Investing In Climate Change

From Goldman Sachs Research, this is Alison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're digging into what may be the most important issue of our time, climate change. On the heels of a climate focused World Economic Forum in Davos, the unveiling of Europe's new green deal, and increased attention on climate change by the world's largest asset managers and banks, climate change is undoubtedly top of mind. But before we dig in, let's take a step back. At the UN Climate Change Conference in Paris in 2015, nearly

we're very far away from it. Despite some of the gains in the past few years of starting to slow the growth of carbon emissions and greenhouse gas emissions globally, they're still rising. And even if you look at what the trajectory would be if all of the current targets countries have put on the table for the Paris agreement were met by 2025, 2030, we would still be very far away from the trajectory we need to meet the overall objective of the agreement. We

obviously just concluded another round of UN climate talks, which took place in Madrid, and they ended without any new commitments to emission reductions. What should we take away from that?

It's certainly true there were no new major commitments. I don't think anybody really expected that there would be. What was a little bit surprising or disappointing, parties weren't even able to agree on language around ambition in the ultimate decision that was produced by the conference. The fact that they couldn't even agree on talking about the importance of ambition was not a good sign.

So if climate change is such a pressing problem today, why is it so difficult to achieve a solution? I turn to Michael Greenstone, director of the Energy Policy Institute at the University of Chicago, to better understand the complexity of the climate challenge and the trade offs associated with it. I

think the right way to think about this is to think about the global energy challenge, and that's a challenge that societies around the world and certainly developing countries face, which is how to balance the need for inexpensive and reliable energy, which is so critical for economic growth. And that economic growth is especially urgent in developing countries. And how the countries and societies balance that need with the need to manage local pollutants, which are often the result of energy consumption, and, of course, how to manage the the least of c o two and how it increases the odds of

Is it realistic to think that the lion's share of energy in developing economies that they need to propel growth is going to come from anything but fossil fuels? In

the

absence of fundamental changes in the cost of fossil fuel versus low carbon energy sources, I think we should expect that developing countries will continue to prioritize the use of fossil fuels.