long-run temperatures rises of around 4° Celsius.
17 October 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 – launched last year – is designed to give investors an insight into the progress governments and industries are making towards meeting the 2°C 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 of around 4°C:
We introduced the Climate Progress Dashboard to help our analysts, fund managers and clients track climate action1. 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.2
- Up to 300 million people would be affected by coastal flooding.3
- One third of the world’s population would face water shortages.4
- 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.5
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.
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.6
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.
Source: Thomson Reuters, RGGI
The rise – which began a year ago – stems from the European Union’s changes to the its Emissions Trading Scheme (ETS). 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.
1. Meeting global leaders’ commitments to limit temperature rises to two degrees will require action across a range of areas, by a range of stakeholders. The dashboard plots the long run rise in temperatures implied by efforts in each area, providing a birds eye view of the speed and scale of climate action across the spectrum of areas that will need to change. It provides a more complete view than any indicator in isolation. Please visit https://www.schroders.com/en/about-us/corporate-responsibility/sustainability/climate-progress-dashboard/ for more details ↩
3. See the Stern Review: http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/sternreview_index.htm ↩
6. For instance, the Prime Minister of Fiji and President of COP 23 recently highlighted the lack of preparation by signatory countries↩
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.