This Week Questions? Read the syllabus first.

. Markets Climate change You should be choosing the company you will analyze for your Scenario Planning Assignment by now

Coming up Next Week An easier week! Globalization and International Business 5% brief due Wednesday 11pm

What are markets?

Working Assumptions of the Political Economy

The basic unit of analysis are people (i.e. Stakeholders)
Employees,

Customers, Shareholders, etc.

People are self-interested

We

look out for ourselves: Whats in it for me?

People are rational (maximize utility)

We

dont act randomly or non-rationally (e.g. emotionally) do we?

Self interest vs. Rationality Does altruism really exist? You tell me
Arguments for Arguments against

Market Failure
Public goods Externalities Monopoly Information asymmetry Agent misdirection Social goals Inequality Economic instability

CLIMATE CHANGE: PHYSICAL IMPACTS

Nardia Haigh, Ph.D.

The Carbon Cycle

http://oceanworld.tamu.edu/resources/oceanographybook/Images/carboncycle.jpg

Temperature increases

http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm

http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm

Regional temperature change

Stern (2006: p294): http://www.hm-treasury.gov.uk/sternreview_index.htm

Fresh water

IPCC water forecast

http://www.ipcc.ch/pdf/assessment-report/ar4/wg2/ar4-wg2-chapter3.pdf

Projected water use by sector

http://www.unep.org/dewa/vitalwater/article43.html

Extreme weather

http://en.wikipedia.org/wiki/List_of_Atlantic_hurricane_seasons

Extreme weather

http://en.wikipedia.org/wiki/List_of_Atlantic_hurricane_seasons

Extreme weather

http://www.wmo.int/pages/publications/meteoworld/archive/june08 /auld_en.html

Useful reports, websites, etc.

IPCC publications: http://www.ipcc.ch/publications_and_data/publications_and_data. htm http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth _assessment_report_synthesis_report.htm Stern Review: http://www.hm-treasury.gov.uk/sternreview_index.htm UN Environment Program: http://www.unep.org/dewa/vitalwater/index.html US Global Research Program: http://www.usgcrp.gov/usgcrp/nacc/background/scenarios/default .htm Tyndall Centre for Climate Change Research: http://www.tyndall.ac.uk/publications/search-all-publications

CLIMATE CHANGE AND BUSINESS

"Scientists make meaningless or ambiguous statements. Advocates and media translate statements into alarmist declarations. Politicians respond to alarm by feeding scientists more money[the accepted evidence is] entirely consistent with there being virtually no problem at all."
Dr. Richard Lindzen, Massachusetts Institute of Technology, 2006

Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores spanning many thousands of years. The global increases in carbon dioxide concentration are due primarily to fossil fuel use and land-use changes, while those for methane and nitrous oxide are primarily due to agriculture.
The Intergovernmental Panel on Climate Change, 2007

The debate is over. There's no longer any debate in the scientific community about this. But the political systems around the world have held this at arm's length because it's an inconvenient truth, because they don't want to accept that it's a moral imperative."
Al Gore, Former United States Vice President, 2006

Over the past 2 hours, I have offered compelling evidence that catastrophic global warming is a hoax. That conclusion is supported by the painstaking work of the nation's top climate scientists.
James M. Inhofe, United States Senator, 2003

Market Shift

2 Questions and why theyre the wrong ones.

1.

How much will it cost?

0.6-1.4% GDP increase by 2030 to reach 450ppm (McKinsey, 2007). 1% GDP increase to reach 500-550ppm (Stern,2007). Increase in GDP of H.R. 2454 (CBO, 2009)
Year 2020 2030 2040 2050 Percentage Change -0.2 to -0.7 -0.4 to -1.1 -0.7 to -2.0 -1.1 to -3.4

2 Questions and why theyre the wrong ones.

1. 2.

How much will it cost? Does it pay to be green?

Report by Andy Hoffman

100 question survey of 31 companies.
Advanced Micro Devices, AEP, Air Products, Alcan, Alcoa, Baxter, BP, Calpine, Cinergy, DTE Energy, DuPont, Entergy, Exelon, Fairchild Semiconductors, Georgia-Pacific, Holcim, IBM, Intel, Interface, Maytag, PG&E, Rio Tinto, Rohm and Haas, SC Johnson, Shell, Staples, Sunoco, TransAlta, United Technologies, Whirlpool, and Wisconsin Energy

6 Case studies:

Source: Hoffman, A. 2007 Carbon Strategies: How Leading Companies are Reducing their Climate Change Footprint

Why take Action?

Once begun, how important are the following measures of success in undertaking your climate-related strategy? (Rate their level of importance: 1 = not important; 3 = neutral; 5 = important).
Energy efficiency

Operational improvement

Cost savings

Anticipating and influencing climate change regulation

Protect the global climate

Elevating corporate reputation

Social responsibility

Improving risk management

Identifying new market opportunities Enhancing human resource management and corporate culture

Accessing new sources of capital

3 Average Response

Why take Action?

Once begun, how important are the following measures of success in undertaking your climate-related strategy? (Rate their level of importance: 1 = not important; 3 = neutral; 5 = important).
Energy efficiency

1. Increase Profits
Operational improvement Cost savings

Anticipating and influencing climate change regulation

2. Pending Government Regulation 3. Enhance Corporate Reputation

Protect the global climate

Elevating corporate reputation

Social responsibility

Improving risk management

Identifying new market opportunities Enhancing human resource management and corporate culture

Accessing new sources of capital

3 Average Response

Why take Action?

1.

Increase Profits

Uncertain energy costs

$/bbl
$160

Crude Oil Price

2. 3.

Pending Government Regulation Enhance Corporate Reputation

WTI $120 $100 $80 $60 $40 $20 $0 May-83 May-87 May-91 May-95 May-99 May-03 May-07

$140

Source: Bloomberg

Why take Action?

1.

Increase Profits

Increasing energy costs Investor interest

Growth in SRI Funds in U.S. $ billions, 1995-2005
$200 $180

2. 3.

Pending Government Regulation Enhance Corporate Reputation

$140 $120 $100 $80 $60 $40 $20 $0
1 2 3 4 5 6

$160

Why take Action?

1.

Increase Profits

Increasing energy costs Investor interest Greentech sector

Global New Investment in Clean Energy
$12.0 $10.0

2. 3.

Pending Government Regulation Enhance Corporate Reputation

$8.0 $6.0 $10.6 $4.0 $6.5 $2.0 $0.0 $0.6 2002 $0.9 2003 $1.9 2004 2005 2006 2007 2008 YTD $5.1 $7.9

Source: New Energy Finance

Note: Includes buyouts, excludes projects

Why take Action?

1.

Increase Profits

Increasing energy costs Investor interest Greentech sector Growing consumer demand

In the 1980s, energy efficiency was number ten, eleven or twelve in consumer priorities. In the last four or five years, it has come up to number three behind cost and performance, and we believe these concerns will continue to grow. Casey Tubman, Brand Manager of Fabric Care Products, Whirlpool

Why take Action?

1.

Increase Profits

Increasing energy costs Investor interest Growing greentech sector Growing consumer demand

2. 3.

Pending Government Regulation Enhance Corporate Reputation

Why take Action?

2. Pending Government Regulation
[If you believe that federal standards on climate change are imminent] when do you believe these standards will take effect?
2005-2010 2010-2015 2015-2020 Beyond 2020 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percentage of Respondents

Why take Action?

1.

Increase Profits

Increasing energy costs Investor interest Growing greentech sector Growing consumer demand

2. 3.

Pending Government Regulation Enhance Corporate Reputation

Businesses that ignore the debate over climate change do so at their peril. The Conference Board

How to take action?

Ensure Strategic Timing

Not whether to take action, but when. You should always remain one step ahead of the competition. But if you are two steps ahead, you lose the crowd. The ideal is for you to be the leader of the pack and everyone pulling in the same direction. David Bresch, Head of Atmospheric Perils Group, Swiss Re How aggressive should the strategy be? Pay attention to market signals. Policy sets the rules of the game Reduce uncertainty by gaining a seat at the policy table: hold the seat, companies have to bring experience, you cant take a seat without bringing experience to the table.

Establish Appropriate Levels of Commitment Within the Firm

Influence Policy Development

Create Business Opportunity

Create Business Opportunity

Risk Management, Bottom-line Protection

Business Opportunity, Top-line Enhancement

Climate change cannot be an add-on.

We need to understand, measure, and assess market opportunities. How do you know and communicate which products will be successful in a GHG constrained world?...The company that answers these questions successfully will be the winner. Linda Fisher, Vice President and Chief Sustainability Officer, DuPont

Climate Change Represents a Market Transition

The key is both influencing the rules of the game and timing your shift to a new carbon-constrained strategy. Its knowing what the next technology for energy production is, and shifting when the market is ready to reward it. Were not going to get out of the oil business in the near term. But, you have to ask, What is the iPod for energy? Is it out there? You have to be on watch. David Hone, Group Climate Change Advisor, The Shell Group

Climate Cost Abatement Curve

Source: Enkvist, Naucler, & Rosander. A Cost Curve for Greenhouse Gas Reduction. McKinsey Quarterly, no. 1 (2007): 17

Source: Schilling, M.A. & Esmundo, M. 2009. Technology s-curves in renewable energy alternatives: Analysis and implications for industry and government. Energy Policy, 37:1767-1781.

This telephone has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.
Western Union internal memo (1876)

Who the hell wants to hear actors talk?

H. M. Warner, Warner Brothers (1927)

I think there is a world market for maybe five computers.

Thomas Watson, chairman of IBM (1943)

We don't like their sound, and guitar music is on the way out.
Decca Recording Co. rejecting the Beatles (1962)

Id put my money on the sun and solar energy. What a source of power! I hope we dont have to wait until oil and coal run out before we tackle that.
Thomas Edison (1931)

The Business Case

Market Shift

Source: Schilling, M.A. & Esmundo, M. 2009. Technology s-curves in renewable energy alternatives: Analysis and implications for industry and government. Energy Policy, 37:1767-1781.