Flying closer to the sun – the new drivers of decarbonisation

Pension funds, investment managers and now global insurers and energy companies are preparing for a carbon-free future – and we actuaries must do the same.

Henri de Castries, chairman and CEO of AXA SA – France’s biggest insurer, took many by surprise last week when he announced that AXA has decided to divest its carbon assets1. Not only will AXA sell €500m in coal assets by the end of the year, it will also seek to invest €3 billion in renewable energy, green infrastructure and green bonds by 2020.

De Castries noted that: “Extreme weather events are increasing in intensity and severity. Last year alone, AXA paid out over €1 billion globally in weather-related insurance claims. Climate risk for us is neither an ideological or theoretical issue: it is a core business issue, as we are already seeing the impact of increasing weather-related disaster risks.”

This business imperative means insurance is “one of the only industries with a role to play in both the adaptation and mitigation aspects”, he said.

“Insurers are in a uniquely long-term business, with some insurance liabilities that stretch up to 30 years.”

Climate risk for us is neither an ideological or theoretical issue: it is a core business issue

AXA is the first major insurer – and the first global investor – to divest from carbon-intensive assets. Until now, churches, universities and ethical investment funds have been leading the divestment. Many international and local pension funds have recognised the long-term risk of investing in carbon-intensive assets and taken a variety of actions in response2.

The International Energy Authority (IEA) has estimated3 that no more than one-third of known fossil fuel reserves can be consumed prior to 2050 if the world is to restrict global temperature increases to 2°C – currently the limit agreed by virtually every country (including Australia!). Effectively this means that two-thirds of carbon assets will become unburnable, or “stranded”, if there is enough political will to enforce this 2°C limit.

That’s a big ‘if’. However, there are signs that the reduction in the value of carbon-intensive assets is not just as a result of political activity or even environmental concern. Increasingly, carbon divestment is being driven by economic and technological factors.

Reducing demand for energy

Despite forecasts expecting demand for energy in Australia to increase with increasing GDP, actual demand has been reducing every year since FY 2010, due to both economic factors – a response to the increase in electricity prices, and technological factors – improving efficiency enabled by technology. We simply don’t need as much energy as we used to.

Figure-1

The price of renewables is falling far faster than envisaged

The IEA notes that the cost of solar is already well below retail electrical prices in several countries, and rapidly approaching the level of conventional alternatives4. This reduction has been driven by improvements in technology and economies of scale in the massive increase in production over the last few years.

Figure-2

Storage

The most obvious problem with solar is that it cannot provide power in peak periods. However, battery technology has also undergone a massive transformation, most notably with the launch of the powerwall5 by Tesla Motors.

Increasingly, carbon divestment is being driven by economic and technological factors.

Even Australian energy companies are moving away from fossil fuels. AGL, the largest emitter of greenhouse gases in Australia, recently announced a new policy, providing a pathway to decarbonisation of its electricity generation by 20506. Shortly after, it announced that it too will be retailing battery storage7. Whilst AGL stated they were supporting the 2°C limit, I imagine that they would not have implemented their new policy if it wasn’t technically feasible, and economically profitable.

AGL notes that 88% of energy generation in Australia is currently from fossil fuels. That won’t change overnight, but it appears that business is no longer waiting for political reform, and getting on with the job.

1 http://www.axa.com/en/news/2015/climate_insurance.aspx
2 See http://aodproject.net/ and http://montrealpledge.org/signatories/
3 https://www.iea.org/newsroomandevents/pressreleases/2012/november/name,33015,en.html
4 http://www.iea.org/media/freepublications/technologyroadmaps/solar/TechnologyRoadmapSolarPhotovoltaicEnergy_2014edition.pdf
5 http://www.teslamotors.com/en_AU/powerwall
6 http://www.agl.com.au/about-agl/media-centre/article-list/2015/april/agl-policy-to-provide-pathway-to-decarbonisation-of-electricity-generation
7 http://www.agl.com.au/about-agl/media-centre/article-list/2015/may/agl-is-first-major-retailer-to-launch-battery-storage

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Comments

Image of alan_greenfield
alan_greenfield says

June 5 2015

Good article.
I think the decarbonisation of our economies might actually occur much faster than anyone is expecting. If you haven't seen Tony Seba speak check out this link on the disruption occurring now to energy, automotive and other industries. Based on his analysis the oil industry will be finished by 2030.

https://www.youtube.com/watch?v=RBkND76J91k
https://www.youtube.com/watch?v=bI2tFnzMOWk

Image of Sharanjit
Sharanjit says

June 10 2015

Thanks Alan. I definitely think we've reached a tipping point for decarbonisation.

Image of Sharanjit
Sharanjit says

June 10 2015


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