Politics and Business: Climate Change Policy Approaches a Turning Point

POLITICS AND BUSINESS: CLIMATE CHANGE POLICY APPROACHES A TURNING POINT 

SPEECH BY EILEEN CLAUSSEN
PRESIDENT, PEW CENTER ON GLOBAL CLIMATE CHANGE

DAVID BRADFORD SEMINARS ON SCIENCE, TECHNOLOGY, AND ENVIRONMENTAL POLICY
WOODROW WILSON SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS
PRINCETON UNIVERSITY

November 7, 2005

Thank you very much.   It is a pleasure to be here at the Woodrow Wilson School and an honor to be delivering the David Bradford Seminar this week.   I knew David when he was at the Council of Economic Advisors, and found him to be honest, thoughtful and engaged, so it is a double honor for me to be giving this seminar. 

I am here today to talk about climate change policy.  And I must admit that in the current political environment, with White House investigations and Supreme Court nominations dominating the agenda, it is a challenge to break through the noise and get people to pay attention to this issue.  But never fear.  In preparing my remarks, I had a couple of ideas for how to get action on climate change in the current political environment:

One is to start naming hurricanes after members of Congress who still say we don’t know enough about this issue to act.   Or telling   the White House that if they think they’re in hot water now, just wait.  It’s only going to get hotter. 

In all seriousness, the title of my remarks today is Politics and Business: Climate Change Policy Approaches a Turning Point.   And I want to revise that, given the attention that’s gone to the recent bestselling book by the New Yorker writer Malcolm Gladwell.  Rather than saying climate change policy is approaching a turning point, I want to say it is approaching a tipping point. 

Gladwell defines a tipping point as “that one dramatic moment when everything can change all at once.” Granted, we are not there yet on climate policy, but we are certainly getting close. And I think there are two reasons for that: One is that the science of climate change has reached a point where it simply cannot be ignored or pushed aside. And the second reason is the growing number of financial and business leaders that are saying it is time to take this issue seriously – indeed, many are saying that it would be irresponsible not to take it seriously. As the private sector becomes increasingly vocal and active on this issue, particularly here in the United States, there is no doubt in my mind that our nation’s elected leaders will finally reach their tipping point – and step up and act.

Why are corporate leaders putting climate change on the agenda? The answer is simple: this is an issue that poses very real risks for business – and opportunities as well. And to ignore it is like ignoring those radar pictures we became so accustomed to this fall – those images of huge storms barreling toward our coastline. You can turn off the TV if you want, but that will not change the fact that we are all in the projected storm track for climate change. A business or an investor who is not thinking long and hard about how to respond is going to be like all those wrecked homes and boats we saw in the after-storm coverage. The boats all beaten and washed up on shore, the homes a shell of their former selves.

It is a tribute to the foresight of many in the private sector that they understand this and are beginning to plan for doing business in a world where climate change is a dominant concern. And today I want to talk about what investors and companies around the world are saying and doing about this issue.

Climate Change Science: An Open-and-Shut Case

But first I want to talk very briefly about the hurricanes we have seen this fall – and I will remind you the season’s not over yet. The U.S. Gulf Coast, as all of you know, was hit hard by hurricanes this year. Katrina alone killed more than 1,200 people, and we all know about the enormous destruction it left behind – an entire city decimated; 1 million displaced from their homes in coastal areas of Louisiana and Mississippi alone.

At the Pew Center, we have been quite busy answering questions about whether Katrina and these other storms were the product of global warming. And the honest answer is we don’t know for sure – no one does. But what we do know is that hurricanes draw their strength from the heat of the surface waters in the ocean. And as those waters get warmer, they are more likely to produce stronger storms. While Katrina was moving across the Gulf, the surface waters were unusually warm, about 2 degrees above normal for that time of year. Around the world, sea surface temperatures are more than 1 degree warmer on average than they were a century ago. So, whether or not Katrina and company were directly influenced by climate change, and there is certainly a case to be made that they were, they nevertheless are a sign of things to come.

Scientists have established beyond any reasonable doubt that the climate is changing, that these changes are the result of human activities, and that these changes are likely to become more pronounced – and more dangerous – in the decades to come. Instead of detailing all the various studies, I will refer you to the Pew Center website, www.c2es.org, for an overview of what we know.

An Economic Toll As Well

But it is not only the science of climate change that should cause us to stand up and take notice; it is also the economics of climate change. Katrina alone is projected to cost U.S. taxpayers as much as $200 billion. We saw disruption in our energy supplies, higher fuel prices, losses of farmland and crops, destruction of countless businesses large and small, effects on ports and shipping, and much more.

Consider the economic impact on the energy sector alone. Because of Katrina and Rita, 90 percent of crude oil production in the Gulf of Mexico was still “shut in” as of mid-October, meaning companies had made little progress in restoring output. Seventy-two percent of offshore natural gas production was still offline. And we’ve all heard what that is going to do to home heating bills this winter.

This is happening, I remind you, in an area that is responsible for 30 percent of U.S. oil production and about a quarter of our natural gas output. And that’s not even the whole story of how these storms damaged our energy infrastructure – because they also hit a region that boasts nearly half of the nation’s refining capacity. At its peak, Rita closed 16 refineries in Texas and Louisiana that together account for more than 5 percent of refining capacity. Some of these suffered significant damage and are likely to remain closed for months.

And the energy industry wasn’t alone in suffering these direct economic losses. Insurers took a big hit as well. Overall insured losses from Katrina and Rita are estimated at between fifty and seventy-five billion dollars. That’s not even counting the losses Wilma incurred in Florida, at this point estimated at between 8 and 12 Billion.

It is no wonder that the insurance industry has been out in front on the climate issue and making the case for action. Here is a statement from Munich Re Group, one of the world’s largest reinsurers. “The increasing weather extremes linked to impending climate change are already causing weather catastrophes of a new dimension.” End quote. According to another insurance giant, Allianz, climate change is increasing the potential for property damage at a rate of between 2 and 4 percent every year.

Allianz and Munich Re are not the only insurance companies that believe climate change is a risk. In the United States, AIG had this to say: “On the risk side, especially in the longer term of several decades and more, the potential impacts of climate change such as temperature rise, increased weather disturbance activity and sea level rise pose risks of widespread and possibly devastating damage to infrastructure in low-lying coastal areas, to forests and other ecosystems, to food production, to water resources and to human health. In turn, these potential consequences could result in far-reaching negative impacts on economies and societies worldwide.” End quote.

I believe the leadership of these insurance companies and their industry is emblematic of a broader shift in the private sector. You could say that insurers are the tip of the iceberg – and this one’s not melting.

The Investment Community Takes Note

Another segment of the private sector that is increasingly willing to raise this issue as a real concern is the investment community. Last May, there was a gathering at the United Nations titled the 2005 Investor Summit on Climate Risk. Participants included representatives of U.S. and international pension funds with collective assets of $5 trillion. CalPERS and CalSTERS, the pension funds for the state of California, were there, as were many other institutional investors from around the world. And the reason they were there was to talk about both the risks and the opportunities that climate change poses for investors.

Risks and opportunities. When you are entrusted with investing billions or trillions of dollars, you had better know a fair amount about both of these eventualities. What risks does climate change pose for investors? How can they know that the companies they invest in are positioned to manage those risks? And, in a similar sense, how can they gauge whether companies are prepared to take advantage of new opportunities presented by the growing movement toward regulation and carbon constraints?

The risks of climate change for the business sector can be broken out in three key ways. First, there is litigation risk – companies could face lawsuits. Some of these may be frivolous, while others may have merit. Either way, business needs to factor the risk of litigation into their planning.

The second category of risk facing the business sector is physical risk. Some sectors and businesses will face direct consequences from the physical impacts of climate change, including not just hurricanes, but also drought, sea level rise and flooding. I already talked about insurance companies. But what about agriculture, forestry, real estate and other industries that hinge on the physical environment?

In addition to litigation risk and physical risk, there is also regulatory risk – the risk of government taking action on this issue in a way that affects corporate profits. And this is the risk area that is likely to have the most immediate and substantial impact on businesses and investors.

I know what you are probably thinking. You are thinking that the chance of any meaningful regulation coming out of Washington on this issue any time in the near future is pretty dim. Of course it all depends on your definition of how near “near” is. And you are probably right. But the fact is that many companies, including U.S.-based multinationals, already are experiencing climate-related regulation in their operations in the EU, Canada and other countries working to implement the Kyoto Protocol. And, even here in the United States, most of the CEOs I talk to tell me they view regulation as an inevitability. Maybe not tomorrow or the next day, but sometime soon.

In fact, some of these CEO’s seem to prefer the certainty that comes with regulation to the no-man’s land they are operating in today. Consider what Jeff Immelt, CEO of GE had to say: “Long-term certainty would help us all make smart decisions,” he said. He continued: “We believe that the government can provide leadership by clarifying policy, by committing to market mechanisms [and] by promoting diverse energy sources.”

Jim Rogers, the CEO of Cinergy Corp., said it a little more succinctly: “One day, we will live in a carbon-constrained world.” End quote.

These are the CEO’s of major, major industry, and in the case of Cinergy, a major coal-burning energy company. And the air of inevitability in Jim Rogers’ statement should certainly be a wake-up call for investors that regulatory risk is real.

But of course, it is not just the risks associated with climate change that are attracting the attention of the investment community. It is also, as I said, the opportunities. Those companies that lead the way in low-emission vehicles, clean coal technologies, clean energy, and technologies for slashing emissions are going to be the winners in the 21st-century economy.

Right now, California’s massiveenvironmental risk management into the due diligence process of its private equity divisions.

What’s more, as part of the policy, JP Morgan Chase said it supports reductions in greenhouse gas emissions through market-based, national policies. This is a leading global financial services firm – $1.1 trillion in assets. And now it is leading in another way as well.

The actions of JP Morgan Chase and together with the United Nations Investor Summit on Climate Risk, are clear signs that investors are beginning to take this issue seriously.

And they are not the only signs. A couple of years ago, we saw the launch of The Ca state pension system is investing significant amounts in alternative energy businesses. GE plans to spend an additional $1.5 billion on research on clean technology. And every month, it seems there is another story of a major venture capital or private equity firm – I am talking about the big names like the Carlyle Group – investing in clean energy deals. So while there are many risks, there are also many opportunities out there because of climate change, and savvy investors know it.

Is everyone seeing this as an investment opportunity? Of course not. Just last month, Exxon Mobil announced nearly $10 billion in third-quarter profits but said it has no plans to put any of those earnings toward the development of alternative energy sources. “We’d rather re-invest in what we know,” said the company’s spokesman.

So it may not be for everyone. But you can’t deny that the investment community is beginning to factor climate change into their strategies and research. Last April, for example, JP Morgan Chase announced a set of environmental principles to guide the firm’s global investments and business efforts. Among the highlights: JP Morgan Chase will incorporate rbon Disclosure Project, or CDP. This is an initiative that enables a large number of institutional investors to collectively sign a request to companies for disclosure of their greenhouse gas emissions and climate strategies. When this project was launched in 2003, 35 investors totaling $4.5 trillion in assets signed on. Then in 2004, 95 investors accounting for $10 trillion became signatories. This year, the request to companies went out under the signatures of 155 institutional investors with combined assets of $21 trillion.

CDP then sends this request to the 500 largest companies in the world. Currently, more than 350 of these companies currently report their emissions and climate strategies through the CDP website.

What is happening here, I believe, is a reflection of the post-Enron, post-World Com environment. Investors are asking companies for an even higher level of transparency and information, not just in their accounting but in other risk areas as well. California’s massive pension funds and many others are actually pressuring the SEC to enact separate disclosure rules specific to greenhouse gas emissions.

A related factor in the movement toward greater disclosure is Sarbanes-Oxley. Because of this law, growing numbers of U.S. companies are weighing whether climate change may create a material impact on future earnings. And, as the number of companies disclosing emissions and exposure to climate-related risk increases, Sarbanes-Oxley actually strengthens the hand of activist shareholders who are pressing companies that have not yet addressed the issue.

A study by CERES last year found that oil and gas companies faced a record total of 31 shareholder resolutions on the climate issue in 2004. The filers of these resolutions included state and city pension funds, a foundation, socially responsible investment firms, and religious pension funds. And an important focus of the resolutions was risk disclosure – in other words, to what extent are these companies preparing for looming constraints on their carbon emissions?

So the bottom line, if you will excuse the pun, is that investors are flexing their muscle on this issue – these investors do not want to see corporate boards and CEOs with their heads buried in the sand. They want to see an acknowledgment of the problem, an understanding of its potential impact on business performance, and concrete strategies for staying ahead of the problem and even turning it into a platform for new products and increased profitability.

Business Steps Up to the Plate

And the good news is that those investors who are concerned about this issue are beginning to get what they want from the companies they invest in. At the Pew Center, we work with 41 leading companies to promote action on climate change. These are mostly Fortune 500 companies with a combined market capitalization of over $2 trillion and 3 million employees. They represent most industrial sectors and many of the largest emitters of greenhouse gases, including coal-burning utilities, mining companies, aluminum producers, automobile manufacturers, pulp and paper manufacturers, chemical companies, oil and gas businesses, and the cement industry. Council members include BP, Shell, General Electric, American Electric Power, DuPont, Toyota, Whirlpool, Intel, and more.

In joining the Council, these companies are united with the Pew Center in several beliefs, including this one – and I quote:

“We accept the views of most scientists that enough is known about the science and environmental impacts of climate change for us to take actions to address its consequences.”

To date, 30 of the 41 companies that work with the Pew Center have set targets to reduce their emissions, many of them more stringent than those in the Kyoto Protocol. And 13 of these companies already have met or exceeded at least one of their targets. And not a single one of these companies has found that it cost them money or market share. Of course, no one is under the impression that long-term efforts to address climate change will be cost-free. But the sooner we begin and the more we do to help companies manage these costs through market-based and flexible strategies, the more we will realize that we can reduce emissions without causing real and lasting damage to the economy or our competitiveness.

Let me talk briefly about what three of the companies we work with are doing – and I will start with one of the world’s largest companies, GE. GE just joined the Pew Center in July. It has committed to reduce its greenhouse gas emissions by 1 percent by 2012, relative to 2004 levels, and it will increase energy efficiency by 30 percent. Based on the company’s projected growth, GE’s emissions would have risen 40 percent by 2012 without further action.

But this is really not what is significant about GE. Much more important is that GE is committed to doubling its investment in environmental technologies to $1.5 billion by 2010. Think about that for a moment: $1.5 BILLION by 2010 – that is basically the equivalent of starting a new Fortune 250 company – focused exclusively on clean technology. These efforts are part of GE’s “Ecomagination” initiative to aggressively bring to market new technologies that will help customers meet pressing environmental challenges. In one instance here, you have a company addressing both the risks and the opportunities of climate change.

I also want to tell you about the work of Cinergy. I quoted Cinergy’s CEO, Jim Rogers, at the start of my remarks. This is a company that burns more than 30 million tons of coal each year, and it devoted its entire 2004 annual report to climate change – not to debunk the issue or attack the science, but to acknowledge that climate change is a problem, and that Cinergy should be a part of the solution. Cinergy’s goal is to reduce greenhouse gas emissions to an average of 5 percent below 2000 levels during the period from 2010-2012.

Cinergy recently announced plans to merge with Duke Energy, and Jim Rogers said that one rationale for the merger is the imminent arrival of carbon constraints. Duke Energy, he says, has a significant number of clean-burning natural gas plants, which will allow Cinergy to retire some of its coal-burning facilities more quickly.

The third company I want to talk briefly about today is Alcoa. Alcoa already has met its 2010 goal of reducing companywide emissions of greenhouse gases by 25 percent from 1990 levels. And in June, Alcoa issued a forecast that the aluminum industry could be greenhouse-gas neutral by 2017. Among the reasons: the increased use of aluminum in cars and trucks, which will reduce emissions from that sector. While this is an ambitious goal, there will likely be some lively debate about which industry – aluminum or autos – gets credit for this reduction.

GE, Cinergy, Alcoa and the other companies we work with at the Pew Center aren’t just looking internally at what can be done to address the climate problem. They are also looking beyond their own operations at public policies. For many years, there was a real hesitancy among business leaders to speak out on this issue, but that is changing. Why are the companies and the CEOs I have mentioned stepping out from behind the shadows now? Because they see that regulation is inevitable, and they want to make sure it is regulation they can live with. They see the states stepping into the void and adopting state and regional policies that seek to curb emissions. They see other countries putting together their own policies, some of them quite ambitious. They see that these actions are having a real effect – or soon will – on significant portions of their operations around the world. They get the picture. It’s inevitable to them that regulation is coming down the pike. In many cases, it is already here.

In addition to their interest in staying a step ahead of the regulations, these companies also want a higher level of certainty – they’re frankly tired of not knowing what’s going to be expected of them in the years ahead. It gets back to the issue of regulatory risk – they need to know what kind of risk they face.

Here is Wayne H. Brunetti, CEO and Chairman of Xcel Energy, as quoted in Business Week: “Give us a date, tell us how much we need to cut, give us the flexibility to meet the goals, and we’ll get it done.”

Four of the companies we work with at the Pew Center testified in front of the House Science Committee this year. The companies included Cinergy, DuPont, Baxter and United Technologies. Another company on the Council, Whirlpool, submitted written testimony. Their message: they are already living with greenhouse gas regulations in Europe and they are thriving in those places. These companies also told the committee that a lot of what they’re doing to cut emissions has bottom-line benefits. Efficiency pays. It’s smart business.

These companies are demonstrating a real boldness in entering the policy debate on this issue. They see it as absolutely essential to couple the work they are doing to reduce their emissions with a more active policy stance. The policy decisions that are made on this issue will have important implications for their future profits and performance, and these companies feel they have a responsibility to their shareholders to be involved.

Policies for Moving Forward

These companies also see a pressing need for U.S. leadership in the international arena. Remember: many of these firms are multinationals – they have operations around the world. So, in the same way that they want certainty here at home, they also want to know that policies around the world will be as predictable and as integrated and as consistent as possible.

At the G-8 meeting this past June in Gleneagles, Scotland, 20 business leaders were part of a special Climate Change Roundtable that identified a set of key principles for climate change policy. Included in those principles are the following:

  • “Policy frameworks that use market-based mechanisms to set clear, transparent and consistent price signals over the long term offer the best hope for unleashing needed innovation and competition.”
  • “Solutions must be global – participation of all major emitters is essential.”

The fact that these corporate leaders, including some from the United States, were able to agree to these and other principles shows how important they perceive this issue is for the future of their businesses. Business is in many respects leading the way, and it is time for policy makers, particularly those in Washington, DC, to get the message and act on their behalf.

What should policymakers do? Over the past year, the Pew Center brought together a group of policymakers and stakeholders from around the world to consider that question. We just recently held our last meeting and we’ll be releasing our final report, International Climate Efforts – Beyond 2012 next week. So without giving away too much, let me share with you a couple of key points.

First, while ultimately we need a fully global approach, what’s absolutely imperative at this stage is engaging the major economies. That includes the United States and the major developing countries. Twenty-five countries account for 83 percent of global emissions. They also account for 71 percent of global population and 86 percent global GDP. This is the core group that needs to act. It’s important, at the same time, that we recognize the tremendous diversity within this group. Their per capita emissions range by a factor of 14; their per capita income by a factor of 18.

So while all the major economies must commit to stronger action, we need to recognize and respect those differences, and allow different countries to take different kinds of approaches best suited to their needs and circumstances.

This leads to a second point: We need a more flexible framework, one that can accommodate different approaches by allowing for different kinds of commitments. Emission targets may work for some countries; but not for others. Maybe the best approach is some type of policy commitment that doesn’t entail a binding emissions limit. In the dialogue, we looked at a whole range of options, and the final report identifies those that seem most promising, and looks at ways they can be combined into a comprehensive framework. But for those details, I’ll have to ask you to stay tuned. The report will be out in just a few days, and we’ll have lots more to say about these ideas in the months ahead.

For now, suffice it to say that a tipping point is almost upon us. The combination of growing scientific certainty, growing concern – and growing action – among businesses and investors has brought us to a place where the kinds of international policies I am talking about are no longer a pipe dream. Even the U.S. Senate has shown support for real action, with a majority of senators supporting a resolution this summer that called for a mandatory national program to slow and eventually reverse U.S. emissions. The resolution was nonbinding, but it is yet another sign of change.

Thanks in large part to the leadership of the financial and business communities; climate change policy is approaching “that one dramatic moment when everything can change all at once.” My only fear is that this tipping point in policy arrives too late to keep another tipping point at bay – the point at which catastrophic climate change becomes inevitable, a force too strong to stop.

That is one case when tipping will not be appreciated. Thank you very much.