Transcript Climate Change Risk Management

Climate Change Risk Management
Measuring Risk and Understanding Success
Washington DC: December 9, 2010
Motivation
13
•
Define a broad structure of different risk exposures defined in the context of
Climate Change
•
Identify quantitative methods to track success by treating Climate Change
initiatives as an investment
•
Highlight the challenge of measuring “success” in Climate Change initiatives
•
Address some specific examples of how Climate Change risks are being
addressed
•
Desirable Outcome: A realistic perspective to measuring the success of
climate change initiatives
Energy | Environment | National Security | Health | Critical Infrastructure
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Climate Change Risk Management
How does climate change risk affect you?
Environmental
Strategic/Franchise
Financial/Documentation/Reporting
Political
Volumetric
Financing/Financial
3
Staffing/Organization
Market/Price
Regulatory
Technological
Legal
Credit/Default
Operations
Modeling/Valuation
Operational
Business
Continuity
Energy | Environment | National Security | Health | Critical Infrastructure
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Evolution of Disclosure: Financial Statements
View impacts in terms of financial statements:
Balance Sheet
Geographic asset risk
Change in asset values
Capital expenditure
changes
Income Statement
Expense Risks and Exposures:
Energy/water/feedstock/
regulatory/“carbon passthrough”
4
Impact to capital
position and
adequacy?
Magnitude of
impact to operating
ratios and net
income?
Energy | Environment | National Security | Health | Critical Infrastructure
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Climate Change Risk Management as Investment
System of metrics with same rigor as financial investments
C02/Investment
C02/Operating Expenses
Org
Sustainability
&
Carbon
Rate Impact
EBITDA
ROE
Operations
Investment
Cash Flow
IRR
EPS
Management and Dispatch of Current Assets
5
Rate Impact
Energy | Environment | National Security | Health | Critical Infrastructure
New Investment
Measuring the Return on Climate Change Risk Strategies
Example – Integrated Utility
An integrated utility is
interested in changing
its generation portfolio
to one with less carbon
footprint

What is the estimated
impact of a change in the
portfolio structure?

What are the main
risk/reward trade-offs?

What are the marginal
contributions?
6
Energy | Environment | National Security | Health | Critical Infrastructure
Climate Change Risks to Policy Makers
Example – Policy Makers
The economic effect associated with managing the effects of
climate change are unavoidable
•
•
•
•
•
•
•
7
Reduce unforeseen pressures on public costs
Losses in tax collection and other revenue
Anticipate economic measures (fiscal, commercial and investments)
Investments to finance adaptation
Investments to finance technology transfer and disaster relief
Crowding out of scheduled (planned) expenditures
Non-scheduled expenditures (disaster relief)
Energy | Environment | National Security | Health | Critical Infrastructure
Climate Change Risks to Military
Example: U.S. Navy – Major Energy Challenges
Navy Total Ownership Cost
Resource Scarcity
WorldOil
Oil
Projections
Peak
Oil
Projections
Peak
Projections
Aviation, Ship, & Sub OM&R
Based on BP p.l.c. “Statistical Review
of World Energy”
Reflects Flying Hour, Aviation Depot, Ship Ops, Ship Maintenance Programs
14
14
30
Volumen diario (MBbls/día)
DailyDaily
Volume
(MBbls/Day)
Volume (MBbls/Day)
$B
20
15
10
10
10
Saudi
Arabia
Skrebowski
Skrebowski
Simmons
Simmons
Bakhitari
Bakhitari
Russian
Federation
2006 2008 2010
2012 2014 2016
2018 2020 2022
2024 2026 2028
2030
2006
2012
2018
2024
2030
88
USA
66
Libya
Canada
China
44
300
Iran
Kuwait
UAE
Norway
22
Nigeria
Iraq
Proven
Reserves
(BBbls)
UK
Qatar
Kazakhstan
00
Venezuela
Algeria
2010
2030
2050
2070
2090
2009
2029
2049
2069
2089
0
2010
2015
2020
2025
2030
2110
2130
2150
2109
2129
2149
Year
Oil Reservesat
at 50%
Current
Reserve
Levels
EstimatedEstimated
Year Oil
Oil
Reserves
at
50%
Current
Reserve
Levels
Estimated
Year
Reserves
50%
Current
Reserve
Levels
Energy Challenges For The Navy And The Nation
8
150
50
5
Angola
Mexico
5
WEC
Campbell
Campbell
Goodstein
Goodstein
Deffeyes
Deffeyes
World Energy Council
12
12
25
Shell
Shell
CERA
CERA
Laherrere
Laherrere
Energy | Environment | National Security | Health | Critical Infrastructure
Climate Change Risks to Military
Example: U.S. Navy – Risk Management
•
•
•
9
Working to reduce uncertainty by reducing our energy requirements and
finding alternatives to petroleum
Opportunities: Arctic oil, gas & shipping lanes, cooperative science efforts,
new markets for adaptation technology.
Challenges: Water scarcity, further stress on resources, coastal erosion,
inundation due to sea level rise
Energy | Environment | National Security | Health | Critical Infrastructure
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Climate Change Risks to Companies
Example: SEC and Insurance Companies Capturing Impact of Risk
10
•
January 2010: Securities and Exchange Commission (SEC) announced
interpretive guidance on existing SEC disclosure requirements as they apply
to business or legal developments relating to the issue of climate change.
• This is guidance on existing “material risk” disclosure, not an SEC Rule
• Effective February 8, 2010
•
SEC's interpretative guidance highlights the following areas as examples of
where climate change may trigger disclosure requirements:
• Impact of legislation and regulation
• Impact of international accords
• Indirect consequences of regulation or business trends
• Physical impacts of climate change
Energy | Environment | National Security | Health | Critical Infrastructure
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Climate Change Impacts – Physical Impacts
Example Physical Impacts Variables:
Sea levels/coastal regions
Weather (storms/drought/precipitation/temperature)
Energy/water resources
Agriculture and food availability
Identify Boundaries and Define Exposure to Physical Impact Variables:
Boundaries:
Geographic and operational (supply/value chain)
Define exposure:
Specific impact exposures and intensities (for example, coastal, weather, water,
resource)
Resulting asset/revenue/expense impacts
11
Energy | Environment | National Security | Health | Critical Infrastructure
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Climate Change Risk Management for Compliance
Example: Evolving Regulatory Compliance
State/Fed Legislation:
International Legislation:
EPA Endangerment Finding
EPA Mandatory Reporting Rule
Regional Greenhouse Gas Initiative
Western Climate Initiative
AB 32
EU Emission Trading System
Kyoto
Copenhagen Commitments
Indirect Business Trends:
Physical Impacts:
Customer demands
Market dynamics (ARRA influence)
Changing perceptions
Commodity pass-throughs
Capital expenditures
Insurance
Water availability
Geo-political
Weather events
Coastal locations
Flooding
Temperature
Food availability
EPA = Environmental Protection Agency AB = Assembly bill EU = European Union ARRA = American Recovery and Reinvestment Act
1
Energy | Environment | National Security | Health | Critical Infrastructure
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Climate Change Risk Management for Disclosure
Example: Disclosure Requirements
•
Federal and international regulations
– Operations regulated
– Direct and indirect costs; cost of compliance
•
Indirect business trends
–
–
–
–
•
Capital expenditure impacts (IT/energy efficiency/distributed generation)
Re-prioritization of project or product mix that meets hurdle rate
Market opportunities and threats (market assessment)
“Carbon” or commodity pass-through contracts
Physical impacts
– Qualitative (water, weather, coastal)
– Asset impacts (valuation)
Short Term Impacts:
SEC guidance will drive deeper quantitative and monetary analysis climate change impacts
Sustainability reporting will start transitioning to 10-k /annual reports
SEC = Securities and Exchange Commission
1
Energy | Environment | National Security | Health | Critical Infrastructure
©
Corporation.
All
reserved.
SAIC
logo
are
registered
trademarks
Applications
International
Corporation
the
U.S.
and/or
other
© Science
Science
Applications
International
Corporation.
All rights
rightsAll
reserved.
SAIC and
and
the
SAIC
logologo
are are
registered
trademarks
of
Science
Applications
International
Corporation
in
theand/or
U.S. other
and/or
other countries.
countries.
© Applications
2009 Science International
Applications International
Corporation.
rights reserved.
SAICthe
andSAIC
the SAIC
registered
trademarks of
of Science
Science Applications
International
Corporation
in the in
U.S.
countries.
Climate Change Risk Management for Compliance
Example: Legislative Impact
NEMS Projected CO2 Allowance Prices for Waxman Markey
200
Potential Costs to Fortune 500
Food and Beverage Company
180
160
2007 dollars/mtCO2e
Basic
140
120
Electricity
(mWh)
High Offsets
100
No International
Offsets / Limited
Alternatives
80
60
Natural Gas
(MMBTU)
Coal (MMBTU)
Energy Used
13,994,405
60,614,432
15,153,608
Metric Tons
CO2E
9,460,218
3,191,350
1,456,565
Value at $10
$94,602,178
$31,913,498
$14,565,648
Value at $20
$189,204,356
$63,826,997
$29,131,296
Value at $40
$378,408,711
$127,653,994
$58,262,592
Value at $80
$756,817,422
$255,307,988
$116,525,184
40
20
Y2
01
2
Y2
01
3
Y2
01
4
Y2
01
5
Y2
01
6
Y2
01
7
Y2
01
8
Y2
01
9
Y2
02
0
Y2
02
1
Y2
02
2
Y2
02
3
Y2
02
4
Y2
02
5
Y2
02
6
Y2
02
7
Y2
02
8
Y2
02
9
Y2
03
0
0
Gasoline consumers
1 cent per gallon per each $1 per ton of carbon tax
or allowance price
Electricity consumers
1 cent per kWh for each $16 per ton of carbon tax
or allowance price
Natural gas consumers
Five plus cents per MMBTU for each $1 per ton
carbon tax or allowance price



Based on U.S. Average Default Emissions Factors from the Energy
Information Administration
Total Costs Under Kerry Lieberman Price
Collar: $169 Million to $352 Million
Annually
NEMS = The U.S. Energy Information Administration's National Energy Modeling System
Fortune 500 is registered trademark of Time, Inc. in the U.S. and/or other countries.
14
1
Energy | Environment | National Security | Health | Critical Infrastructure
© Science
Corporation.
All rightsAll
reserved.
SAIC and
logologo
are are
registered
trademarks
Applications
International
Corporation
theand/or
U.S. other
and/or
other countries.
© Applications
2009 Science International
Applications International
Corporation.
rights reserved.
SAICthe
andSAIC
the SAIC
registered
trademarks of
of Science
Science Applications
International
Corporation
in the in
U.S.
countries.
Conclusions
The Black Swan Effect
•
The aggregate success of climate change risk management from the popular
perspective is hard to measure, and the success is also challenging or
controversial
•
•
15
Conclusively prove the return on an investment measured as a function of avoided
costs
What is the return on a cost that never materialized?
•
Measures to mitigate the impact of climate change and to adapt to a new
reality will be costly, heterogeneous and unavoidable. The return on these
investments will be in the form of national government budgetary stability
•
Voluntary/Mandatory compliance to standards will involve proactive approach,
especially as the standards for compliance are still being worked out.
Energy | Environment | National Security | Health | Critical Infrastructure
© 2009 Science Applications International Corporation. All rights reserved. SAIC and the SAIC logo are registered trademarks of Science Applications International Corporation in the U.S. and/or other countries.
Contact Information
Ruben Moreno
Director, Risk Management
SAIC
8301 Greensboro Drive
E-4-6
McLean, VA 22124
Ph: 202-730-2352
[email protected]
16
Energy | Environment | National Security | Health | Critical Infrastructure
© Science
Corporation.
All rightsAll
reserved.
SAIC and
logologo
are are
registered
trademarks
Applications
International
Corporation
theand/or
U.S. other
and/or
other countries.
© Applications
2009 Science International
Applications International
Corporation.
rights reserved.
SAICthe
andSAIC
the SAIC
registered
trademarks of
of Science
Science Applications
International
Corporation
in the in
U.S.
countries.