Week 3 Markets and Climate Change

8/3/2019 Week 3 Markets and Climate Change

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This Week

Questions? Read the syllabus first.

Markets

Climate change

You should be choosing the company you will analyze for

your Scenario Planning Assignment by now

Coming up Next Week

An easier week!

Globalization and International Business 5% brief due Wednesda 11 m


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What are markets?


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Working Assumptions of the Political

Economy

The basic unit of analysis are people (i.e.

Stakeholders)

Employees, Customers, Shareholders, etc.

People are self-interested

We look out for ourselves: Whats in it for me?

People are rational (maximize utility)

We dont act randomly or non-rationally (e.g.emotionally) do we?


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Self interest vs. Rationality

Does altruism really exist? You tell me

Arguments for

Arguments against


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Market Failure

Public goods

Externalities

Monopoly Information asymmetry

Agent misdirection

Social goals Inequality

Economic instability


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CLIMATE CHANGE:PHYSICAL IMPACTS

Nardia Haigh, Ph.D.


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The Carbon Cycle http://oceanworld.tamu.edu/resources/oceanography-book/Images/carboncycle.jpg


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Temperature increases

http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm


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Regional temperature changehttp://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm


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Stern (2006: p294): http://www.hm-treasury.gov.uk/sternreview_index.htm


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Fresh water


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IPCC water forecast

http://www.ipcc.ch/pdf/assessment-report/ar4/wg2/ar4-wg2-chapter3.pdf


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Projected water use by sector

http://www.unep.org/dewa/vitalwater/article43.html


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Extreme weather

http://en.wikipedia.org/wiki/List_of_Atlantic_hurricane_seasons


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Extreme weather

http://en.wikipedia.org/wiki/List_of_Atlantic_hurricane_seasons


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Extreme weather

http://www.wmo.int/pages/publications/meteoworld/archive/june08/auld_en.html


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Useful reports, websites, etc.

IPCC publications:http://www.ipcc.ch/publications_and_data/publications_and_data.htm

http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm

Stern Review: http://www.hm-treasury.gov.uk/sternreview_index.htm

UN Environment Program:http://www.unep.org/dewa/vitalwater/index.html

US Global Research Program:http://www.usgcrp.gov/usgcrp/nacc/background/scenarios/default

.htm Tyndall Centre for Climate Change Research:

http://www.tyndall.ac.uk/publications/search-all-publications


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CLIMATE CHANGE ANDBUSINESS


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"Scientists make meaningless orambiguous statements.

Advocates and media translatestatements into alarmist

declarations. Politicians respond

to alarm by feeding scientistsmore money[the accepted

evidence is] entirely consistentwith there being virtually no

problem at all."

Dr. Richard Lindzen, MassachusettsInstitute of Technology, 2006

Global atmosphericconcentrations of carbon dioxide,methane and nitrous oxide haveincreased markedly as a result ofhuman activities since 1750 and

now far exceed pre-industrial

values determined from ice coresspanning many thousands ofyears. The global increases in

carbon dioxide concentration aredue primarily to fossil fuel useand land-use changes, while

those for methane and nitrousoxide are primarily due to

agriculture.The Intergovernmental Panel on Climate

Change, 2007


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Over the past 2 hours, I have

offered compelling evidence that

catastrophic global warming is ahoax. That conclusion is

supported by the painstaking

work of the nation's top climate

scientists.James M. Inhofe,

United States Senator, 2003

The debate is over. There's no

longer any debate in the

scientific community about

this. But the political systems

around the world have held this

at arm's length because it's aninconvenient truth, because

they don't want to accept that

it's a moral imperative."

Al Gore, Former United States

Vice President, 2006


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Market Shift


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2Questionsand why theyre the wrong ones.

1. How much will it cost? 0.6-1.4% GDP increase by 2030 to reach 450ppm (McKinsey,

2007). 1% GDP increase to reach 500-550ppm (Stern,2007).

Increase in GDP of H.R. 2454 (CBO, 2009)

Year Percentage Change

2020 -0.2 to -0.7

2030 -0.4 to -1.1

2040 -0.7 to -2.0

2050 -1.1 to -3.4


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2Questionsand why theyre the wrong ones.

1. How much will it cost?

2. Does it pay to be green?


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Source: Hoffman, A. 2007 Carbon Strategies: How Leading Companies are Reducing their Climate Change Footprint

Report by Andy Hoffman

100 question survey of 31 companies.Advanced Micro Devices, AEP, Air Products, Alcan, Alcoa,Baxter, BP, Calpine, Cinergy, DTE Energy, DuPont, Entergy,Exelon, Fairchild Semiconductors, Georgia-Pacific, Holcim,IBM, Intel, Interface, Maytag, PG&E, Rio Tinto, Rohm and

Haas, SC Johnson, Shell, Staples, Sunoco, TransAlta,United Technologies, Whirlpool, and Wisconsin Energy

6 Case studies:


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1 2 3 4 5

Accessing new sources of capital

Enhancing human resource

management and corporate culture

Identifying new market

opportunities

Improving risk management

Social responsibility

Elevating corporate reputation

Protect the global climate

Anticipating and influencing climate

change regulation

Cost savings

Operational improvement

Energy efficiency

Average Response

Why take Action?

Once begun, how important are the following measures of success inundertaking your climate-related strategy?(Rate their level of importance: 1 = not important; 3 = neutral; 5 = important).


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1 2 3 4 5

Accessing new sources of capital

Enhancing human resource

management and corporate culture

Identifying new market

opportunities

Improving risk management

Social responsibility

Elevating corporate reputation

Protect the global climate

Anticipating and influencing climate

change regulation

Cost savings

Operational improvement

Energy efficiency

Average Response

Why take Action?Once begun, how important are the following measures of success in undertaking yourclimate-related strategy?(Rate their level of importance: 1 = not important; 3 = neutral; 5 = important).

1. Increase Profits

3. Enhance Corporate Reputation

2. Pending Government Regulation


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Why take Action?

1. Increase Profits

Uncertain energy costs



Source: Bloomberg

$0

$20

$40

$60

$80

$100

$120

$140

$160

May-83 May-87 May-91 May-95 May-99 May-03 May-07

WTI

$/bbl Crude Oil Price


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Why take Action?

1. Increase Profits

Increasing energy costs

Investor interest



$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

1 2 3 4 5 6

Growth in SRIFunds in U.S.$ billions, 1995-2005


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Why take Action?

1. Increase Profits


Investor interest

Greentech sector



$0.6 $0.9$1.9

$5.1$6.5

$10.6

$7.9

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

2002 2003 2004 2005 2006 2007 2008 YTD

Global New Investment in Clean Energy

Source: New Energy FinanceNote: Includes buyouts, excludes projects


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Why take Action?

1. Increase Profits


Investor interest

Greentech sector

Growing consumer demand

In the 1980s, energy efficiency was number ten, eleven or twelve in consumer priorities. Inthe last four or five years, it has come up to number three behind cost and performance, and

we believe these concerns will continue to grow.

Casey Tubman, Brand Manager of FabricCare Products, Whirlpool


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Why take Action?

1. Increase Profits


Investor interest

Growing greentech sector





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Why take Action?


[If you believe that federal standards on climate change are imminent]when do you believe these standards will take effect?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Beyond 2020

2015-2020

2010-2015

2005-2010

Percentage of Respondents


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Why take Action?

1. Increase Profits


Investor interest

Growing greentech sector




Businesses that ignore the debate over climate change do so at their peril.

The Conference Board


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How to take action?

Ensure Strategic Timing Not whether to take action, but when.

You should always remain one step ahead of the competition. But if youare two steps ahead, you lose the crowd. The ideal is for you to be theleader of the pack and everyone pulling in the same direction. David

Bresch, Head of Atmospheric Perils Group, Swiss Re Establish Appropriate Levels of Commitment Within the Firm

How aggressive should the strategy be?

Pay attention to market signals.

Influence Policy Development

Policy sets the rules of the game Reduce uncertainty by gaining a seat at the policy table: hold the seat,

companies have to bring experience, you cant take a seat withoutbringing experience to the table.

Create Business Opportunity


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Create Business Opportunity

Climate change cannot be an add-on.

We need to understand, measure, and assess market opportunities. Howdo you know and communicate which products will be successful

in a GHG constrained world?...The company that answers these

questions successfully will be the winner.

Linda Fisher, Vice President andChief Sustainability Officer, DuPont

Risk Management,

Bottom-line

Protection

Business Opportunity,

Top-line

Enhancement


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Climate Change Represents a Market

Transition

The key is both influencing the rules of the game and timing your shift to a

new carbon-constrained strategy. Its knowing what the next technology forenergy production is, and shifting when the market is ready to reward it. Were

not going to get out of the oil business in the near term. But, you have to ask,

What is the iPod for energy? Is it out there? You have to be on watch.

David Hone, Group Climate Change Advisor, The ShellGroup


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Source: Enkvist, Naucler, & Rosander. A Cost Curve for Greenhouse Gas Reduction. McKinsey Quarterly, no. 1 (2007): 17

Climate Cost Abatement Curve


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Source: Schilling, M.A. & Esmundo, M. 2009. Technology s-curves in renewable energy alternatives: Analysis and implications for industry and government. Energy Policy,

37:1767-1781.


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This telephone has too many shortcomings to be seriously

considered as a means of communication.

The device is inherently of no value to us.Western Union internal memo (1876)

Who the hell wants to hear actors talk?H. M. Warner, WarnerBrothers (1927)

I think there is a world market for maybe five computers.Thomas Watson, chairman ofIBM (1943)

We don't like their sound,

and guitar music is on the way out.Decca RecordingCo. rejecting the Beatles (1962)


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Id put my money on the sun and solar energy.

What a source of power! I hope we dont have to waituntil oil and coal run out before we tackle that.

Thomas Edison (1931)


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The Business Case

MarketShift


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Source: Schilling, M.A. & Esmundo, M. 2009. Technology s-curves in renewable energy alternatives: Analysis and implications for industry and government. Energy Policy,

37 1767 1781

Week 3 Markets and Climate Change

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