Simbarashe Manwere FIFM, MCIPS: Climate Finance Researcher
Cyclone climate change set to wipe US$2.5 trillion off financial assets
Occasioned by carbon and other green-house gas emissions stemming from human activities, cyclone climate change (CCC) is resolutely travelling at an incremental acceleration in excess of the globally-endorsed danger limit of two Degrees Celsius (20C) in the direction of all cardinal and ordinal points of the compass. In her wake, a trail of destruction to the tune of US$2.5 trillion is anticipated off global financial assets. Still worse, the projected ruin could escalate to nearly ten times, amounting to US$24 trillion according to London School of Economics (LSE) GDP-based maiden economic modeling lead-authored by Professor Simon Dietz (2016). Admittedly, this ushers the entire universe further into the much dreaded ecological hell prophesied by environmentalists.
True to the recent trend that hurricanes, cyclones, typhoons and other destructive forces of nature are increasingly appearing with feminine names, environmental economists singularly concur that global warming, or its less horrifying euphemism, climate change, is the mother of all externalities. According to Harvard’s Martin L. Weitzman (2015), if climate change is the mother of all free-rider public goods problems, then the quick-fix interim solution of geo-engineering the stratosphere with reflective particles to block incoming solar radiation (in response to global warming) becomes the father of all free-driver externalities. Now that both genders are involved, and the fact that human activities are the prime cause of anthropogenic climate change, the moral question should be tackled as the villains have been singled out.
In so far incremental emissions cuts alone are insufficient to tame global warming, there is need for innovative development of new technologies for carbon disposal. These carbon capture investments should be combined with the global pledge to let all fossil fuel reserves remain in the ground as stranded assets. Thusly, fossil fuel companies, with a stock market capitalization of US$5 trillion, would suffer as their coal, oil and gas reserves remain untapped with a view to keeping global temperatures within the 20C danger limit. After 2017, other research reports, no new coal and gas fired power stations should be built anywhere in the world unless they are subsequently closed down or retrofitted with carbon capture and storage technology, according to Professor Cameron Hepburn of Oxford University.
Already, some major investors have begun selling off high carbon stocks from their portfolios, like Norway’s sovereign wealth fund. One might as well ask, will the Public Investment Corporation (PIC) do the same in South Africa?
At the same time, major exchanges like the S & P 500 have launched a number of more specific carbon-efficient indices in November 2015, a trend which is likely to be replicated by the Johannesburg Stock Exchange (JSE), ZARX and other exchanges like 4 Africa Exchange and A2X.
Enter South Africa.
Against this backdrop, South Africa has proposed a carbon tax of R120 per tonne according to the Carbon Tax Policy Paper published by National Treasury in May 2013. The British High Commission in Pretoria, through its Prosperity Fund, financed the research on the potential structuring of a carbon offset trading against the proposed carbon tax.
Documentary evidence in government publications points to a dual use of carbon offsets in South Africa. On the one hand, companies are able to mitigate their financial liability in terms of the proposed carbon tax. At the same time, carbon offsets can be used against a potential carbon budgeting system.
As indicated in the South African Carbon Tax Policy Paper, companies are able to reduce their carbon tax liability up to a limit, depending on their respective sectors. Some sectors obviously have more mitigation potential than other sectors. The table below shows the maximum level of access to offsets, which will remain fixed for the period 2015 – 2019.
According to the Prosperity Fund report, it is possible to parallel the practical implementation of the carbon tax with the operationalization of the carbon trading scheme provided maximum leverage off existing infrastructure takes place. This entails collaborative effort among existing stakeholders in the entire value chain of the ecological sustainability.
There is no need to reinvent the wheel by creating new standards. Existing offset standards like the Clean Development Mechanism (CDM), Verified Carbon Standard (VCS) or Gold Standard have to be used; neither should new trading platforms be developed together with their associated registries for clearing and settlement. The Johannesburg Stock Exchange (JSE), Africa’s oldest and arguably most sophisticated exchange can be used as a trading platform provider. Alternatively, the new exchanges which the FSB has licensed to operate in South Africa namely ZARX and 4AX can be utilized as well, provided they are up to speed while the clearing and settlement is carried out by Strate, the local registry. Of course, this does not rule out existing international registries like Markit or APX.
The proposed SA Carbon Tax system will operate as set forth below;
Source: Promethium Carbon, 2014
The foregoing research recommends the setting up of a public-private sector committee to take ownership of the rules that specify the eligibility criteria of projects that can be traded within the system, dubbed National Appropriateness Tagging Rules. Granted the fact that there is sufficient demand and supply to support a carbon offset trading scheme, the marginal cost of R120 per ton CO2e justifies the case for carbon trading.
While the South African market is averse to increased taxation levels, the real threat of actual financial losses from unchecked global warming could be higher than LSE estimates of US$2.5 trillion and US$24 trillion in the respective scenarios. According to Mark Campanale of the Carbon Tracker Initiative think-tank, the loss of financial capital can be a lot higher and faster than the GDP losses used to model costs of climate change in the LSE study. It is high time we directed in our militancy and restless energy towards the Carbon Must Fall rally for a better future. Otherwise we stand as the proverbial rats wondering who will bell the cat.
At a more serious level, a collective effort is required by all nations. Since this is a global challenge with equally global ramifications, volunteer altruism alone by more charitable states will not work. Formulas and frameworks of collective commitment have to be implemented. The only choice is which frameworks and formulas can be executed more practicably than others. Ultimately, this calls for nations to sacrifice their sovereignty on the altar of human expedience.
