On the heels of a climate-focused World Economic Forum in Davos, the unveiling of Europe’s new Green Deal, and increased attention on climate change by the world’s largest asset managers and banks, Allison Nathan, a senior strategist for global investment research at Goldman Sachs, interviewed EPIC Director Michael Greenstone. Their conversation was part of a Goldman Sachs “Top of Mind” podcast that also included Nathaniel Keohane of the Environmental Defense Fund and Goldman Sachs’ Steve Strongin and John Goldstein. In the podcast, they dig into the climate challenge, what it will take to address it, and the growing investment implications as shareholders and clients increasingly demand more accountability on climate change.
Via Goldman Sachs
We start by speaking with two climate policy experts, Michael Greenstone, Director of the Energy Policy Institute at the University of Chicago, and Nathaniel Keohane, Senior Vice President of the Environmental Defense Fund. They both argue that putting a price on carbon is our best bet to realizing carbon reductions efficiently, which is essential to managing the delicate balance between pursuing cleaner energy and economic growth-the core dilemma underlying the climate challenge. That said, they believe that addressing climate change is not incompatible with growth, but rather essential to it, as the only path to a prosperous future is a low-carbon one.
But how will carbon pricing actually help achieve an efficient solution to climate change? Steve Strongin, head of GS Global Investment Research, explains that setting a price for carbon would be an important step in incentivizing enough R&D to actually solve the problem. And knowing what removing a ton of carbon from the atmosphere is worth will motivate people to maximize the amount of carbon removed per dollar spent-the definition of an efficient solution.
That said, establishing a price for carbon is easier said than done. In practice, the primary mechanisms for doing so are carbon taxes, which effectively assign a price for carbon, and cap-and trade programs, which set a limit on emissions-typically for a certain sector or industry-and enable participants to trade emissions allowances under the cap, which gives rise to a carbon price at which the demand and supply for allowances clears.
Greenstone is relatively agnostic between the two options; in his view, any price for carbon materially above zero would be a positive step, and whether we get there via carbon taxes or cap and-trade programs just depends on whether having certainty on price (via a tax) or on emissions reductions (via cap-and-trade) is more important, because you can’t have both. Keohane believes that any approach must put both a price and a limit on emissions to ensure progress towards emissions targets. So he prefers cap and-trade programs to pure carbon taxes, and points to the success of the 1990 cap-and-trade system for sulfur emissions in eradicating acid rain as evidence that such programs work.
But Jeff Currie, global head of GS Commodities Research argues that the acid rain problem was very different than today’s climate challenge; the number and diversity of countries involved was smaller, the source of harmful emissions was more concentrated, and income inequality-which lies at the center of backlash to addressing climate change today-was lower. In his view, that means rich people in rich countries will have to play a larger role in solving (i.e. paying for) this global problem.
Strongin, for his part, agrees that rich countries will have to bear the majority of the initial costs, and makes the larger point that most of today’s policy proposals to address climate change from carbon taxes, to cap-and-trade programs, and beyond share the problem of assuming that the answer lies with the source of the problem-utilities, cars and energy producers. But, Strongin says, these sectors are not typically considered the most innovative areas of the economy, and others may be better placed to find more efficient solutions. In his view, a carbon price, a funding mechanism from which to pay innovators for each ton of carbon their technologies remove, and a referee to verify those savings will motivate the most efficient answers.
Across the current spectrum of possible solutions, Strong in sees the most hope for batteries and carbon capture and sequestration technologies to be part of the climate solution, given their immense scalability, as does Greenstone. But they point out that we may not yet know which technology will be the best answer. After all, Strong in says, no one could have anticipated that shale would have solved the problem of “peak oil”-but it did.
Michele Della Vigna, head of GS Energy Industry Research, also sees sequestration technologies as a potentially important part of the answer. That’s because his Carbonomics work has found that today’s conservation technologies have the potential to abate only about half of current carbon emissions at a carbon price of less than $200/ton, and would leave a quarter unabated. More broadly, Della Vigna argues that capital markets’ focus on decarbonization is paving the way for an energy transition. Tighter financing for hydrocarbon assets is driving consolidation in the oil & gas industry, which he believes is likely to lead to a halt in non-OPEC supply growth, higher energy prices and increased profitability of Big Oils. In his view, these shifts should ultimately enable Big Oils to be part of the solution to climate change.
Alberto Gandolfi, head of GS European Renewables, then takes a close look at Europe’s new Green Deal-a plan for Europe to reach net zero carbon emissions by 2050. He sees the plan as a €7tn investment opportunity that will generate strong returns for European “Climate Champions” in the coming decades, and will likely reshape the larger economy in the process.
More broadly, how should investors-and corporates, for that matter-approach green/sustainable investing? Derek Bingham, head of GS Americas SUSTAIN research, answers our clients’ most-asked questions about ESG investing. And we then dive deeper with John Goldstein, head of the GS Sustainable Finance Group, who discusses everything from the investment rationale for sustainable investing, to the ESG strategies that hold the most value today, and those on the horizon for tomorrow.
