The cost of carbon in Europe has soared to its highest levels for almost a decade but it has not been enough to slow the pace of global warming, according to Schroders’ latest Climate Progress Dashboard update, which remains on track for 4°C.
Global asset manager Schroders launched its Climate Progress Dashboard in July of 2017 to provide investors with “a unique insight” into the global progress towards limiting global warming to the 2°C set by the Paris Agreement. At the time of its inaugural publication, Schroders predicted that we are on path for a temperature rise of 4°C — a forecast which remained unchanged a year later.
Schroders published a further update to the Dashboard this week which highlighted the important role that carbon prices are playing in the global push to limit global warming. Specifically, despite the fact that the path of global warming remains virtually unmoved over the past 15 months, Schroders’ Head of Sustainable Research, Andrew Howard, believes that rising carbon prices in both Europe and the United States provides a bright spark, representing strong signals for change.
This is especially the case in Europe where carbon prices have risen to their highest level for almost a decade, from €8 per tonne (t) a year ago to €24/t by the end of September 2018.
“The rise in carbon prices has given the carbon credit market more teeth in its intended purpose to incentivise efficiencies and investment in clean technologies,” said Schroders’ Andrew Howard. “Carbon prices are on the agenda of many of the discussions our analysts and fund managers are having.”
In fact, Europe’s carbon price credits have grown from €15/t to over €20/t since the middle of 2018 and reached over €25/t in mid-September — a level not seen since 2009. The nearly year-long increase stems from Europe’s transition to its European Trading Scheme (ETS), however, Schroders believes there is a long way to go, and that carbon credits must reach as high as $100/t if we are to meet long-term emissions reduction targets.
“There remains much further to go – we estimate prices will need to rise as far as $100 per tonne to meet long-term emissions reduction targets – and carbon pricing represents one piece in the puzzle of climate action,” Howard added.
However, the bright spark of strong carbon prices is just that, a bright spark amidst a much larger shadow, bolstered by an increase in investment in the oil and gas industries, which leads Schroders to predict that we are still on track for a 4°C rise in global warming.
“But for these steps forward, there has also been a fall backward. Last quarter, we highlighted the importance of continued discipline in capital investment across the oil and gas industry as prices rise,” Howard continued. “And unfortunately investment data from the latest quarter indicates that this has tempted producers into opening their wallets as the oil price has recovered. Investment discipline lies at the heart of fossil fuel producers’ ability to decarbonise and will be a key focus going forward.”
Schroders’ Dashboard is based on 12 indicators (below) which span politics, business, technological progress, and energy, identified as key drivers and controls of climate change. Together, they still point to a 4°C rise in global warming.
Further, the difference between a 4°C rise in global warming and a 2°C rise, while it looks small, is likely to result in dramatic effects in the long-term. Specifically, Schroders explains that scientific studies have shown what a 4°C rise would look like in practical terms, including:
- Global crop yields would fall 30-40% below current levels on average.
- Up to 300 million people would be affected by coastal flooding.
- One-third of the world’s population would face water shortages.
- 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.