Complex Made Simple

Why Trump’s withdrawal from the Paris agreement is not a disaster

Following the announcement by President Donald Trump that the United States will withdraw from the COP21 agreement, leading impact investor Jochen Wermuth, Founder and CIO of Wermuth Asset Management, has said that the move will not be detrimental to climate protection efforts.

US exit from COP21 won’t impact climate protection efforts 

Speaking at the Berlin Green Investment Summit at the offices of the Tagesspiegel on 20 June, Wermuth said that market forces will dictate the path of climate change, following the strong growth and resulting competitiveness of renewable energy and electric vehicles.

Jochen Wermuth commented: “Trump’s withdrawal from the Paris agreement is not the catastrophe it seems. Mega-trends in ever cheaper renewable energy, electric mobility and storage are well established and backed by their competitiveness. As recently as a year ago, such a decision could have been detrimental, now it simply means parts of the US will be left behind.

“The EU and China are leading the green industrial revolution and will assume global economic leadership. The economic case for moving into renewables before the carbon bubble bursts is well understood. Market forces are now climate change’s best friends. The world of fossil fuels is slowly coming to an end, and is set to become as outdated as an unreconstructed US president attempting to extend the life of America’s coal and oil industries.”

UAE opportunity to lead ME in growing renewable energy infrastructure 

The conditions for investment in renewable energy in the Middle East are healthy. The cost of solar energy in Dubai is now approximately $3 cents per kilowatt. Commitments have been made by leading Middle East countries, such as the UAE, to develop solar energy production.

The Mohammed bin Rashid Al Maktoum Solar Park, for example, is a $13 billion project that will produce five gigawatts of power once completed. As a project developed in the oil-rich UAE, this is a clear example that environmental sustainability is now increasingly high on the regional economic agenda.

The global cost of energy generation from wind and solar power has continued to fall and is now offered at less than $3cent/kWh, with which oil can only compete at a price below $5/barrel. Electric vehicles are competitive, with 250 million Chinese drivers now using 100 per cent electric cars, scooters and bikes. Meanwhile, the cost of storage is also falling rapidly.

In many developed markets, renewable energy is more competitively priced than fossil fuel alternatives without the support of government subsidies, and therefore an obvious choice for forward-thinking investors.

Fossil fuel subsidies, however, remain an issue. The health costs of burning a ton of CO2 (eg. through asthma, allergies and cancer) are estimated by the IMF to be around €60/ton of CO2, with global climate change costs of around €70/ton. The total cost amounts to around €130/ton, which is what Sweden, the fastest growing OECD economy for the past 20 years, charges for CO2 emissions.

According to the EU Emission Trading System (ETS), the price of CO2 emissions is as low as €5/ton, with some estimates for the price of CO2 globally as low as negative €150/ton (subsidised).

In May 2017, the High Level Commission on Carbon Prices, led by Nobel Laureate Joseph Stiglitz and Lord Nicholas Stern concluded that an immediate move to CO2 prices of at least €40-€70/ton is required to limit further misallocation of capital and to have a chance of reaching the Paris agreement’s target of no more than 1.5 degrees Celsius global warming.

Market forces will drive climate change efforts

In investment terms, major global corporates, insurers, and other institutions have shown a growing appetite, and are delivering on commitments, to divest from fossil fuels. They realize that the financial risk associated with investment in exploration for oil, coal and gas is growing.

Wermuth explained: “Resource-efficient and green power companies not only contribute to the reduction of CO2 emissions, but are economically attractive and therefore offer profitable investment opportunities now and in the future. Investments in companies with established business models in the areas of resource efficiency, renewable energy and electro-mobility – whether through the purchase of shares or bonds, or private equity investments – will continue to grow in importance. In this context, growth stage private equity investment is key, as many companies in the emerging technologies space will be absent from stock markets for some time.

“The historical comparison is striking: the champions of the last industrial revolution – the Siemens, Rockefellers and JP Morgans – were not listed from inception, but all eventually took their place as champions, eventually replacing all but one of the constituents of the first Dow Jones Index, which had been made up mainly of steam engine railway companies.”

The international Divest Invest programme, which establishes commitments to investing away from fossil fuels and into environmentally-friendly alternatives, calculates that over $5 trillion has been withdrawn from oil, gas and coal companies by institutional and private investors globally.

Wermuth added: “The upside potential of the green industrial revolution can therefore mainly be realised by investing in growth stage private equity, which will be of critical importance for asset allocation by institutional investors, not just for the returns it offers, but also for the strategic information new technologies and business models provide for other assets, such as bonds of oil-producing nations.”