Let’s use financial risk management for a couple of different possible future scenarios. The additional costs to go beyond code requirements into the realm of high performance is often seen as something that is “nice to have” instead of a “necessity”. This has worked for us in the past because, in the past, we haven’t had to pay for our carbon pollution. But what if policies change? Let’s look at different possible policy scenarios and their implications on your investment.
Scenario 1: No Climate Policy in the Future, Carbon Price of $0
If you are holding onto your assets for longterm you might be considering future utility costs and how it will affect the operational costs and your profit margins. If you are not considering the costs of carbon then you are pricing it at $0.
Will we reach a tipping point in climate policy in the next ten years?
It is highly unlikely that we won’t. Right now we are distracted by the COVID-19 pandemic and the likely possible scenario is that we will continue to be hit by continuous waves of infection until an effective treatment or a vaccine is developed. If we continue encroaching into wilderness areas and harvesting wildlife, and continue to raise livestock at this mass scale we will also be hit by other pandemics.
“Will we reach a tipping point in climate policy in the next ten years?
It is highly unlikely that we won’t.”
Whether or not pandemics hit is something that we cannot easily control. Whether or not they hit while we are being hit with a concurrent climate change-related disaster is something that we can control.
Pandemics just got real. Severe weather events like severe droughts in our breadbasket areas from climate change will be coming if we don’t do anything about it. None of us can afford to do business in such a risky environment. There will be a new push to take care of climate change and get this risk off the table.
Although we are late to get to the table, climate action that would limit the world to 1.5oC or even 2oC of warming would require for all hands-on-deck. We know that climate change is slowly spiralling out of control but it has not reach the crisis level, and now, in 2020, we know how fast things can change. All-hands-on-deck means that every business will have to reduce emissions, and perhaps rather quickly, and will pay a carbon pollution fee for the impact that they are making.
While we are evaluating risk and investment it is prudent to do a deep review of your baked-in discount rate. How close is it to the more societal 3% discount rate? Who was specifically involved in determining your discount rate and what assumptions did they make? Can you get access to more capital or the same amount of capital at a lower interest rate if you target high performance? Can you get a grant instead of a loan?
Scenario 2: Climate Change Policy is Introduced,
Carbon is Priced in 2030
We estimate that in order to limit our carbon emissions to 2oC of warming, everyone will be paying USD $150/tonne for carbon in 2030. What will your future operational costs of this infrastructure given this price?
What is the current carbon breakeven price for the investments needed for bringing the development to net zero?
If bringing the additional investments that are required to bring the development to net zero is $25/tonne then it is basic prudence to make those investments. Build whatever upgrades that you can that would cost $25/tonne. The alternative that your are facing is $150/tonne. If you can hedge that risk today for $25 then that is “no brainer”.
If bringing the additional investments that are required to bring the development to net zero is $125/tonne then it is still a good decision to make those investments. The alternative that your are still facing is $150/tonne. If you can hedge that risk today and get all of the societal benefits of having a net zero development, like reduced or eliminated utility costs then this is still “no brainer”.
It is also useful to think about a future scenario that might be mandated in order to limit our emissions to 2oC of warming and that is mandatory low-carbon retrofits. Will it cost you $200/tonne to retrofit the building to net zero?
Just to add more cooks to the kitchen, let’s say you add future pandemics to the mix. We have some ideas for you on how to reduce your liability and risks, but that is for a future blog post…