Hot and getting hotter but why don't we react
Key takeaway
Contact the author Chris Blyth
In this short article, we explain how "prisoner's dilemma" and commercial project returns might account for Australia seemingly doing far too little to change the state of the environment we live in.
Key takeaway
Despite growing evidence of climate change there appears to be an underwhelming response by consumers, businesses and governments in Australia (and elsewhere) making proactive steps to avert climate change.
We believe that there are at least two rational explanations for this inaction: (a) ‘prisoners dilemma’ behaviour and (b) inadequate ‘stand-alone’ Return On Investments (ROI) on select initiatives and projects.
Overwhelming evidence that its getting hotter and dryer in Australia
Across the domestic and global press, it has been mentioned all too often that Australia continues to break heat records and that incidents of extreme weather are on the rise. January of 2019 was declared as the hottest January in history and the year of 2018 set the record of 3rd hottest year, with 2013 as the hottest and 2005 following behind. According to the Australian Government Bureau of Meteorology, the average temperature last year was around 1.1% higher than the average calculated between 1961 and 1990. This trend is not anomalous given that only one of Australia's warmest ten years occurred before 2005.
Source: Australian Government: Bureau of Meteorology
Too hot? So what? Get off to the beach! Who cares?
Moral, political, environmental and economic impacts all overlap
What is the political response to this ongoing debate? Will the responsibility fall on various industries to fill the void that is our energy and climate policy? It is important to note that the current global debate on climate change is no longer about whether it exists, but rather why do individuals, businesses and Governments have a responsibility to act on it. In December 2018, the Yale 2018 annual survey found that the percentage of Americans who say global warming is personally important is now at a record high (72%), up 9 percentage points since March 2018.
"After a year of devastating extreme events, dire scientific reports, and growing media coverage of climate change, a record number of Americans are convinced that human-caused global warming is happening, are increasingly worried, and say the issue is personally important to them,”
Source: Anhtony Leiserowitz, PhD of Yale University
It’s been 10 years since Kevin Rudd declared climate change to be “the great moral challenge of our generation”, with plenty of others pointing this out – even the Pope gave his two cents, saying that we have a “common home” and ultimately, we need to decide what world we gift our children. However, the moral aspects of this issue, though much has already been said, are no longer enough to change mindsets and spark a reaction. The focus has now veered towards the political, economic and environmental impacts of climate change, all of which are intertwined.
We have previously commented that politicians (on both sides of government) have consistently lost their way on policy and failed to make any ground – no more to be said for now. Go to the Beach? Who cares?
Environmental effects abound - our eco systems appear to be stretched to their limits. Consider a million dead fish in the Murray Darling; heat stressed bats drop dead; 200,000 hectares burn in Tasmanian fires; and 90 dead wild horses; unprecedented bleaching of the Great Barrier Reef. All highly visible and no doubt ’so called’ natural disasters have occurred before – we are increasingly becoming immune to reading about this.
Finally, we get to the part that everyone responds to: the economic costs to households and businesses. It is no secret that consumers are facing growing energy and insurance costs as ‘nature events’ – such as floods, fires and storms become more frequent. Businesses in sectors such as agriculture, energy, tourism, beverages, insurance and construction are increasingly pressured by consumers to adopt new, “eco-friendly” and “smart” business models in response to climate change.
Okay, so you have my attention now… what can be done? Or more precisely, if it is that obvious that changes need to be made, why are we so slow to move and done far too little?
The answer to these questions may be twofold: (a) a lack of ROI and (b) prisoners dilemma mentality.
Is there a lack of Return on Investment (ROI) that explains inaction?
On a global and local scale, a transformative shift is taking place in the way energy is produced, consumed and stored. This is most relevant to Australia as its energy sector contributes 74% of the country’s net GHG emissions.
If there is a way to make a change, renewable energy is a good start, but why has there been a lack of action from businesses and Governments? This is due to the uninformed belief that pursuing a ‘clean’ economy will somehow amount to more costs than the current and future consequences of climate change. According to “Energy Darwinism II”, a report by Citibank, if trillions of dollars were invested globally into clean technology across all infrastructure-rich industries, tens of trillions of dollars worth of benefits could be realised. The economics of implementing a clean economy has greatly improved due to exponential growth in solar energy generation across Europe, the US and Australia and with the scale of investment in renewables at A$900bn, there are opportunities for new markets in energy, finance and transportation.
This is evident in Australia with the rise in solar and now battery uptake on a residential and commercial level. The costs associated with producing and consuming renewable energy has decreased significantly over the last 10 years, giving households and businesses a choice in cutting their energy costs all whilst positively impacting the environment.
A recent ANU report has found that Australia is installing renewable power per person each year faster than any other country, helping it to meet its entire Paris Agreement emissions reduction targets five years early.
“The installation of renewables in Australia last year really ramped up compared to these other major economies, and we expect that trend to continue this year and beyond.”
Source: Professor Blakers from the ANU Research School of Electrical, Energy and Materials Engineering (RSEEME)
Wishful thinking says the Clean Energy Council:
“The reality is that the Federal Government’s current approach to the energy sector is undermining confidence in future investment, which is essential to reduce emissions across the energy sector and the entire economy”
Source: Kane Thornton, CEO of the Clean Energy Council
This all sounds very convincing but if there is evidently “infinite ROI”, why hasn’t everyone made the changes necessary? This brings us to the second point: prisoners dilemma; who are the winners and losers if we are to work towards a clean economy.
What is prisoners dilemma and does it explain our collective inaction?
Prisoners dilemma was developed by Merill Flood and Melvin Dresher while working at RAND in the 1950s and explains that two rational individuals might not cooperate even when it's demonstrably in their interest to do so. In context of climate change, if we all take responsibility (individuals, businesses, Governments), we can achieve mutually beneficial outcomes in the long run. The only problem is that doing the ‘right thing’ usually means incurring short term costs as opposed to doing what is ‘easy’. It is ultimately not in all our interests to forego comfort for the greater good if there is a clear separation between who wins and who loses out. In the shift towards a cleaner economy, there will be industries that will phase out - such as fossil fuels and manufacturing, all to make way for advanced technology in the AI, automation and renewables space. This however is where Governments can step in to facilitate this transition and to ensure that communities and businesses are not treated as collateral, but are part of this process.
It has been long argued by Australian politicians and media commentators that the sole reason for doing nothing is that Australia is a small economy and that the changes we make practically “do no matter” in the grand scheme of things.
Our conclusion is that we are on the cusp of massive change and its time to get going on renewables
At Venture Advisory, we believe that individual and business decisions do matter as big changes start with small steps. We are proud to support organisations that can see through the prisoner’s dilemma to come up with innovative solutions for everyday decisions that will effectively make a difference. These companies are able to find commercial business opportunities that provide their investors with attractive Returns on Investment.