Asset value will shape the existential politics of climate change

New research suggests that how climate change impacts global assets will shape how nations and companies respond to a changing world

The world was stunned last week by the release of a report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC), a group of scientists whose findings are endorsed by the world’s governments. Among the report’s conclusions are that:

• The global surface temperature was 1.09°C higher in the decade between 2011-2020 than between 1850-1900

• The past five years have been the hottest on record since 1850

• The recent rate of sea-level rise has nearly tripled compared with 1901-1971

• Human influence is “very likely” (90%) the main driver of the global retreat of glaciers since the 1990s and the decrease in Arctic sea-ice

• It is “virtually certain” that hot extremes including heatwaves have become more frequent and more intense since the 1950s, while cold events have become less frequent and less severe

Professor Carolina Vera, vice-chair of the working group that produced the document, said: “The report clearly shows that we are already living the consequences of climate change everywhere. But we will experience further and concurrent changes that increase with every additional beat of warming.”

Figure 1: Total global emissions of carbon dioxide from burning of fossil fuels as well as deforestation, agriculture, and other human activities that affect the landscape. (Source: Global Carbon Project)

The knowledge that our climate was changing in response to human action has been present for decades. For example, the United Nations Conference on Environment and Development, also known as the ‘Earth Summit,’ was held in Rio de Janeiro back in 1992, on the 20th anniversary of the first Human Environment Conference. For decades, various political leaders, diplomats, scientists, representatives of the media, and non-governmental organizations (NGOs) from all over the world have pushed for a massive effort to decrease the negative impact of human socio-economic activities on the environment. That effort has, for the most part, not materialized. Indeed, as a 2019 Nature analysis noted: “Although the IPCC has been warning about the perils of global warming for three decades, governments have yet to take the kind of action necessary to transition to clean-energy sources and halt greenhouse-gas emissions.”

Researchers looking at the lack of meaningful responses in the face of growing evidence for human-made climate change have generally based their analysis on what may be termed the collective action problem. According to this widely-held view, nations waited for others to cut pollution and planet-warming emissions first so they could “free-ride” on the beneficial efforts made by others. As a recent paper noted:

Scholars have largely converged on collective action theory to explain the global failure to mitigate climate risks. According to this received wisdom, every country wants a stable climate but also faces individual incentives to free-ride off other countries’ climate mitigation efforts. This pushes all countries to unsustainably exploit the global atmospheric commons. In turn, policy guidance from collective action proponents emphasizes the need for international institutions to overcome the climate policy free-riding problem. The global climate policy architecture, as embodied by the Kyoto Protocol, reflects a belief that free-riding constituted the main constraint on effective climate action.

The collective action perspective has shaped environmental policy and strategy in both the public and private sectors for decades; however, researchers are starting to question whether it is the best way to explain the behavior we see now in response to the increasingly real effects of climate change. A good example of this reconsideration is a recent paper from Jeff D. Colgan (Brown), Jessica F. Green (Toronto), and Thomas N. Hale (Oxford) in which asset valuation is proposed as a more effective model for understanding how nations and companies have dealt with — and will deal with — an increasingly volatile climate outlook. 

The authors begin their analysis by noting that real-world actions by various entities conflict with the idea that free-riding is the dominant response framework to the climate crisis. They note that many countries have defied the simplistic logic of collective action and have enacted pro-climate policies such as carbon pricing or regulations that restrict emissions. In considering these proactive political responses, the authors propose that previous research has underestimated the impact of three factors on climate change responses:

The key driver of climate politics is domestic politics: politicians are responding to the demands of their constituents, many of whom want emissions reductions regardless of what other countries are doing. 

Second, because domestic politics are so salient, the distribution of power and interests within nations, and the mediating effect of domestic institutions, are key. The unitary-actor assumption that underpins many collective action models of climate politics leads to significant inaccuracies. 

Third, strategic actors may recognize the climate challenge as dynamic, in which actions taken in the present can affect preferences and the feasibility of actions in the future. Therefore, first movers may reap benefits from taking early action, and unilateral emissions reductions can have demonstration effects.

To better account for the impact of these factors, the authors propose a new framework based on the idea that in every developed nation one finds holders of climate-forcing assets (CFAs) (e.g., example, oil fields, beef farms) and holders of climate-vulnerable assets (CVAs) (e.g., coastal property, fisheries). From the 1980s to mid-1990s, the authors note, CFA holders were content to cast doubt on the certainty of climate science to prevent CVA holders from realizing the threat that they faced and thus mobilizing against CFA-friendly policies. However, starting in the late 1990s, CFA holders became more aware of the economic threats to their assets and began to mobilize, as specific sectors and communities (e.g., coal miners, flood-prone areas) began to feel the real costs imposed by a shifting climate. 

Since that time, many nations and companies have begun to act unilaterally, often in line with the degree of the perceived economic vulnerability of held assets. This shift comes about from a greater awareness of the potential financial impact of climate change as well as the growing number of entities that it affects. In other words, whereas CFA holders were previously generally restricted to fossil fuel companies, the authors note that “it is now clear that vast swaths of the economy will have to decarbonize relatively soon.” Indeed, sectors such as shipping, aviation, and industrial and chemical production can now be considered CFAs. Decarbonization and climate change, note the authors, “are not only deepening the concentration of interests among CFA and CVA holders, they are also ‘broadening’ the dispersion of those interests.”

The broadening of the present and future CVA ecosystem is leading to new legal and policy initiatives in response to the increasing economic threat that climate change poses. In the legal realm, for example, “there are an increasing number of lawsuits in which future generations and other affected groups are compelling states to increase their climate policies.” For example, associations representing California crab fishermen filed a suit in November 2018 against thirty fossil fuel companies to make them pay for damages to California’s fisheries that they claimed were the result of climate change. Additional disputes or lawsuits, note the authors, “exist in California, Washington, Rhode Island, New York, and in France and the European Union.” As the effects of climate change become more frequent and intense, the authors predict the emergence of an existential political perspective among CVAs that seeks not merely compensatory economic benefits but the assured continued existence of their assets in a drastically different world.

The authors’ explanation of this new perspective is worth quoting in full:

Climate change and decarbonization policies raise the prospect of extinction for CVAs and CFAs, respectively. It contrasts with other kinds of distributional politics, which involve adjustments on the margins (for example, falling wages) or through which a substitutable good is lost (for example, high trade tariffs making avocados prohibitively expensive, leading to consumers buying something else). Existential politics often means that there is a contest over whose way of life gets to survive. Should we have Miami Beach and the Marshall Islands, or should we have coal miners, ExxonMobil, and Chevron? This extreme form of distributional politics exists in other areas of international political economy (for example, a trade agreement or technological change can wipe out an uncompetitive industry), but we suggest that the scale of climate change will make existential politics the increasingly dominant lens through which to understand climate politics.

Looking at the wildfires in the American West and in Europe this summer, it is not difficult to imagine vast swathes of the human population who would agree that what is at stake for them is not a house or factory but a way of life under threat of disappearing forever. 

A Dynamic Theory of Asset Revaluation

In response to the shift in outlook noted above, the authors offer a new approach to climate politics. They argue that as climate politics become existential, “different interests will not only fight over who gets what but also over whose way of life survives.” As shown in Figure 2 below, this situation will be a dynamic conflict that will shift as climate change and decarbonization policies alter the value of assets over time. In other words, the more CVAs are able to create protective policies, the less CFAs assets will be worth. This phenomenon will force CFAs to either protect their legacy positions with greater efforts or to abandon increasingly valueless assets in response to changing environmental policy. Saudi Arabia, for example, exemplifies the former strategy, while Norway — a large oil producer with a populace largely committed to environmental action — exemplifies the latter approach. 

Figure 2: A dynamic theory of asset revaluation (Source: Authors)

For the authors, the way in which asset value changes in response to environmental policies and to the changes in climate themselves will be a critical driver of shifts in national and corporate climate politics. Moreover, they argue that these shifts will take three broad forms: flipping, realignment, and strategic repositioning:

Flipping occurs when an individual actor’s asset balance tips from being CFA dominated to being CVA dominated, or vice versa. Realignment, instead, occurs when the balance of power between CFA holders and CVA holders tips from one group to the other in a polity or other collective body. Strategic repositioning occurs when an actor such as a firm decides to change its policy preferences based on its competitive position relative to other firms, perhaps seeing that although climate policy would be costly, it would be more costly for the actor’s competitors than for itself.

A good example of flipping is the car industry, which for decades fought tighter emissions standards and now races to an electric future. A good example of realignment is taking place as more and more institutional investors demand real action on climate change from the CEOs they place into leadership roles. As for strategic repositioning, one can look to firms such as Nike, which leads its industry’s move to renewable manufacturing materials. As these shifts occur, the balance of power in environmental politics could also shift. For example, in the United States, the three states with the highest per capita greenhouse gas (GHG) emissions are Wyoming, North Dakota, and West Virginia, respectively. All three are right-leaning states with major fossil fuel extraction. In the future, the authors hypothesize, a decline in the economic power of the fossil fuel industries would weaken the political power of these CFA holders, possibly shifting these states toward more climate-friendly policies. The potential for sharp realignments, the authors argue, highlights how both climate change and responses to it could affect response dynamics across from single companies to entire economic sectors.

Conclusions

Looking ahead, the authors suggest that the most likely future political scenario is that — much as is the case today — different actors will pursue different climate change policies: 

The four emitters that are arguably most important—China, the United States, the European Union, and India—are moving in quite different directions on climate policy. Broadly speaking, the European Union is the most progressive on climate policy. Lagging behind the European Union are China and the United States, where most effort is concentrated in subnational units and overall emissions reductions are modest. India continues to mostly prioritize economic development over environmental goals. 

Because different players will move in different directions, the researchers argue that the "lens of asset revaluation" is a powerful tool to help us analyze how political and corporate actors will shift in the coming decades. In this future, "increasingly intense conflicts will arise among a growing number of interest groups over whose assets get preserved." In instances "in which assets are central to a way of life, and are at risk of being eliminated, politics will become existential." The existential politics of climate change will generate new factions and movements as asset values are recalculated in response to the new climate realities.

The hypothesis noted above is, I think, already visible. We see "progressive" oil firms such as Shell and BP increasingly distancing themselves from traditional peers such as Exxon and Chevron. We see auto manufacturers such as VW and Volvo pushing consumers to abandon fossil-fueled engines for a future with electric motors. We see leading institutional investors and even hedge funds partnering with environmental groups to push the climate change agenda inside of global corporations. Indeed, media outlets that for decades were skeptical about climate change’s very existence, now publish arguments about what political party should take the lead in fixing the climate change problem.

As we see the shifting political landscape of climate change, it is a useful strategy to update the models we use to understand these new realities. The authors’ research provides a new framework that is both tactically useful and strategically insightful. Indeed, its current validity may lie in the conclusion many people may already have reached that the free-riding approach simply did not work. Perhaps at one time nations and big companies expected that someone else would bear the burdens produced by climate change. As this new research may indicate, that strategy failed. Thus, the time has come for a new approach that looks at climate change not as a theoretical problem but as an existential economic threat that will dramatically reallocate asset value for decades to come.

---

The Research

Colgan, J., Green, J., & Hale, T. (2021). Asset Revaluation and the Existential Politics of Climate Change. International Organization,75(2), 586-610. doi:10.1017/S0020818320000296