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  From the report
The Global Risks Landscape 2009
The Financial Crisis and Global Risks
Resource Challenges
Global Governance
The Risk Assessment
Global Risks Report
Contributors and Acknowledgements
  Global Risks 2009
    In collaboration with Citigroup, Marsh & McLennan Companies (MMC)
    Swiss Re, Wharton School Risk Center, Zurich Financial Services
Global Risks 2009 Home   

Resource Challenges, Sustainability and Competition Printer friendly version  Send to a friend

Demographics, resources and climate change
Despite a slowdown in the rate of global population growth, the world's population is still growing and expected to peak at 9 billion people in 2050, up from 6.6 billion in 2006. The past decades have seen urbanization accelerate to the point where over half the world's population now live in cities, a trend that is expected to continue. These shifts are placing greater pressure on resources and are contributing directly and indirectly to the rising emissions linked to climate change and the resulting consequences for the environment.

More intensive agricultural methods, greater industrialization and growing energy needs, urbanization and rising incomes in emerging economies are already sources of pressure on water resources. Globally, agriculture accounts for 69% of all renewable water consumption, industry for 23% and domestic use for 8%. The push to improve agricultural productivity in a number of countries will drive water consumption higher. The flipside is that the focus on increasing agriculturalproduction, through what is often referred to as a "second green revolution", could also be used as an opportunity to introduce more water-efficient irrigation techniques and drought-resistant crops that require less water. Nonetheless, as the global population grows, and water demand increases, the interest in fertile, water-rich land will rise. This will be compounded by shifting rainfall and drought patterns due to climate change. Farmers from Europe to South-East Asia and Australia are already having to manage their crops and water differently as droughts are prolonged, or monsoons are heavier but shorter in duration.

Competition for land and water
This demand on, and for, fertile land for food production and associated water resources is prompting some countries to take action to secure access to water both within and beyond their borders. Countries such as Saudi Arabia and China have already made significant investments in infrastructure and agricultural productivity to access land for food supplies in Kazakhstan and Mozambique respectively. These agreements may be the first of many, where countries and corporations lock in their access to arable land and water supply to fulfil a strategic need or for which they see a future market. China's arable land availability is decreasing due to soil erosion, pollution and urbanization. Given its very limited fresh water resources, Saudi Arabia has strategically chosen to use its water resources for household rather than agricultural use. In November 2008, South Korea announced that it had taken a 99-year lease on half the arable land in Madagascar in return for employing local labour and building road and storage infrastructure.

Private companies have also entered this arena, in particular for water. Water has become an alternative asset class. Private companies in the US and Turkey have already begun to operate or explore the possibility of pipelines transporting water over long distances to service demand in water-poor areas. Hedge funds have purchased rights to glaciers in Scandinavia.

Resource risks and instability
What do these new arrangements mean for international relations? The past few years have seen a number of agreements between resource-rich, cash-poor countries with cash-rich, high-growth nations. Often tied to infrastructure and capacity building, these agreements provide benefits in the short term but may prove unsustainable over the long term in terms of environmental and societal considerations. Land rights are already a frequent source of tension between people and state, and among political factions. Over time, as the effects of climate change on both water and land availability become apparent, the rising demand for food and the pressures on land use for industrial and residential purposes could trigger intra-state or even interstate tensions as sovereignty or contractual issues arise.

The linked demand for energy and water
While the focus on water for biofuels captured public attention, water is in fact crucial to a range of conventional and alternative energy and power generation solutions. The combination of a need to meet longer term increases in energy demand and to find "cleaner" alternatives to oil and coal may in fact drive us towards more water-intensive energy paths. Water is used in the extraction of oil and coal mining, in refining, for biofuels, in power plants for cooling, for thermalelectric forms of electricity generation and in nuclear power plants. The water used in these processes is not necessarily wasted, many are closed loop systems but it is required in large quantities and in some cases it is returned to natural water areas at a higher temperature which can cause pollution from algae and damage to marine life.

Demand for energy and water are tightly interrelated, with water critical to energy generation and supply and water supply dependent upon energy for pumping, treatment, distribution, heating and waste treatment. On average, 50% of the costs associated with water supply are related to energy. According to a 2008 OECD report, just 2.8 billion people (44% of the world's population) currently live in high water stress areas but this will rise to 3.9 billion by 2030 (50% the global population) if better water policies are not implemented. Energy demand is also set to rise according to the International Energy Agency's latest World Energy Outlook estimates, and global demand will increase by 45%, with 30% of this rise coming from coal-fired plants.

Investing to mitigate climate change risks
The current financial crisis underlines how important it is to see risks in the context of a wider system and to understand where vulnerabilities lie. Now is an opportune time for industries and governments to consider the risks related to resources and climate change, and what they could imply for them in the future. At the national level, governments should be considering policies that encourage efficient resource management, especially for energy and water and that promote investment in this direction. Governments must be long term in their thinking about how their regulatory regimes need to develop and how they should invest in infrastructure, which will be one of the key areas when it comes to long-term sustainable resource management.

Sustainable resource management and infrastructure investment
As this report examines in the section on the financial crisis and global risks, governments in both developed and developing economies are facing tighter fiscal conditions due to the economic downturn. Likewise, the financial crisis has dramatically reduced confidence and made access to capital difficult. The US alone requires an estimated US$ 1.3 trillion in investment to address ageing infrastructure: the Environmental Protection Agency says there is a gap of between US$ 300 billion and US$ 500 billion alone for waste water infrastructure. In November 2008, China announced a US$ 586 billion package, most of which will go into infrastructure over the next two years. Over recent years, China's infrastructure spending has averaged 9% of its GDP. India's public spending on infrastructure has historically represented 3.5% of GDP; it plans to increase this amount to 8% in 2012. Worldwide it is estimated that the global economy needs about US$ 5 trillion for infrastructure over the next five years alone - ranging from transport networks to sanitation and power - just to maintain the quality of the existing infrastructure network and meet rising demand.

Today's infrastructure investment choices are key, as they represent a huge opportunity to spend on projects that will result in better, long-term resource management - from technology and plant choices to reduce emissions and waste, to transport and building development that will be more energy and land efficient. A lack of investment now or investment in unsustainable areas will result in further costs through climate change, poor living conditions in crowded cities and, ultimately, will be a drag on future growth. Governments will need to spend effectively but they will also need to implement policies that encourage investors to understand the risks and take a long-term view.

The Road to Copenhagen: An Update

2009 is a critical year for international climate change issues. By year-end the countries at the Copenhagen conference, which is a follow-up to the United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol, must agree to a new protocol to ensure that international efforts to reduce global greenhouse gas emissions continue beyond 2012. Recent studies indicate climate change is occurring faster than expected. Without resolute action we could face irreversible changes to the climate. There is pressure on the discussions in Copenhagen to produce a concrete result - a framework far more comprehensive, long term and ambitious than the Kyoto Protocol, ironically at a time when the world economy is entering a major economic slowdown.

The four cornerstone issues that the 2009 climate negotiations need to address are discussed below:

1. A long-term global goal for emission reduction
There is a need for an agreed global goal for emission reductions by 2050 in the range of 50-80%, compared to 1990 levels. Greenhouse gas emissions are an expression of the market's economic failure to adequately value a public good - the climate. To solve this market failure a combination of state-defined conditions, caps, incentives and standards will be necessary to give emissions a price and to reward emission reduction measures.

2. Enhanced national/ international action on mitigation
Leaders from developed countries will be under pressure to provide clear targets, milestones and a strategy as to how the world economy can progress to a low carbon future. All countries signing the UNFCCC will need to commit to a level of carbon emissions by a specific date. Developing nations must be a part of the solution, cooperating with meeting the targets, but also allowed to achieve their economic development goals.

3. Enhanced action on adaptation
If emissions continue to rise at the rate of the past 30 years, atmospheric concentrations will increase to 700ppm or more, corresponding to global average temperatures of +6°C or more by 2050 (Intergovernmental Panel on Climate Change (IPCC) 2007 4th report; World Energy Outlook, International Energy Agency 2008). Even if we stopped emitting greenhouse gases altogether, the effects of global warming are now unavoidable. For these reasons, societies will need to adapt to the unavoidable consequences of climate change.

Importantly, it is developing nations who face the worst consequences because they are more vulnerable to the physical effects of climate change than developed nations, due to their limited institutional frameworks and financial adaptive capacities:
• In Africa alone, 75-250 million people will be exposed to water stress by 2020 (IPCC 4th report). The area suitable for agriculture will decrease and reductions in yields could amount to 50% by 2020.
• Towards the end of the 21st century, projected sealevel rise and storms will affect low-lying coastal areas with large populations potentially triggering migration of people.
• Weather-related disasters disproportionately affect the agricultural sector in least developed countries (subsistence farming) where most farmers have only limited access to financial means such as microcredit and insurance solutions.

4. Enhanced action on technology development and transfer
The UNFCCC estimates that 85% of the capital required for low carbon investments needs to come from private sources. Adjusting public policies to stimulate private investments, technology development and adaptation in developing countries will be vital. A major deal flow of projects in both today's realisable low carbon technologies and tomorrow's technologies (e.g. carbon capture and storage, next generation photo-voltaics and biofuels) will be required. Financial and project development expertise from the international private sector will need to partner with governments and multilateral development banks.

Energy Security: Reconciling Growth and Sustainability in Future Infrastructure Investment

In 2008, national energy security was challenged from many different directions. Infrastructure has been damaged by extreme weather events, for example during tropical storm Gustav in the Gulf of Mexico. Countries such as France and Slovenia have had to close nuclear plants for safety reasons. Climate policies have toughened, oil and gas prices have been highly volatile, and geopolitical tensions have led to the temporary closure of gas pipelines and heightened resource nationalism. The approval and delivery of new power plants have faced lengthy delays in many countries and large-scale mergers and acquisitions among leading industry players have increased crossborder ownership. The value of global energy-related mergers and acquisitions between May 2007 and the last quarter of 2008 amounted to approximately US$ 500 billion.

Policy-makers and industry players are struggling to assess the many investment options open to them in the light of growing energy demand, commitments to reduce carbon emissions, deteriorating infrastructure and the depletion of fossil fuel resources. The scale of investment is high (according to the IMF's World Economic Outlook, between 2007 and 2030 the new expenditure required to update and expand global energy infrastructure alone amounts to US$ 26.3 trillion), the time frames are long and the technological choices require significant tradeoffs. Decisions can be piecemeal and often lack the coherence, vision and follow-through that give confidence to all parties.

In this context it is helpful to conceptualize energy security as having four objectives:
• Autonomy: energy supply that is within the control of a country and is not vulnerable to disruption by external agents
• Reliability: energy distribution that is safe and secure in both the short and long term and meets demand without interruption
• Affordability: energy prices that are commensurate with the buying power of domestic and business consumers - at the same time this objective is, however, often difficult to achieve in a manner consistent with the final objective
• Sustainability: energy use that is sufficient to support a high quality of life but does not damage the environment to an unacceptable degree

This framework is useful for decision-makers not only to analyse how their existing infrastructure and renewal plans match up against the different objectives but also to understand where their principal exposures lie. This is the basis for a long-term strategy that not only provides for a supply mix appropriate to national circumstances but also policies that will improve productivity through increased energy efficiency and demand reduction. Such a strategy will also need to anticipate the systematic disruption that might be caused by innovations such as the introduction of distributed generation or the rapid uptake of plug-in electric vehicles.

Effective governance arrangements as well as strategic vision are critical to underpinning decisions at both the planning and implementation stages. Policy-makers and other energy system players should therefore address the following questions:
1. Does our energy policy fully dovetail with our climate policy in terms of its goals and measures?
2. Are our regulatory and investment incentives strong enough to drive the development of optimal supply solutions, grid infrastructure renewal, energy efficiency measures adoption and new technology development?
3.  Is there a need to streamline national regulations, harmonize international laws and strengthen bilateral trading agreements?
4. Does our engagement with the different stakeholder groups enable us to deploy their different strengths to turn the optimal energy solutions into reality?