Market Commentary: Cheap green electricity may not be so good for the climate as you may think

There are two important and stable global trends which will determine the structure of our economies. Decision makers have to take them into account: 1) CO2 emissions will continue to increase which means that the environment will keep deteriorating for some time to come; 2) the relative costs of producing electricity from alternative sources will fall – relative, that is, to those from burning fossil fuels. The overall cost of energy will be on the way down – which will not only boost the demand for “green” energy but also for fossil fuels. To avoid a global climate catastrophe, governments have to intervene by using their regulatory power, ideally in an internationally coordinated way.

Looking at the development of CO2 emissions in OECD countries, ie, in the richer part of the world one could be forgiven to assume that global emissions as a whole will also soon be on the way down. But this is not the case. In the poor southern part of the planet, including China, real GDP growth is in the order of 4 to 5% annually, and the burning of coal, gas and oil continues unabated, as if there was no tomorrow. The priorities for people there are to own a car, to install air conditioners, to buy cheap food from an industrialized agricultural sector, and to fly energy-intensively to distant places. A healthy environment is not yet a top priority.

Over the past 50 years, global emissions have increased at an average annual rate of 1.5%, and over the past decade the growth rate has still been in the order of 0.7%. Given these trends the climate will continue to deteriorate fast, and the 1.5 degree target cannot be reached. Before things get better they will get worse.

As to my second proposition, the technical progress in the area of developing electricity from wind, solar and geothermal heat is so rapid that electricity prices from these sources will fall in absolute as well in relative terms (relative to those from fossil fuels). Not only that, because of arbitrage processes the cost of energy in general is bound to fall – which includes coal, gas and oil.

Since consumers and business will respond to the falling prices of fossil fuels, the demand for them will increase. The technical progress in the area of green energy leads to falling energy prices in general and may turn out, in the final analysis, to be a climate killer – if left unchecked.

But this is a problem that can be solved, to the benefit of all, and the climate in particular: over the years, the taxes on burning coal, gas and oil have to be raised continuously, in response to hitting or missing emission targets. This can actually be done without negative effects on the standard of living. If the number of climate disasters continues to increase – which is likely if present trends persist – it will become politically easier to reach international agreements about the reduction of CO2 emissions. The structural change which will be necessary cannot be underestimated, though. It is still a long road and requires a lot of work and goodwill.

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About Wermuth Asset Management
Wermuth Asset Management (WAM) is a Family Office which also acts as a BAFIN-regulated investment consultant.
The company specializes in climate impact investments across all asset classes, with a focus on EU “exponential organizations” as defined by Singularity University, i.e., companies which solve a major problem of humanity profitably and can grow exponentially. Through private equity, listed assets, infrastructure and real assets, the company invests through its own funds and third-party funds. WAM adheres to the UN Principles of Responsible Investing (UNPRI) and UN Compact and is a member of the Institutional Investor Group on Climate Change (IIGCC), the Global Impact Investing Network (GIIN) and the Divest-Invest Movement.
Jochen Wermuth founded WAM in 1999. He is a German climate impact investor who served on the steering committee of “Europeans for Divest Invest”. As of June 2017, he is also a member of the investment strategy committee for the EUR 24 billion German Sovereign Wealth Fund (KENFO).

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The information contained in this document is for informational purposes only and does not constitute investment advice. The opinions and valuations contained in this document are subject to change and reflect the viewpoint of Wermuth Asset Management in the current economic environment. No liability is assumed for the accuracy and completeness of the information. Past performance is not a reliable indication of current or future developments. The financial instruments mentioned are for illustrative purposes only and should not be construed as a direct offer or investment recommendation or advice. The securities listed have been selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the issues presented and do not necessarily form part of any portfolio or constitute recommendations by the portfolio managers. There is no guarantee that forecasts will occur.

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