Climate change and economic growth

Travelling to work this morning through a thick fog, I was reminded how focused we are on a day to day basis, on weather and climate – and yet despite the huge challenges of climate change, we seem prepared collectively in aggregate to ignore what’s happening and the options, implications and choices that we face.

The debate’s not helped by the lack of consensus on precisely where we are and where we’re heading, with genuine disagreements on some of the key issues such as the outlook for, and implications of shale gas and fracking. Thus yesterday I met with an analyst who happily assured me that shale gas was a huge win for climate change – yet as Robert W. Howarth, the David R. Atkinson Professor of Ecology & Environmental Biology at Cornell University has pointed out, “Natural gas is widely advertised and promoted as a clean burning fuel that produces less greenhouse gas emissions than coal when burned. While it is true that less carbon dioxide is emitted from burning natural gas than from burning coal per unit of energy generated, the combustion emissions are only part of story and the comparison is quite misleading”.

Professor Howarth’s point is that realistically the climate change lobby should be more concerned about methane leaking into the atmosphere during hydraulic fracturing. Methane is the main gas in ‘natural gas’, and is a potent greenhouse gas, especially in the short term, with 105 times more warming impact, weight for weight, than carbon dioxide. What this means is that even small leaks make a big difference to the overall ‘climate cost’ of energy production, and it’s estimated that as much as 8 percent of the methane in shale gas, leaks into the air during the lifetime of a hydraulic shale gas well, and this is up to twice what escapes from conventional gas production.

Professor Howarth’s analyses can be summarised by his statement in the Cornell study published in Climatic Change Letters (105:5), “The take-home message of our study is that if you do an integration (by which he means taking into account direct emissions of CO2 during combustion, indirect emissions of CO2 necessary to develop and use the energy source and methane emissions, converted to equivalent value of CO2 for global warming potential) of 20 years following the development of the gas, shale gas is worse than conventional gas and is, in fact, worse than coal and worse than oil…We are not advocating for more coal or oil, but rather to move to a truly green, renewable future as quickly as possible. We need to look at the true environmental consequences of shale gas.”

From a markets’ perspective, the low cost of shale gas has had huge influence on US financial energy costs, with implications for company profits and profitability, the economics of energy generally, and the sense of urgency attached to developing alternative and sustainable sources of energy. We need to maintain a close watch on what’s going on, and monitor the tide of regulation and the appetite for control as part of understanding the likely way forward.

There’s another key point. As global investors with an eye on ongoing developments but also an extended time horizon, we have long seen shale gas as an issue that affects us all, for better and for worse, with significant implications for multi-industry structure and function as well as the economy in its broadest sense. It is therefore intriguing and proof-pudding of the dangerous nature of silo thinking in investment houses that have country-focused desks, that it is only now becoming a recognised issue for UK-centric investors and investment managers as a result of the governments’ evolving energy policies and the claims by Tim Yeo, Tory chairman of the Energy Committee, that the Treasury is holding back investment by failing to set out a clear plan for energy policy, and the spat between Chancellor Osborne, who wants more gas generation, and Edward Davey, the Lib Dem Energy Secretary, who supports calls to make electricity go “green”. Watch this space.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla