First off, I want to thank Oregon State Treasurer Randall Edwards and the conference organizers for helping make today’s event possible. I also want to acknowledge Tate Reeves of Mississippi, who is the President of NAST and Lynn Jenkins of Kansas, who is the senior vice president—thank you both for your hard work and leadership. And thank you all for inviting me—it is a pleasure to participate in this important and timely event.
You know, this summer has been a hectic one… over the past few months, we have seen floods, heat waves, tornadoes, wildfires, in the United States and abroad, and two category five hurricanes… Mother Nature seems to be the only one who did not take a summer vacation!
But seriously, our conversation today is very timely. You have seen the overdue shift in the global warming debate: from whether climate change is real to a sense of urgency about how to address it.
The science and the economics are conclusive: doing nothing about global warming presents a far greater cost than addressing it.
Global warming, if not reversed, will consume our national resources and threaten the well-being of future generations, and volatile energy prices and more extreme weather will devastate our economy.
The urgency of this issue demands a president and a Congress willing to make climate challenge a centerpiece not only of their energy policy but also of their economic program, to produce broad-based growth and sustain American economic leadership in the 21st century.
Society faces mounting physical risks, and businesses face grave financial risks if they fail to adapt to a changing policy climate because of the rapidly changing physical climate.
The challenge we face is nothing short of transforming our economy from a high-carbon model—which is putting both our economy and planet at risk—to a low-carbon model that can create new markets and a healthier environment.
The scale of this undertaking is immense and its potential enormous, but time is working against us. We need to move quickly on this.
Now, let me emphasize that global warming is emphatically not a partisan issue, and we must never let it become one. It is instead engaging people across the political spectrum, Republicans and Democrats, religious and secular, young and old—perhaps like no other issue we face today. Global warming cuts across old lines of division, and, if we are smart about it, can get us focused on investing in solutions.
But although this issue has galvanized many and policies in response to this threat are increasingly inevitable, we still have a lot of work ahead of us.
The United Nations’ International Panel on Climate Change brought together the largest collection of scientists ever assembled to study global warming, its impacts, and mitigation measures necessary to stop it. In its Fourth Assessment Report, the IPCC determined that if the world reduces emissions of heat trapping gases down to between 50 percent and 85 percent of 2000 levels by 2050, we have a good probability of limiting the temperature increase to about two degrees Celsius above pre-industrial levels, meaning we would likely prevent the occurrence of the worst impacts of global warming.
In other words, efforts to reduce global warming pollution must begin now so that we can meet the reduction goal in 2050. So if we continue to invest in technologies that do not reflect this reduction imperative, it will be nearly impossible to curb the effects of global warming in what could truly be called a global catastrophe.
The environmental and social consequences of global warming will be many, but the most relevant to our discussion today are the major impacts it will have on our economy, on investment, and what we should expect from the regulatory climate. Those are the three issues I’d like to focus on today.
In the United States, the potential economic impacts on regional economic development are many. Droughts and loss of soil moisture from a warming climate are predicted to cause a lowering of water tables, with potentially devastating economic impacts to agricultural communities throughout the Great Plains.
Direct impacts from global warming on regional economies will also include a serious blow to the timber industry from increased prevalence of pests like the southern pine beetle, slower growth rates for trees, and more frequent wildfires. This would mean a decrease in revenue for producers of $1 billion to $2 billion per year.
For resource-dependent states and industries, whether you are calculating expected agricultural yields or changes in hydroelectric energy production from melting snow pack, global warming has real consequences for businesses and investors.
Additionally, states face substantial policy risk from the increasing regulation of carbon, particularly where dominant industries are tied to energy generation and use. Coal producing states and those with larger shares of coal-based electricity, for example, have a strong interest in ensuring a rapid shift to technologies capable of capturing and storing carbon, to ensure a place for coal in a carbon-constrained world.
Across our industrial heartland, the regional economy will depend on the ability of manufacturing firms to successfully anticipate global market demands and regulatory mandates for automobiles that use less gas, or run on entirely new forms of energy. Companies that fail to respond to this changing policy landscape will face increasing liability for climate impacts, while those that embrace new technology can capture new and vibrant markets.
Although there are no federal mandates to cap greenhouse gas emissions today, the wheels have been set in motion toward a low-carbon economy through private sector and city and state government action.
The business community and state and local government officials are already seizing the opportunity for change and are making investments in clean technology that curb our dependence on fossil fuels.
Capitalizing on renewable energy by investing in renewable energy technologies is no longer just about doing the right thing; it’s about making money, creating jobs, and remaining competitive in the world economy. And the potential to effect change is enormous with each year bringing an ever-higher plateau of success and growth for clean energy.
According to the research and publishing firm Clean Edge, in 2006 we saw a tripling of venture investments in energy technology bringing that figure to $2.4 billion. We also saw the annual revenue for solar power, wind power, biofuels and fuel cells ramped up from $40 billion in 2005 to $55.4 billion in 2006—that’s a nearly 40 percent increase in one year. Projections are that the annual revenues for these four technologies will quadruple within a decade to more than $226.5 billion.
Business has recognized that efficiency, sustainability and profits are all intertwined and we have seen their leadership on this issue.
For example, more than two dozen CEOs of major companies like General Electric, Duke Energy, Alcoa, and DuPont together with a few environmental groups, under the umbrella of the United States Climate Action Partnership, issued a call for a far-reaching, mandatory program to cut greenhouse gas emissions 60 percent to 80 percent below current levels by 2050.
States have also been on the front lines on this issue—recognizing the enormous potential of investing in clean energy; with even fossil fuel producing states such as Texas, New Mexico, and Pennsylvania investing in renewable energy.
- 29 states have completed comprehensive Climate Action Plans,
- Half of all states and the District of Columbia require that electric utilities generate specified amounts of electricity from renewable energy sources,
- And 17 states have greenhouse gas emissions reductions targets.
Next month, Gov. Arnold Schwarzenegger will likely sue the Environmental Protection Agency for moving too slowly on a request to allow California to regulate greenhouse gas emissions from automobiles. Already fourteen states have lined up to adopt this standard once the EPA grants its federal preemption waiver request. And just last Wednesday, a federal judge ruled that the state of Vermont can require a 30 percent cut in greenhouse gas emissions from automobiles—dealing a huge blow to car manufacturers.
When it comes to action on climate and clean energy, state leaders from both parties are already setting the national agenda.
Nonetheless, I believe that in the fight against global warming our capacity to realize the full potential of a clean alternative future depends on smart and aggressive federal policy.
For years there has been legitimate debate over how to manage carbon emissions, but a consensus has emerged that business needs the certainty of a coherent and binding national policy. The current policy framework, which has centered on voluntary emission reductions, is not giving the private sector the tools it needs and is leaving valuable energy savings on the table.
Changes on Capitol Hill, however, have brought a new consensus that has leaders on both sides of the aisle calling for new, clearer rules. When Nancy Pelosi took the helm in Congress as Speaker of the House, one of her first actions was to create the House Select Committee on Energy Independence and Global Warming. And members of this Congress have introduced climate change-related legislation at a faster pace than any previous Congress. But this is not merely a difference stemming from a change in party last November. There is something deeper going on. The conversation has shifted and the public and the business community are looking for answers.
This Congress has also responded to the looming threat of global warming by passing comprehensive energy legislation that includes policies to reduce global warming pollution from major sources, as well as to reduce oil use, increase energy efficiency, and spur clean alternative energy technologies.
The current Senate energy bill includes a 35 mile per gallon fuel economy standard by 2020, which would remove 206 million metric tons of carbon dioxide by 2020 or the equivalent of removing 32 million cars off the road.
The House energy bill includes a renewable electricity standard that requires utilities to provide 15 percent of their electricity from renewable energy sources by 2020 which would reduce carbon dioxide pollution by 180 million metric tons per year by 2030 or the equivalent to taking more than 29 million cars off the road.
The Senate-House Conference to settle the differences between these bills will likely take place in the fall. If the final legislation contains the best provisions of both bills, it could significantly reduce greenhouse gas emissions and put forth a major down payment on reductions necessary to slow and later halt global warming.
Additionally, members of Congress have introduced 10 market-based climate change bills to regulate greenhouse gas emissions. This market-based approach has the potential to turn pollution reduction into marketable assets. The different bills have a varying allowance allocations and reduction targets but the message Congress is sending is clear: we need to take steps to sharply reduce our dependence on oil, cut our emissions, and enhance the competitiveness of our economy.
This is a major shift: this year, for the first time ever, there will be serious federal debate on legislative proposals that could specifically address global warming pollution. This represents a change that it is not likely to be undone in future elections.
It is safe to bet that despite whoever controls Congress or becomes the next president, we will have some sort of regulatory scheme within the next few years. Businesses, investors, and policymakers that fail to recognize this shifting dynamic face real risks as the energy market changes.
If history is any guide, the transition to a low-carbon economy will create many new opportunities in the form of emerging markets and turn a problem into a profit-making opportunity. Take carbon trading for example. The supply of carbon credits comes largely from two regulatory frameworks—the European Emissions Trading Scheme and the Clean Development Mechanism set up under the Kyoto Protocol.
Carbon emission markets around the globe have expanded rapidly, with $30.4 billion allowances traded last year and estimated to grow to $100 billion by 2010.
With global warming emerging as the single most important financial risk of our time, we need policies to properly address it and in the current political climate the forecast seems promising. As a matter of financial prudence and sound policy, treasurers can play a powerful role by calling on the federal government to pass laws that effectively cap carbon emissions. This would reduce overall risk to investors, including to those funds and pensioners for which you have responsibility.
Too often global warming is seen solely as a policy issue best left to energy secretaries, but in truth, cap and trade and other climate policies are about establishing markets. As Congress looks to create tradable emissions credits for CO2 and other greenhouse gases, they are really dealing with an issue of securities.
The drivers behind the growth in renewable energy investment are many and are likely to be enduring even without regulatory support—so even though investment now is still in flux there are no signs of it slowing down. But to ensure that resources are managed efficiently, this market-making mechanism will need enforcement and regulatory oversight from the federal government to build trust in the market.
On this front, treasurers can add tremendous value to our national debate, by advancing the execution of sound policies, and building working markets for carbon. I don’t have to tell you that investing in emerging markets entails risk—political and economic—but I believe your expertise can help shape what this market looks like, particularly at this moment when Congress enters a serious debate on this issue this fall.
Continued leadership from state treasurers on global warming will be essential to ensure that we address the scale and urgency of climate risk—and capture the vast economic possibilities that lie ahead as the world transitions to a clean energy future.
Climate change is a threat to the long-term value of the economy and failure to calculate its impacts or manage or reduce its harm mean that our assets are being over valued, and the risks we face are being under reported. We need to start looking at the long-term horizon of our investments and taking into account the detrimental effect of a warming climate on business. Experts estimate that dealing with global warming could cost major companies up to 15 percent of their total market capitalization, yet only a handful of firms are addressing or disclosing the risk and costs of climate change in their financial reports.
Conventional financial reports typically disclose what has already happened—earnings and revenues—but in a changing landscape of regulation and natural resources we must make sure we are making sound investments based not only on where we have been, but on what is coming down the road, in order to build a solid financial infrastructure.
The bottom line is that current business reporting is inadequate to judge economic progress and we need to address this. Take for instance the recent story on China’s “Green GDP” project—an effort by President Hu Jintao to evaluate the performance of China’s economic growth factoring in the yearly damage to environmental and human health.
The results of this calculation were very sobering. In fact, when adjusting growth for environmental damage, to reflect the cost of pollution, the economic growth rate of some provinces was reduced to practically zero.
So for all we’ve heard about China’s economic success, when we account for environmental degradation, its growth is reduced to nothing—this is simply not sustainable. With an increasingly interconnected global economy and an interdependent global environment, this should be a lesson for policymakers in the United States. China is not considering the health of its long-term economy, but once done, the damage its doing cannot be “recalled” so easily as China’s other exports to the world.
Those entrusted with protecting the financial security of pensioners need to look at the long-term yield of any investment—considering environmental impacts and advancing solutions to climate change. As treasurers, you have long stood up for that long-term financial interest—attending to the economic consequences of global warming is now a natural addition to your portfolio of concerns.
Your shared voice has the ability to help place this global threat into the context of prudent long-term management of the economy and the public good, where it belongs.
And many of you are already offering shining examples of leadership investing in climate solutions. California’s Green Wave initiative, which directed Public Employee pension investments into technology like renewable energy and efficiency retrofits for real estate portfolio holdings, is but one example.
I want to commend all of the state treasurers whom we’ve heard from today, who are acting on their fiduciary duties to address the risks and opportunities posed by climate change. The treasurers from Florida, Oregon, California, Connecticut, Pennsylvania, and Vermont are each providing tremendous leadership.
I also want to acknowledge those treasurers that are members of the Investor Network on Climate Risk. INCR was founded by Ceres and six state treasurers in 2003 at the first Investor Summit on Climate Risk at the United Nations and has since played a critical role in helping treasurers address climate change. Today INCR has 60 members with a combined $4 trillion in assets.
I was impressed by the impact of the most recent INCR call to action released in March 2007—signed by treasurers and other leaders in investing and business. This action called for the U.S. government to take three steps:
- Enact a policy to reduce Green House Gas emissions 60-90% below 1990 levels by 2050,
- Realign national energy and transportation policies to stimulate research, development, and deployment of new and existing clean technologies, and
- That the Securities and Exchange Commission clarify what companies should disclose to investors on climate change in their regular financial reporting.
This sort of work can form a shared voice for treasurers; one that rises above partisan rancor, and one that is sorely needed in shaping the national debate moving forward, to ensure that good policy is created.
As we have heard today, there are many pathways for action—whether directing investment advisors to evaluate climate change risk in the companies you invest, or choosing to vote your proxies as major institutional shareholders to support climate change resolutions that reduce risk for funds under your care. All are critical.
What we can take away from this conference is that energy independence and tackling climate change are not at odds with our economic and financial goals. But it will fall on treasurers, fiduciaries, and financial managers to shape and direct the markets created by those policies.
So get in the game early and help steer the direction of those policies. You have a tremendous opportunity to effect change, I hope you seize it.
For more on CAP’s recommendations on combating climate change, please see: