Others

Deflated Copenhagen

 

Story Highlights:

  • The UN's Copenhagen summit fell short of its aim to get countries to legally adhere to carbon emissions limits under a cap-and-trade scheme.
  • After a series of deadlocked talks, the summit finally reached consensus over the nonbinding "Copenhagen Accord."
  • Encouragingly for business, especially in developing nations, the diluted Copenhagen Accord means companies are spared (for now, at least) of potential production limits and other restrictions tied to emissions targets.
  • This has been an enlightening case study in politics—specifically to watch what politicians do, not what they say.

 ___________________________________________________________________________________

Fill a balloon with too much hot air and it bursts—an apt summary of the UN's Copenhagen summit on climate change. Billed as the first significant global step toward reducing greenhouse gas, the summit's goals included reaching legally binding agreement between some 190 countries to adhere to carbon emissions limits under a cap-and-trade scheme. But the two-week long summit concluded Sunday with an outcome that fell far short of its lofty intentions. 

Don't get rankled—this soap box isn't for arguing for or against manmade global warming. As always, it's a question of what the market will do. In that light, it's probably no small coincidence markets heaved a sigh of relief Monday after Copenhagen turned out to be mostly hot air late last Friday. Also, carbon prices in Europe and prices for carbon permits fell as the talks deteriorated into dramatic backroom dealings, name calling, and other soap opera ennui—proof enough of an ineffectual summit. Investors would do well to be wary of international talks producing tangible results—consensus among a diverse group of nations is hard to wrangle.

The summit finally reached consensus over a 3-page "Copenhagen Accord." The nonbinding document includes a pledge by the developed world to contribute $30 billion in climate "aid" to the developing world, with the amount rising to $100 billion a year after 2020, and a broad agreement to prevent global temperatures from rising 2 degrees Celsius. Specific emissions limits, however, were absent from the accord. 

Lack of specifics is generally a dead giveaway of a feckless result in matters of this sort. And for that matter, who enforces this accord is anyone's guess. Much like the UN and other so-called global coalitions, there is no "climate police" to run or rule any of these initiatives. Another prime reason most summits—be they of the G20 variety or otherwise—end up more bark than bite. 

Encouragingly for business, especially in developing nations, the diluted Copenhagen Accord means companies are spared (for now) potential production limits and higher prices for energy inputs, as well as dealing with applying for permits and credits. (Already, the UN carbon market is understaffed, and 66% of the 5,641 projects submitted since 2003 to secure carbon credits are still awaiting review. It's been a mess since inception.) 

Today's industry turns to carbon-based energy because it's cheap and abundant. Asking companies to incur higher costs by switching to another energy source makes them less competitive—pure and simple. That means higher prices on, well, pretty much everything. Plus, the policies put forth originally could have impacted developing nations more than industrialized ones, as the limits are set on carbon production, not consumption—no wonder China, India, and Brazil balked during the talks. This is all part of the politicization of this issue, and, again, why it's near impossible to get all nations to agree on a single agenda. Without consensus and a level playing field for all countries, it's simply too high a hurdle to ask some companies in certain regions to compete against others without the same rules/restrictions. Capital will simply flow to where it's cheaper and easier to do business and squeeze out the rest. (Look no further than the Atlas-like burdens [CAFE, unions, etc.] US auto companies have shouldered relative to other countries for evidence—and how those firms have fared relative to their global peers.)

This has been an enlightening case study in politics—specifically to watch what politicians do, not what they say. Most often the high rhetoric is met with meeker action. These lessons can be applied elsewhere (check back with us later this week for more on the US healthcare saga). Again we reveal our cynical side: After witnessing the tiff between President Obama and Chinese leadership, or the ham-handed, overwrought denouncement of capitalism by dictator extraordinaire Hugo Chavez (who got a rousing standing O from the Copenhagen delegates!), excuse us if we never believed Copenhagen was about economic or ecological reform in the first place. 

What does it mean for investors? Stocks simply don't like the prospect of grandiose efforts to regulate the natural course of business and flow of capital. Whichever side you fall on the climate change debate, what is less debatable is the potentially deleterious economic effect a lumbering new global energy regulator would create. 

Dare we suggest it: Many countries and companies are already adopting goals and practices with an eye toward the environment—on their own terms. There is ample evidence of that, and we marvel at the speed of technological breakthrough of, for instance, hybrid auto technology once an (gulp) incentive for profit (e.g. high energy prices) emerged. Instead of thinking of ways to limit energy use (a classic form of power hoarding), we'd rather see global governments investing in cutting-edge utilities infrastructure to replace the aging grids, embracing nuclear energy, and so on. And that's change we can believe in. 

For more information on the energy sector, visit the Fisher Investments on Energy website.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.