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Copenhagen conclusions…where now ?

By Simon Webber Co-manager, Schroder Global Climate Change strategy

So, after two years of negotiations, the UN Copenhagen conference on climate change produced a cobbled-together last-minute compromise agreement. The positives include the drawing in of China and the US to a target of keeping global temperature increases to below 2oC, and an aim of raising $100 billion a year by 2020 to support mitigation and adaptation actions in poorer economies. Basically, the world’s major economies have agreed that temperatures should ideally be kept below a rise of 2oC and other countries have ‘noted’ this.

These positives are offset by the lack of any real detail or certainty over emission reductions, which are left to individual countries to submit their own action plans later. A Chinese negotiator has already described the Accord as being like a ‘voluntary agreement’, which is unlikely to inspire confidence within the private sector when making long-term investment decisions.

What conclusions can be drawn ?
Firstly, the UN process of reaching consensus is clearly under severe pressure now, and has perhaps been fatally undermined by the chaotic negotiating process in Copenhagen this month. After such blatant spoiling tactics and bilateral frictions, distrust amongst world leaders will probably have risen, proving negative for decision making on all kinds of other important global issues. Indeed, when leaders like Angela Merkel - who would normally be heralding a deal - say ‘we have done one step, we had hoped for several more’, you know that there is little substance behind this voluntary international agreement.

That said, it will be important to see how participants interpret the agreement over the next six weeks. By 31 January 2010, the signatories have to submit plans for the emission reductions that they will voluntarily make. These plans will give an indication of intent and commitment, but are likely to be close to the already public positions on the matter. Thus, we are left with a situation little changed from before Copenhagen - that of a patchwork of individual national emission reduction plans and a lack of trust on the issue between nations. Governments will remain wary of the free rider problem, fearing that if they go too far in reducing emissions unilaterally, their domestic businesses will be put at a competitive disadvantage. As we have written previously, this therefore raises the spectre of environmental protectionism going forward.

What are the implications for equities ?
Irrespective of the Copenhagen ‘fudge’, the existing national action plans will drive meaningful investment in low carbon technologies for the foreseeable future. China, Europe, India, Korea, Australia, Brazil and the US all have major renewable energy investment plans. The electric car industry, which is clearly the long-term solution to emissions from the transport sector, is also developing rapidly. We expect a continuation of strong investment growth in all of these industries, which, along with energy efficiency, represent the core climate change investment themes. The investment outlook here is unchanged, and we expect 2010 to be a relatively good year for clean energy stocks.

Carbon loses out
The big loser from Copenhagen has been the carbon markets as there was no clear agreement for a continuation of the scheme beyond 2012. Without a clear framework for extending the international carbon markets, companies too focused on carbon credits or carbon prices will face serious challenges. The lack of clarity on carbon pricing will also make regulation all the more important to achieve stated industrial policy, with UK nuclear power a perfect example. Private enterprise simply will not take the risk of investing $5-10 billon to build a new nuclear power station in the UK without greater guarantees over power prices or regulated returns – and with even less certainty on carbon prices now, governments will have to introduce other policy mechanisms to achieve their goals.

The bottom line is that Copenhagen will probably have more impact on international diplomacy than short-run investments in low carbon technologies, where the growth outlook remains strong for the time being. However, an increasing number of participants will probably conclude that successful mitigation of climate change is becoming
much less likely. More thought will, therefore, be given to protecting societies from the consequences of climate change, and regions such as the EU, which are committed to climate change mitigation, will have to begin accepting that more investment needs to be focused on adapting to the inevitable and disruptive climate change ahead. Plans are already in place to drive growth in low carbon technologies for the next three to five years, so this matters little in the short term. For now, we will be avoiding carbon market-oriented stocks where uncertainty is greatest, and stick to more basic and affordable low carbon technologies, such as energy efficient materials and fuel efficient engines, along with wind and nuclear power generation.

Mardi 5 Janvier 2010

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