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Climate for Change

07.12.2015

All world leaders are currently at the climate summit in Paris. For the next ten years low-carbon economy will be facing a boom, while the livelihood of carbon-intensive industry is increasingly in danger.

The climate summit in Paris will not be as unsuccessful as the summit in Copenhagen six years ago. Despite the fact that the Paris summit will not achieve a binding agreement, the meeting is a success even before it has started.

The reason is that most countries have already announced ambitious national climate targets in the prelude to the conference. In Paris they should only agree on a way to monitor the progress and a way to punish offenders through a “name and shame” process.

The two key success factors for a smooth transition to a low-carbon economy have little to do with Paris. The first one is the public opinion.

Public opinion demands action

Polls show that the fossil fuels industry is losing the battle for public opinion in all major economies. In Japan and Germany 80-90 percent of the population support climate change actions, while the corresponding number for China and India is slightly over 70 percent.

Even in such countries as USA and Russia, which are labeled as ‘climate bad guys’, over 60 percent of respondents demand action to limit CO2 emissions.

Heads of State who are obstructing action on climate change will find that there is an increasing political cost associated with it. This is an important reason for why the Paris summit will be a success.

If the negotiations break down the government will face a hostile public opinion after coming back home.

Fast technological development

Another important driving force is technology. A lifetime of research on low-carbon technologies is now beginning to pay off.

The price for wind and solar energy has fallen by respectively 50 and 75 percent over the last five years. The competitiveness of both of these technologies has evolved much stronger than expected, and we are now witnessing the beginning of a full-scale global commercialization.

However, the rollout of battery-powered and hybrid vehicles is still at an early stage. Nonetheless, these technologies are quickly approaching a point that would enable a self-reinforcing breakthrough. A lot has to do with solving the “chicken and egg” conundrum.

A commercial success requires that the price goes down and necessary infrastructure is implemented, such as charging stations. However, for the price to go down production has to reach large volumes and economies of scale. Furthermore, the knowledge of charging infrastructure needs to develop for electric vehicles to become a volume product. 

Investment implications

Like most technological breakthroughs the low-carbon revolution will create more losers than winners. What position should an investor take?

Let’s start with the losers. On the Oslo stock exchange we got a reminder of a growing political risk in carbon intensive industries when the state budget was published. Norwegian shareholders received a cold shower when flight ticket prices rose up sharply.

Companies throughout high carbon valuation chain face accelerating risks of aggressive regulation and taxation in the years ahead, as well as increasing reputational risk. This can negatively affect earnings and stock prices.

World’s consumption of oil and natural gas should not be negatively affected by action on climate change in the short term. However, in the long term the consequences can be significant, especially if low-emission cars blast through to a large scale.

What do the sheikhs do?

This does not mean that our domestic oil industry can have a sigh of relief. The question is how the emerging low-carbon revolution will affect the behavior of countries with large oil reserves, such as Saudi Arabia.

Perhaps the sheikhs catch on and decide to pump up as much oil as possible before it is too late?

In a scenario where the Gulf countries are responding with a panic pumping to slow the emergence of low-carbon technologies as well as selling most of their goods before the market disappears, the obvious consequences for many companies on the Oslo Stock Exchange and the Kingdom of Norway could be particularly serious.

Wind, sun and cars

Wind and solar industry as producers of hybrid and battery-electric vehicles appear to be in front of an explosive growth in the coming decade.

High growth does not guarantee high returns, as investors in solar stocks have painfully experienced in the recent years. Overcapacity, volatile subsidy regimes and rapid technological shift have created just as many pitfalls as opportunities.

However, Vestas and Tesla are two likely long-term winners. Danish Vestas is the global leader in the production of wind turbines and has economies of scale making it difficult to put them on pins and needles.

Tesla is a manufacturer of electric vehicles in the luxury segment. However, what makes the company interesting is the giant battery factory which it has under construction. This will enable a sharp decline in the price of batteries.

Access to significantly cheaper batteries than the competition will give Tesla a great competitive advantage, at least for the next few years.

Dovre-portfolio:

  • Panoro Energy
  • Det norske oljeselskap
  • REC
  • Aker Solutions
  • PGS
  • Thin Film

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