Not Leaving the Kitchen
In our recent daily, we discussed impressive investment figures and emissions abatement contributions in the energy transition sector. Power grids are critical infrastructure linking renewable generation and electrified transportation.
Today, we want to dig a bit deeper into a topic relevant to every investor: the social cost of climate change. Despite being familiar territory, a recent working paper by two economists from Harvard and Northwestern has been making waves in the climate economics community. Their findings indicate that the economic harm from climate change is six times greater than previously believed. They estimate that a mere 1°C increase in global temperature could cause a 12% decrease in global GDP.
To put this into perspective, the world has already warmed by more than 1°C since pre-industrial times, with a predicted 3°C rise by 2100 if we continue burning fossil fuels at the current rate. The implications are profound. A 3°C temperature increase, the paper states, will cause "precipitous declines in output, capital and consumption," with economic loss so severe that it is "comparable to the economic damage caused by fighting a war domestically and permanently." They also calculate the social cost of carbon to be a whopping $1,056 per ton, far higher than the U.S. Environmental Protection Agency's estimate of around $190 per ton.
For major economies like the United States, China, or the European Union, the domestic economic damages from unchecked climate change would be so severe that the benefits of unilateral emissions reductions would likely outweigh the costs, even if other nations fail to act. The outcomes of this study might therefore help catalyse action by underscoring the overwhelming economic case for aggressive emissions reductions.
The economic toll of climate change is likely to have major implications for key macro variables, such as potential lower neutral interest rates paired with heightened inflation risk if the energy transition falters, and significant fiscal strain. This reinforces our view that the companies enabling the energy transition – from renewable power generation to electrification to the critical connective infrastructure – are not just doing good but are positioned to do very well in the coming decades. Although the overall findings of this study are sobering, they present clear opportunities for investors to navigate the transition to a low-carbon economy, particularly given the current climate change and ESG headwinds.
As the saying goes, if you can't stand the heat, it’s time to renovate the kitchen. And, as we have highlighted before, that kitchen renovation is going to require a lot of new wiring.
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