Climate change and the commodity trade

The Swiss Research Institute of Commodities Foundation (SRIC) is an organization established to promote research on commodity training, finance and shipping. Last night, I attended a lecture SRIC organized in Geneva to raise awareness about climate change and the role for the commodity trade. It was attended by 50 people made up of traders and students. Here are my notes.

Professor Martin Beniston spoke about COP21 and what it had set out to do. He described the five themes of COP21 in Paris.

Objectives of Paris COP21

  1. Use latest research to drive policy

He gave example of main temperature anomalies since 1850 1 C per century. To understand this in a more tangible way he showed that in 1950 Geneva the temperature in July was 22 C with 3.5 mm precipitation. In the same year in Toulouse it was 24C with 1.5 mm. Fifty years later, Geneva has the same temperature and precipitation rate as Toulouse. So we are seeing a systematic shift of climatic regimes northwards.

  1. Humans are responsible

Unequivocable agreement amongst scientists that climate change is man made.

  1. An agreement was needed to replace Kyoto Protocol with more legally binding international agreement
  1. To limit global warming to 2C or less compared to pre industrial values

What does this means for commodity trade? – Increased risk to business from the impact of sea level rise on major trading ports like NY, Rotterdam, Shanghai. Hurricane impacts in SE Asia.

  1. Bottom up approach to climate policy

A new paradigm emerged in Paris to address CC in a bottom up way as an alternative to top down approach. To engage not only governments but also local authorities, business and industry and civil society.

Implementation of Paris Agreement

Despite a certain optimism, the road to full implementation of the Paris accord remains long and complex.

  • Main problem is that maths doesn’t add up. The Paris Agreement stipulate global warming should not exceed 2C and if possible by 1.5 . The Nationally Determined Contributions (the emissions reductions that countries have committed to) add to 3.5C rise in temperature not the 1.5 – 2 needed. So much effort is needed to bring down emissions.
  • Anti-climate commitment from Trump will be significant obstacle as US represent 30 per cent of carbon commitments.

The current price of fossil fuels is too low to incentivize and big switch to renewables. 80 per cent of emissions come from burning fossil fuels.

To wrap up.

Long inertia built into carbon system. It will not be possible to stop current trends rapidly.50 to 100 years for climate system to slow down if stopped emissions today.

While addressing the long term issues of emission abatements, adaptation strategies need to be implemented in order to:

  • Preserve human health
  • Ensure access to food, clean water, shelter, education and to
  • Sustain biodiversity conservation

Attaining these goals raises ethical questions of unequal access to education, resources and technologies. Poor countries need immediate access to development which determines how they think about CC. Second order priority compared to meeting daily priorities.

Professor Salvatore di Falco spoke about the economics of climate change.

Impact of CC on growth

Developing countries growth is negatively affected by climate change. Per capita growth rates track rainfall and temp anomalies in sub-Saharan African countries (Barrios 2010). This means countries are not only poorer today, but are on course to be relatively poorer in the future. Why is the case for developing countries? Because they rely heavily on agriculture and ag products.

Impacts on agriculture

Longer droughts with impact on the most important capital in agriculture namely soil which has less moisture and so reducing productivity. There are losers and winners. Developing countries are in the list of losers. Most agricultural commodity producers are in this list

There is a debate about whether to focus on mitigation or adaptation. However, it is clear that we can not do without adaptation. We have to focus on how to increase resilience of agricultural systems and how to identify and diffuse best practices for different sets of actors.

Case study Ethiopia

He presented results from a paper Di Falco and Veronesi 2014 in which a survey of farmers showed that producers were facing poor soils, declining yields and higher risk of crop failure. Climate change was exacerbating the situation. Solutions include diffusing better soil and water management practices in combination with new seeds as this reduced the likelihood of crop failure

What does climate change mean for the commodity trade?

Di Falco discussed how investors face the risk of stranded assets in terms of “unburnable carbon reserves” under a policy scenario where complying with emissions limits means can not burn reserve of fossil fuels. There are 565 to 886 billion tonnes of C02 is the carbon budget for limiting temperature rises to 2C. The carbon embedded in worlds reserves amount to 2860 billion tonnes, thus we can only use 20 per cent as a precautionary approach.

If current investment trends continue we may create a carbon bubble. Capital invested in expanding reserves can be wasted. According to HSBC, equity valuations could be reduced by 40 to 60 percent in a low emissions scenario. We need to have a greater understanding of the uncertainty and risk around fossil fuels and see how to redistribute these funds towards more attractive alternatives. There is a need for diversification.

“Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky strategy” Lord Stern

Different commodities chains have different issues, but across all political inertia on mitigation makes adaptation unavoidable. Identification and diffusion of best practices is of paramount importance.

Aid for trade perspective

In the discussion that followed, it was remarked that commodity traders are mainly concerned with managing the risk of supply, CC increases that risk and the trade will invest in diffusion of best practices to enable its suppliers to maintain production.

SMEs exporters are in this situation of how to manage the declining productivity of their suppliers. This was illustrated in the survey of exporters carried out by ITC in 2014 in which they said CC along with price volatility and poor infrastructure are the biggest threats to their competitiveness.

It is therefore advisable for aid for trade agencies to continue mainstreaming the management of climate risks into agricultural projects, supporting SMEs and governments in their efforts to maintain productivity of suppliers, identify and manage climate risks and facilitate access to climate finance.




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