Betting on climate change

A blue-sky proposal by an Asian investment bank raises questions of propriety.

It seems like this is the sort of thing that gets the finance industry a bad name:

A financial product could be constructed with payments linked to a sea-level index, and featuring some characteristics similar to a catastrophe bond or weather derivative...

Protection would come in the form of a higher payment to the policyholder if the sea level rises more quickly than expected and a lower or zero payment if the sea level rises less quickly. Some creativity would be needed to make such a product acceptable to both the policyholder and insurer, but it is quite feasible.

But quite apart from the questionable PR which would result from creating such a product, it probably wouldn't work, as alphaville point out:

In terms of getting the technicals of the product down pat, well why not. But thinking about it – you (as the insurer) would be selling insurance on a potentially massive, truly systemic risk here. Something that could – over time – remove island nations from the map altogether. Not something you can hide from using the law of large numbers, quite possibly.

The chart accompanying the original study shows that 37.2 million people in India alone are at risk from sea-level rises by 2050, and well over 100 million in Asia alone -- as well as another 8 million in the USA. It is likely global catastrophe of that level isn't something the world financial system could escape unscathed, so while the creator of these bonds would make a nice income in the years leading up to disaster -- and an even nicer one if climate change was indeed averted -- anyone expecting that the insurance they had purchased would actually protect them against anything would be in for a nasty surprise. Almost as nasty as the people living in coastal areas.

Floods in Peru. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Brexit will hike energy prices - progressive campaigners should seize the opportunity

Winter is Coming. 

Friday 24th June 2016 was a beautiful day. Blue sky and highs of 22 degrees greeted Londoners as they awoke to the news that Britain had voted to leave the EU.  

Yet the sunny weather was at odds with the mood of the capital, which was largely in favour of Remain. And even more so with the prospect of an expensive, uncertain and potentially dirty energy future. 

For not only are prominent members of the Leave leadership well known climate sceptics - with Boris Johnson playing down human impact upon the weather, Nigel Farage admitting he doesn’t “have a clue” about global warming, and Owen Paterson advocating scrapping the Climate Change Act altogether - but Brexit looks set to harm more than just our plans to reduce emissions.

Far from delivering the Leave campaign’s promise of a cheaper and more secure energy supply, it is likely that the referendum’s outcome will cause bills to rise and investment in new infrastructure to delay -  regardless of whether or not we opt to stay within Europe’s internal energy market.

Here’s why: 

1. Rising cost of imports

With the UK importing around 50% of our gas supply, any fall in the value of sterling are likely to push up the wholesale price of fuel and drive up charges - offsetting Boris Johnson’s promise to remove VAT on energy bills.

2. Less funding for energy development

Pulling out of the EU will also require us to give up valuable funding. According to a Chatham House report, not only was the UK set to receive €1.9bn for climate change adaptation and risk prevention, but €1.6bn had also been earmarked to support the transition to a low carbon economy.

3.  Investment uncertainty & capital flight

EU countries currently account for over half of all foreign direct investment in UK energy infrastructure. And while the chairman of EDF energy, the French state giant that is building the planned nuclear plant at Hinkley Point, has said Brexit would have “no impact” on the project’s future, Angus Brendan MacNeil, chair of the energy and climate select committee, believes last week’s vote undermines all such certainty; “anything could happen”, he says.

4. Compromised security

According to a report by the Institute for European Environmental Policy (the IEEP), an independent UK stands less chance of securing favourable bilateral deals with non-EU countries. A situation that carries particular weight with regard to Russia, from whom the UK receives 16% of its energy imports.

5. A divided energy supply

Brexiteers have argued that leaving the EU will strengthen our indigenous energy sources. And is a belief supported by some industry officials: “leaving the EU could ultimately signal a more prosperous future for the UK North Sea”, said Peter Searle of Airswift, the global energy workforce provider, last Friday.

However, not only is North Sea oil and gas already a mature energy arena, but the renewed prospect of Scottish independence could yet throw the above optimism into free fall, with Scotland expected to secure the lion’s share of UK offshore reserves. On top of this, the prospect for protecting the UK’s nascent renewable industry is also looking rocky. “Dreadful” was the word Natalie Bennett used to describe the Conservative’s current record on green policy, while a special government audit committee agreed that UK environment policy was likely to be better off within the EU than without.

The Brexiteer’s promise to deliver, in Andrea Leadsom’s words, the “freedom to keep bills down”, thus looks likely to inflict financial pain on those least able to pay. And consumers could start to feel the effects by the Autumn, when the cold weather closes in and the Conservatives, perhaps appropriately, plan to begin Brexit negotiations in earnest.

Those pressing for full withdrawal from EU ties and trade, may write off price hikes as short term pain for long term gain. While those wishing to protect our place within EU markets may seize on them, as they did during referendum campaign, as an argument to maintain the status quo. Conservative secretary of state for energy and climate change, Amber Rudd, has already warned that leaving the internal energy market could cause energy costs “to rocket by at least half a billion pounds a year”.

But progressive forces might be able to use arguments on energy to do even more than this - to set out the case for an approach to energy policy in which economics is not automatically set against ideals.

Technological innovation could help. HSBC has predicted that plans for additional interconnectors to the continent and Ireland could lower the wholesale market price for baseload electricity by as much as 7% - a physical example of just how linked our international interests are. 

Closer to home, projects that prioritise reducing emission through tackling energy poverty -  from energy efficiency schemes to campaigns for publicly owned energy companies - may provide a means of helping heal the some of the deeper divides that the referendum campaign has exposed.

If the failure of Remain shows anything, it’s that economic arguments alone will not always win the day and that a sense of justice – or injustice – is still equally powerful. Luckily, if played right, the debate over energy and the environment might yet be able to win on both.

 

India Bourke is the New Statesman's editorial assistant.