30 April 2010

Climate Science and the Financial Markets

Over at FT Energy Source Kate Mackenzie has a really interesting post about a report by Nick Robins of HSBC on the possible effects of recent public issues involving climate science (specifically, CRU and IPCC) on the HSBC Climate Change Index (CCI, details on the invest-able version here in PDF).

There are several really interesting things here. First, since 2007 the CCI consistently outperformed the MSCI World Index. When the release of the CRU emails occurred, there was no noticeable negative effect on the market index as compared to the global benchmark. However, following the issues associated with the IPCC, the CCI has underperformed with respect to the global benchmark. This is suggestive only, as I would have expected that the dismal outcome from Copenhagen to be much more important all along. So while we can conclude that the CRU leak has been irrelevant to the markets, it is not possible to conclude the same with respect to the IPCC.

And this brings us to another very interesting point and that is the perceived (and perhaps real) connection between what the IPCC says and the movement of markets. Reuters says of the HSBC report:

"We believe that any market impacts over climate science may be nearing its floor, with the results of the three independent reviews confirming the integrity of the climate science," the report said.

For the rest of this year, HSBC identified four factors that should catalyze a revival in public concern and market confidence.

A review on the U.N.'s Intergovernmental Panel on Climate Change (IPCC) will be finalized at the end of August and governments will meet in October to take any remedial measures.

"We believe that practical steps to strengthen the IPCC's procedures would represent a positive outcome from this saga. The IPCC also has the opportunity to regain momentum with its special report on renewables later in the year," Robins said.

Because the IPCC is perceived to move markets, as least the sliver of the market associated with climate change, and thus management of actual or perceived conflicts of interest are more than a matter of speculation, but very tangible.

And in case you are curious, the largest company in the HSBC CCI is Veolia Environment (PDF), a French Company. IPCC Chairman Rajendra Pachauri sits on two of their committees and his home institution has received funding from Veolia Environment.

At FT Energy Source Mackenzie writes of the HSBC report:
They say three independent reviews into climate science - the key one being the Inter Academy Council review of the IPCC reports, due by August, will assuage doubts about climate science — adding that the IPCC’s general meeting in October and its reports, due out some time in H2, on renewable energy and managing the risks of extreme events will also provide opportunities for a confidence boost.
No kidding? Smart money says you'd better line up your investments in the HSBC CCI while the getting is good!


  1. Excellent find on the ubiquitous Rajendra Pachauri, Roger. Let's hope market makers don't read your blog.

    It is clear that the whole carbon financial system is premised on the credibility of climate science as I have repeatedly implied. No conspiracy theory is necessary, only self interest.

    "assuage doubts about climate science "

    Professionals give much more credence and weight to committees of fellow professionals than the general population. The status of one reinforces the status of the other. I suspect AGW is dead (in America) until all the debacles are forgotten.

    HSBC is a major sponsor of the Guardian environment section, one of the seven wonders of cyberspace.

  2. Given the lack of warming in our oceans, negative PDO shift, waning El Nino, low solar activity, climate science scandals, biased and misrepresented IPCC reporting, and conflicts of interest, perhaps HSBC CCI should disclose whether it is also “shorting its position”.

  3. http://www.istockanalyst.com/article/viewiStockNews/articleid/4075658
    "BEIJING, Apr. 30, 2010 (Xinhua News Agency) -- China and Japan finally nailed down the power coal price for long-term contract (LTC) at 115.5 US dollars per ton, after nearly one months negotiation....The Sino-Japan coal contract will be effective since Apr. 1 of 2010 until Mar. 31 of 2011, and the price has surged 47 percent on year....Japan has also hammered out coal purchasing contract with Australia at a price of 98 US dollar/tonne at the beginning of April. Plus shipping fee from Australia to Japan, the CIF price would come to 120 US dollars/tonne"

    Then we have coal price projections from the DOE.
    "The projected electric-power-sector delivered coal price falls by more than 3 percent to average $2.14 per MMBtu in 2010 and declines by an additional 2.3 percent in 2011."

    I guess the Japanese,Chinese and Australians didn't get the DOE memo.

  4. What about the CCX and the players there in?

  5. Something nobody has pointed out, most likely because it is unseemly to do so, rather than because nobody understands this:

    The HSBC CCI is an effective proxy for government subsidy. Solar, wind, nuclear and other economically unprofitable industries are the major constituents of this index. The only investment case that can be made for them is they will get large wads of taxpayers money or benefit from regulatory restrictions on competition in energy markets (e.g. explicitly or implicitly directing that wind or solar etc. be used).

    And what has also been happening over the period in question is that European public finances are increasingly revealed to be in the most parlous state. Those countries that don't have massive debt/deficit problems will be bailing out those that do.

    That mean a bit of a bare cupboard for these CC wannabees looking for the public handout to enrich their shareholders.

    Talk to Al Gore. He knows exactly how all this works. He virtually invented this investment theme.

  6. HSBC is up-to its ears in climate money. Many people know this.

  7. "Solar, wind, nuclear and other economically unprofitable industries are the major constituents of this index."

    The CBO concluded in 2008 using a $40/ton coal price(1.6 cents per KW ) that nuclear power had a 1.7 cents/Kilowatt price disadvantage over coal.

    Outside of Gillette,Wyoming coal doesn't sell for $40/ton delivered any more.

    Australian steam coal is $98/tonne plus delivery ,South African steam coal is going for $100/tonne plus delivery, Colombian Steam Coal is at $80/ton plus delivery. Arch Coal reports a 1st quarter 2010 price for central Appalachian coal of $68/ton.

    For new nuclear to be cost competitive with coal the delivered coal price needs to be $82.50/ton. $14 doesn't move a ton central Appalachian coal far.

    The UK Royal Society of Engineers had similar conclusions to the US CBO.

  8. Harry. You know it's more complicated than just fuel cost. The fuel of solar and wind power are free. And when you calculate equivalent comparitive costs, including all government support, the calculations are highly subjective. We can safely say though the market won't be investing in nuclear unless decommissioning and insurance costs are underwritten.

    I love the description of "Advanced nuclear" in that report. Do they mean 3rd generation, ie something that only exists on paper and for which the costs are therefore largely unknown? Why yes they do.

    Similarly "innovative coal" is assumed to capture and store carbon emissions for which the costs are also unknown.

    So they compared one wild assed guess with another. Typical.

  9. jdges,

    Yes fuel cost is one element.

    The Price-Anderson Nuclear Indemnity Act has paid out a total of $151 million in claims since 1957.

    At the Price-Anderson Nuclear Indemnity Act stands now each nuclear reactor is required to be insured for up to $300 million. Then each reactor has to contribute up to $95 million to a catastrophic fund in the event of a catastrophic accident. That creates $10 billion in catastrophic insurance, all industry funded against a claims experience of $151 million in 50 years.

    Where is the government subsidy?

    It the 1970's nuclear plants only had to contribute $2 million each to a catastrophic fund, but that amount has been steadily jacked up over the years and was last adjusted in 2003 to $95 million a piece.

    Decommisioning? It's included in current law and cost estimates.
    "26 C.F.R. § 1.468A-5 (i) A nuclear decommissioning fund must be established and maintained at all times in the United States pursuant to an arrangement that qualifies as a trust under State law."

    People had valid concerns about various issues related to nuclear power and our glorious leaders actually addressed some of them.

  10. Harry
    Well we'll see who's right. I predict none of that will make them invest in new nuclear power without seriously large government underwriting. Decommisioning costs billions, not millions, and construction costs of those new reactors are hugely optimistic so expect cost-plus contracts. Insurance I'd agree isn't that important now that it's so easy to get a taxpayer funded bail-out.