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US exit from
COP21 won’t impact climate protection efforts
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UAE
opportunity to lead Middle East in growing renewable energy infrastructure
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Berlin Green
Investment Summit gathers financial, scientific and political leaders
Dubai, United Arab Emirates, 20 June 2017: Following the announcement by President Donald Trump that the United
States will withdraw from the COP21 agreement, leading impact investor Jochen Wermuth, Founder and CIO of Wermuth Asset Management, has said
that the move will not be detrimental to climate protection efforts. Speaking
at the Berlin Green Investment Summit
at the offices of the Tagesspiegel on
20 June, Wermuth said that market forces will dictate the path of climate
change, following the strong growth and resulting competitiveness of renewable
energy and electric vehicles.
The conditions
for investment in renewable energy in the Middle East are healthy. The cost of
solar energy in Dubai is now approximately USD 3 cents per kilowatt. Commitments
have been made by leading Middle East countries, such as the UAE, to develop
solar energy production. The Mohammed bin Rashid Al Maktoum Solar Park, for
example, is a USD 13 billion project that will produce 5 gigawatts of power
once completed. As a project developed in the oil-rich UAE, this is a clear
example that environmental sustainability is now increasingly high on the
regional economic agenda.
The global cost
of energy generation from wind and solar power has continued to fall and is now
offered at less than $3cent/kWh, with which oil can only compete at a price below
$5/barrel. Electric vehicles are competitive, with 250 million Chinese drivers now
using 100% electric cars, scooters and bikes. Meanwhile, the cost of storage is
also falling rapidly. In many developed markets, renewable energy is more competitively
priced than fossil fuel alternatives without the support of government
subsidies, and therefore an obvious choice for forward-thinking investors.
Fossil fuel
subsidies, however, remain an issue. The health costs of burning a ton of CO2
(eg. through asthma, allergies and cancer) are estimated by the IMF to be
around €60/ton of CO2, with global climate change
costs of around €70/ton. The total
cost amounts to around €130/ton,
which is what Sweden, the fastest growing OECD economy for the past 20 years,
charges for CO2 emissions. According to the EU Emission Trading System (ETS),
the price of CO2 emissions is as low as €5/ton, with some estimates for the price of CO2 globally as low as negative
€150/ton (subsidised). In May 2017, the
High Level Commission on Carbon Prices, led by Nobel Laureate Joseph Stiglitz
and Lord Nicholas Stern concluded that an immediate move to CO2 prices of at
least €40-€70/ton is required to limit further misallocation of capital and to
have a chance of reaching the Paris agreement’s target of no more than 1.5
degrees Celsius global warming.
Jochen Wermuth commented:
“Trump’s withdrawal from the Paris agreement is not
the catastrophe it seems. Mega-trends in ever cheaper renewable energy, electric
mobility and storage are well established and backed by their competitiveness. As
recently as a year ago, such a decision could have been detrimental, now it
simply means parts of the US will be left behind. The EU and China are leading
the green industrial revolution and will assume global economic leadership. The
economic case for moving into renewables before the carbon bubble bursts is
well understood. Market forces are now climate change’s best friends. The world
of fossil fuels is slowly coming to an end, and is set to become as outdated as
an unreconstructed US president attempting to extend the life of America’s coal
and oil industries.”
In investment
terms, major global corporates, insurers, and other institutions have shown a
growing appetite, and are delivering on commitments, to divest from fossil
fuels. They realize that the financial risk associated with investment in
exploration for oil, coal and gas is growing. The international Divest Invest
programme, which establishes commitments to investing away from fossil fuels
and into environmentally-friendly alternatives, calculates that over USD 5 trillion
has been withdrawn from oil, gas and coal companies by institutional and
private investors globally.
Wermuth continued:
"Resource-efficient and green power companies not
only contribute to the reduction of CO2 emissions, but are economically
attractive and therefore offer profitable investment opportunities now and in
the future. Investments in companies with established business models in the
areas of resource efficiency, renewable energy and electro-mobility - whether
through the purchase of shares or bonds, or private equity investments - will
continue to grow in importance. In this context, growth stage private equity
investment is key, as many companies in the emerging technologies space will be
absent from stock markets for some time. The historical comparison is striking:
the champions of the last industrial revolution - the Siemens, Rockefellers and
JP Morgans - were not listed from inception, but all eventually took their
place as champions, eventually replacing all but one of the constituents of the
first Dow Jones Index, which had been made up mainly of steam engine railway
companies. The upside potential of the green industrial revolution can
therefore mainly be realised by investing in growth stage private equity, which
will be of critical importance for asset allocation by institutional investors,
not just for the returns it offers, but also for the strategic information new
technologies and business models provide for other assets, such as bonds of
oil-producing nations.”