Like it or not, the evidence that the Earth's climate is changing is no longer up for debate in mainstream scientific communities. In less-scientific communities, it's also becoming harder to make the argument that some sort of climate change isn't present (no snow in Minnesota in January!). Those who predicted climate change, more commonly known as global warming, warned that not only would temperatures increase, severe weather events will increase in scale and frequency, something we may already be seeing. In just the last few years we've seen New Orleans and the New York/New Jersey area devastated by hurricanes, and a drought with record heat that hit the U.S.
The scientific evidence is even more alarming. According to NASA, the 20 warmest years since 1880 have all occurred since 1981 and the 10 warmest have all occurred in the last 12 years. This has melted ice sheets around the world, caused the ocean to warm by 0.3 degrees since 1969, and caused it to rise by 6.7 inches in the last century.
A new report draft on climate change from a 60-person National Climate Assessment and Development Advisory Committee concluded that weather events like heat waves, heavy downpours, floods, and droughts are more frequent and/or intense than in the past. The report says that "Sea levels are rising, oceans are becoming more acidic, and glaciers and arctic sea ice are melting," which would have the most devastating impact on humans.
Here's what mainstream scientists are warning as consequences of global warming or climate change:
- Sea levels rise: We've already seen small increases in the ocean's level, but if both poles melted the ocean would rise an astonishing 200 feet, so the consequences are potentially huge.
- More frequent, stronger storms: One common prediction from climate change is increased storm activity and severity both inland and out at sea. In the U.S., this means more downpours and stronger hurricanes coming from the Gulf of Mexico and Atlantic, as we've seen in recent years.
- Higher temperatures: The average temperature in the U.S. has risen 1.5 degrees Fahrenheit since 1895, but the alarming statistic is 80% of that rise has occurred since 1980. The report linked above says that temperatures are expected to rise 2-4 degrees Fahrenheit more in the next few decades, and as much as 5-10 degrees Fahrenheit by the end of the century.
The impact of these events will affect all of us individually in different ways. But I'd like to focus on a few industries it will influence in the years ahead, both for better and for worse.
The business of risk is at risk
Insurance is the business of paying people for the losses they've suffered because of storms, earthquakes, fires, and other disasters. So, if we're going to see an increase in frequency of these events, then insurers will be adversely affected.
Allstate Insurance, Berkshire Hathaway (NYSE:BRK-B), and Travelers Group are all publicly traded companies who are among the top five in property and casualty insurance as measured by premiums written. They're already modeling for climate change and more frequent storms but if storms like Sandy and Katrina hit back to back then the effect could be large on the insurance industry.
The irony of global warming -- more oil and gas
It's horribly ironic that if the planet heats up enough to melt the northern ice cap it could actually open up a lot of previously unavailable oil and gas drilling. The U.S. Geological Survey estimates that there could be 412 billion barrels of oil equivalent in the Arctic Circle, about 22% of the world's undiscovered conventional oil and natural gas resources.
The negative for oil and gas is that by the time the Arctic melts we'll realize the climate is changing irrevocably and there will be a big push against the industry. Cap and trade measures have already been implemented in Europe, and California is starting its own program this year. Taxes or other ways of making fossil fuels more expensive will likely be in place by the time this resource opens up.
Old energy bites the dust
We've already seen the deterioration of the coal industry because of increased regulation and lower natural gas prices, but we're only at the start of the anti-coal movement. Coal is a legacy energy source in the U.S. and it will soon be replaced by natural gas, and eventually solar, for electricity generation. New coal plants are simply a thing of the past and they're being shut down by the hundreds across the country. For coal miners like James River Coal (NASDAQ: JRCC) and Arch Coal who rely heavily on thermal coal for revenue climate change is a trend they don't want to see get any worse, after losing more than half there market value in the past year.
China is reaching a point where the air quality in major cities is becoming so bad that policy changes could be coming from the government. China is putting billions of dollars into its solar industry, and after environmental protests last year it appears leadership is willing to increase environmental regulation to reduce the smog that fills many cities in China.
Alternatives to fossil fuel
If "fossil fuel" becomes a bad word because of global warming we'll be looking for alternatives for both power generation and automobile fuel.
Power sources like solar aren't ready to take over the grid today but from a cost perspective they're now comparable to other sources of energy. According to Lazard's 2012 analysis of the levelized cost of energy from a variety of sources, crystalline ground-mounted solar is only slightly more costly than new generation fossil fuel and is far less costly than peak energy from gas (the energy it would displace first). With solar being the one energy source that's falling in cost it's only a matter of time before it's a no-brainer for the energy industry.
I've picked out SunPower (NASDAQ:SPWR) as my top stock to take advantage of this solar trend, and after Warren Buffett's Berkshire Hathaway agreed to spend as much as $2.5 billion on one of its projects the market started to see the potential as well. First Solar (NASDAQ:FSLR) is another company that will benefit from the trend toward solar, although likely more on the project development front.
On a vehicle level, the technology to use something other than gasoline is starting to become a reality. Tesla Motors is now mass-producing sedans that can get as much as 300 miles per "tank" of electricity and others are following the lead. Toyota is buying drive trains from Tesla for the Rav4 and it may add it to other vehicles as well.
Alternatives are a great idea but there are still many technology questions to be answered. The solar and wind industries need a way to store energy and transport energy long distances. Electric vehicles need extended range and faster charging. These technological challenges won't be answered overnight, but we won't see climate change overnight either. I think the tides will slowly ebb toward these alternative energy industries, making profitable investments for patient investors.
Climate change is real
The evidence of climate change is real and the impact will be as well. It's not too early to start thinking about how your portfolio could be affected by the changing actions of consumers and changing policy on the government level.
Every company will be affected differently just like every community will be affected by climate change differently, so there's no single answer to how we should invest for climate change. But long-term investors would be wise to consider what the ramifications may be, good or bad.