All eyes are focused on Durban for the 2011 UN Climate Change Conference. But according to many this is much more than a once a year event, reports Andreas Spiegel.
Weather related risks are part of a reinsurer's core business. Reinsurers insure their clients in the public and private sector against weather related risks caused by storms, floods and droughts. Climate change has the potential to change the weather risk landscape significantly offering many new opportunities to develop new services and products.
On the other hand it will affect how the industry prizes these risks. Climate Change is, therefore, of long-term strategic importance for reinsurers.
As a member of the official Swiss climate delegation, Swiss Re is directly involved in the negotiations. However, at the moment there is a skeptical air about what can be achieved in Durban. A new global treaty is very likely out of reach and even a temporary continuation of the Kyoto Protocol is rather unlikely.
It is quite frustrating to recognise that finding a political solution to the problems appears to be so difficult. Even more since on the scientific side there is clear evidence that climate change is happening and that human emissions are causing it. In addition, global emissions are higher than ever and the world is currently on a development path towards a three or four degrees warmer, rather than two degrees.
"Climate Change is, therefore, of long-term strategic importance for reinsurers."
A global governance issue
With regards to the negotiations in Durban, it seems that emerging markets do not want to limit their short-term growth potential and access to energy sources - whereas industrialised countries do not want to accept additional energy costs. This is a true prisoner's dilemma.
In the long term, everyone will suffer from the impacts of climate change. In the short term, delaying action may help individual countries to maintain a competitive advantage. Therefore, this issue between short-term versus long-term thinking has to be resolved.
Cause for optimism
What could happen in Durban is that technical questions related to financing adaptation under the Green Climate Fund might be resolved. For example, more financial capacity could be made available for developing countries to adapt to a changing climate. However, the current capital market environment and national debt situation of major economies does not provide an ideal ground to free up additional financial resources for climate adaptation. Generally, more action and innovation in the renewable energy sector directly is expected
In the absence of a global emission reduction treaty the only way to limit future emissions is through innovations on the energy and efficiency side. Renewable energy technologies have seen significant growth rates in recent years. From 2005 to 2010, wind power grew at an average rate of 27% per year, and solar photovoltaic at an average rate of 56%, admittedly from a very low market share level. But growth is there.
"In the short term, delaying action may help individual countries to maintain a competitive advantage."
At the same time, there are macro trends that will further accelerate this growth. For example, the growing energy needs of emerging markets - China, India, Brazil, population growth, more difficult political risk landscapes in oil producing countries and growing environmental concerns, for instance, related to deep sea drilling, arctic exploration or alternative fossil fuels, will all increase the pressure to invest in new cleaner energy sources. Last year investments into renewable energy projects exceeded investments in fossil fuels for the first time.
But is renewable energy taking off? To some extent it is - however, the question is what needs to happen to ensure growth will be sustainable. One question is how to reduce the costs of renewable energy technologies. Apart from innovations in technology, which should help to reduce overall costs, financial instruments to insure risks play a key role.
For example, risks related to offshore wind power plants are substantially higher than risks for fossil-based power production. Managing these risks effectively will help reduce future losses along the whole value chain.
The politics question
Another key question to address is of political nature and related to how energy is taxed or subsidised. Fossil fuel consumption subsidies worldwide amounted to $409bn in 2010. This is a massive market distortion, which should be reduced or at least be fairly applied to all energy sources, including renewable energy. In comparison, global renewable-energy subsidies amounted to $66bn in 2010 some $340bn less than subsidies in fossil fuels.
The political discussion around these topics is very controversial, however. More liberal thinkers say no subsidies should be in place, while environmental economists insist that external cost should be internalised and, hence subsidies to renewables can be justified. Time will tell - but there will probably be a mixture of subsidies both in the fossil and renewable energy space.
Andreas Spiegel is senior climate change advisor at Swiss Re
This article was written while negotiations in Durban were still ongoing
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