Climate Realities
Earth’s climate is changing, and science suggests that this is almost certainly due to human activities, notably due to the rise in greenhouse gas (GHG) emissions from the burning of fossil fuels.
Despite growing public concern, however, the amount of coal, oil and gas being used continues to rise, and the concentration of carbon dioxide in the atmosphere has reached levels that are close to the levels that most scientists believe will have a serious impact on life on planet earth. Depending on what actions are taken, the level of emissions could double by 2050. Widespread public protests, particularly in advanced western economies, reflect many people’s despair that not enough is being done to slow global warming.
Progress has been made, but it remains limited. This is doubly worrying given that the greenhouse effect has been known about for around a century, and that it is in part anthropogenic (associated with human activity) has been regarded as scientific fact since the 1960s.
The Paris Agreement, drafted in December 2015 and ratified a year later, finally set out pathways to mitigate global warming for the 197 countries that signed up. Since then, the United States has said that it will pull out of the agreement. Two steps forward, one giant leap back by the country that led the world in building a consensus that had been impossible to reach in the earlier rounds of talks which led to the Kyoto and Copenhagen agreements.
Building a consensus for action on the Paris framework is proving more difficult than building a consensus of intent.
Despite signing up to Paris, resource dependent countries such as Russia and Saudi Arabia have been reluctant to translate words into deeds. Environmental activism has become inextricably muddled up with other issues such as human rights and democracy, resulting in a backlash as liberalism has given way to authoritarian populism in countries such as Brazil and the US. The waters have been muddied further by the competing agendas of rich countries, whose development has been fuelled by oil, gas and coal for the last century or more, and poor countries who want to fund their own economic development by exploiting these resources.
Climate Realities
The scientific consensus is that climate change is real, and that it is happening now.
Mindsets
For the last century, energy has been delivered under a centralised system run by powerful companies or state-run institutions.
Energy for mobility has typically been dominated by private enterprise. The Rockefeller fuels monopoly was broken up in the 1920s, creating a model of competing oligopolies that became a template for the capitalist system. The companies that operated the refineries that made the petrol also dominated other transport fuels for airplanes and ships, and petroleum commodities such as petrochemicals and fertilizers. In the 1960s and after, national oil and energy companies emerged, but these typically operate independently even though they are state run.
The state-owned model prevailed in the early years of growth in the power sector, and state control is prevalent in the utilities such as water, gas and communications that operate as natural monopolies. The split between capitalist and communist models after World War II led to a debate about the role of private enterprise, and many countries in the west, including the United States, most European and many Asian companies, have deregulated and/or privatised their utility sectors.
Both the fuels and utility sectors have operated top-down business models with centralised decision-making and where economies of scale dominated business models.
Mindsets
Minsets reflect a way of seeing the world, a kind of prism that determines the visible spectrum. As the energy transition progresses, old ways of thinking are being eroded by new challenges.
The advent of renewable energy was disruptive to the status quo. New technologies such as energy storage are both a threat and an opportunity to the oligopolies who have dominated the energy sector. Meanwhile, the prospect that fossil fuels will be phased out by the end of the present century has led coal, oil and gas companies to reinvent themselves. Faced with this existentiasl threat, radical restructuring is seen by many energy companies as a strategy for survival.
Strength is only one of the aspects of the will, and when dissociated from the others, it can be, and often is, ineffectual or harmful to oneself and other people… In order to go somewhere, one does not proceed by walking in a straight line across open country or by climbing over buildings. One rather studies a roadmap and uses existing roads, which although not in a straight line, can lead one to his (her) destination with the least amount of effort.
Future Leadership
These disruptive changes in the energy landscape require a different mindset from 21st century leaders of energy companies.
In his book Reiventing organisations,
Rather than a CEO working with the board of directors to implement plans that can be rolled out in tiered levels across an organisation, leadership is gradually evolving as a creative process that stimulates and catalyses change at a local level and where decisions from the bottom up are integrated and synthesised.
Of course, there is no single recipe. The disruptive nature of change means that these trends in leadership are emergent and fragmented. The model of organised chaos that has led to such spectacular growth among technology companies can provide only a partial template for the energy sector where the importance of safety is a powerful driver of standardised procedures,
But as the delivery of energy becomes more distributed, and communities have a bigger voice in the forms of energy that serve their local area, energy leaders are becoming more adaptive and flexible. The 20th century model of leaders as deal makers, wielding influence in secret and behind closed doors, is giving way to a new model in which leaders communicate and embody a creative vision.
Companies are changing. It is only in the last 2-3 years that I have heard an executive at the oil company Shell use the word “passion”. The verdict is still out on whether this reflects a change in DNA or a passing management fad.
Times are changing
Traditional leadership models are evolving in the face of disruptive change in the energy landscape.
Business Models
The challenge of leadership is closely related to the issue of what business models are required to run an industry on the scale required to meet world energy needs while still meeting the goal of combatting climate change.
For much of the last century, the energy system oscillated between the twin poles of the “free market” and government “regulation”. These opposed modes of operating reflected divergent narratives. The free market ideology has a story that pits heroic individuals and their corporate correlatives against the suffocating machinations of bureaucracy and the state. Government regulation, in contrast, sees itself as a responsible counterbalancing mechanism that protects individual against the depredations of corporate greed.
These ideological extremes became embedded during the Cold War with individual libertarianism and corporate capitalim opposed to State domination and Communism.
Since then, the yawning gulf between the two ideologies has narrowed. Companies have demanded clear regulation from governments even if it is stringent, provided that the playing field is level. Financial institutions and funds have pressured the big oil and energy companies to do more on climate change. Governments have supported innovation and entrepreneurship as vehicles for the Green Economy.
The old shibboleth of the State vs the Individual, the heart of the adolescent novels of Ayn Rand, has been modulated by the common need for a sustainable future. Although populist governments have tried to revive the old dichotomies, the realities of a world that is volatile, uncertain, complex and ambiguous make simple solutions and mantras increasingly irrelevant.
Re-envisioning the future
In the VUCA world, the old dichotomies break down: right vs left, State vs individual, “us” vs “them” feel increasingly irrelevant.
Frederick Laloux in his book Reinventing Organisations has suggested an evolutionary path for business from centralised Robber baron organisations, which he characterises by the colour red, through more devolved creative companies (orange) to companies that actively pursue goals for the benefit of society (green) and eventually to companies that are driven by self-governing groups that have a sense of shared purpose and community (teal).
It is still unclear whether the future for energy companies is orange, green or teal, but it’s fairly clear that the model of aggressive corporate competition is under challenge. Activist shareholders require the companies in which they invest to have high ethical standards, and are willing to push this agenda at AGMs and in public forums. meanwhile, social media have brought a spotlight on any activities that cut corners with Ciorporate Social Responsibility.
As a result, business models are changing. Greater disclosure, more transparency and community engagement are essential.
Meanwhile, populist governments have tried to trun back the clock, particualrly on anti-corruption and money-laundering. The future direction is unclear at this stage.
Complexity and Synthesis
For at least the last 35 years, it’s been a central dogma of energy pricing that markets can allocate resources more efficiently than mandated pricing systems. Even before the oil exporters’ cartel OPEC switched to market-related pricing, however, commodities have changed hands based on market principles.
The mechanisms used in the pricing of oil, and related commodities such as gas, assume that prices will adjust any imbalances between supply and demand. For example, a sudden shortage of supply caused by a geopolitical event will result – almost immediately – in a price spike that will encourage oil producers to pump more oil onto the market.
The trouble with this approach is that, while the commodity is in abundant supply, there is no economic incentive for potential competitors to develop to deal with future shortages.
The problem has been solved by subsidies, which underpinned the early growth of renewables. This led many governments to subsidise fossil fuels at the consumer level, leading to an uneven playing field.
An Uneven Playing Field
Subsidies have led to an uneven playing field with crippling economic costs. But while cheap energy encourages wasteful consumption, the fact that energy is essential to life makes subsidy removal painful and controversial.
The carbon markets are a different story. The European Union’s Emissions Trading System has been set up as a model for the pricing of “regulated” commodities, but for most of the period since it was incepted in 2005 the carbon price has been below that required to ensure a transition from heavily-polluting fuels to clean energy.
The Paris Agreement highlights the “important role” for providing incentives for carbon reduction through domestic policies and carbon pricing.
Carbon pricing has three main objectives: to penalise emitters of greenhouse gases; to encourage the transition to cleaner fuels; and to fund investment in carbon disposal. Three main methods have been devised by governments to achieve these goals: emissions caps; market-based mechanisms, such as the EU emissions trading system (ETS); and carbon taxes, including carbon price floors.
The vast majority of countries that have committed to carbon pricing in their Intended Nationally Determined Contributions (INDCs) – submitted to COP21 – have favoured market-based measures rather than carbon taxes. The World Bank estimated in 2016 that around 61% of global emissions would be covered by such schemes, including emissions from China, the United States, India, Brazil and the EU.
The trouble with these schemes is that, to date, they have failed to deliver the certainty needed to encourage low-carbon investment or carbon abatement on a large scale. Since its inception in 2005, the EU ETS has failed to deliver a high enough price either to encourage a switch from coal to gas in power generation, or – as it was intended to do – to fund carbon capture and storage (CCS) projects that would allow carbon disposal.
Many of the INDC commitments favouring the market approach are conditional, and tied to unspecified levels of financial and technological support. It seems unlikely these would meaningfully contribute to emissions reduction within the next decade, with the possible exception of China’s nascent National Emissions Trading Scheme.
Adaptation
Much less publicised than the Nationally Determined Contributions to mitigating climate change are the national plans for adaptation to the consequences for a changing climate. Given our projections that, even if we manage a transition from fossil fuels over the next 25-30 years, the earth’s climate will still warm by 3 degrees C, putting in place “common purpose” plans to adjust to the consequences of the temperature rise is essential.
The high-level consequences of global warming are well-known: iconic photographs of melting ice caps have popularised these so that they become a series of vignettes, each of which has a strong emotional resonance.
The trouble with the emotional appeal of such images, largely popularised by climate lobby groups to whip up resentment against corporations, is that they offer no solutions when they become realities. The emotional charge of an image is great at creating a sympathetic response but does not provide any engineering or economic solutions to the dangers it portrays. A picture paints a thousand words but does not create a consensus on what to do. Moreover the nationalistic approach to mitigating climate change makes a global response to adapting unlikely. The gradualness of the problem is also likely to create a slower response; the boiling frog dilemma means that the prompt and pre-emptive action required is not likely to materialise.
The consequences of climate change of 3 degrees C are likely to be as follows:
- Rising sea levels
- More extreme weather
- Widespread desertification
- Disappearance of snow
- Changes in ocean currents
Each of these high-level changes will have specific consequences related to it, although these will vary from region to region.
The assumption has been that adaptation to climate change will only be needed if there is a planetary failure to deal with the challenge of mitigating the onset of climate change. The reality is that the need for both mitigation and adaptation will accelerate together, and that there will be competition demands from both challenges.
Adaptation
It’s realistic to envisage that global warming of 2-3 degrees C will occur over the next few decades. This will have enormous impact but the effects of climate change will be experienced unevenly around the world. Some poorer countries will be decimated; some richer countries may actually benefit.