Lehman Brothers has just released a terrific report, The Business of Climate Change II. The theme is, “Policy is accelerating, with major implications for companies and investors,” but the piece has a lot of breadth, with cogent comments on everything from the social/damage cost of carbon to auctioning vs. granfathering to the Stern Report. Here are some extended excerpts:
What are the chances for a global climate agreement?
The probability of some sort of international greenhouse-gas-limiting agreement in the next three to five years involving the US, China, and perhaps India, which earlier this year we put at 50%, will continue to rise. We now put the probability at around 75%.
Why does climate change matter to business now?
Many clients have asked for our view on the argument that, even assuming that scientists’ projections of the likely effects of climate change are broadly correct, the effects will be felt only slowly, with little effect on asset prices over most investors’ time horizons.
We judge this argument as flawed, for three, linked, reasons. First, markets anticipate even slow-moving variables, such as climate change. Second, policy made in the name of climate change could have an almost immediate, up-front effect on asset prices. And third, markets anticipate policy itself. In this way, expected future effects of climate change become brought right forward to the present.
Fundamentally, the economic case for considering climate change ultimately depends on the science. Our judgement is that the science will increasingly be seen as broadly correct; that this view will be progressively accepted by the weight of market opinion; and that, while the adjustment of asset prices has begun, full adjustment will take years, rather than months.
What is the “social” or “damage” cost of carbon?