Construction workers' clothes hang by a thermal power plant near New Delhi, India - AP
Few people can be unaware of the arguments for an international agreement on carbon emissions, while even fewer may grasp the complexities this would entail. But that is why officials representing scores of developed and developing nations will huddle in Copenhagen for the next two weeks, attempting to hammer out the foundations of such an accord.
Given the general state of confusion over the role that markets could play in encouraging a global shift to cleaner energy, they face understandable difficulties. But economists are happy to help out in such situations.
To assist the policy makers, Robert Ritz of the Oxford Institute for Energy Studies in the UK has recently put forward an
analysis
of the tricky issue of "carbon leakage", which for the uninitiated is what happens when industries export their emissions to take advantage of uneven environmental regulation.
It is a huge problem that in the worst case could cause global carbon emissions to rise as a consequence of the laws that well-intentioned governments enact to control them. So addressing it is vital.
The institute's analysis is by no means light reading, as it bristles with mathematical formulas. Like all attempts to model the real world with equations, it also makes simplifying assumptions that may or may not be valid. Nonetheless, the approach yields important qualitative insights.
First is the unsettling conclusion that substantial carbon leakage can result from even a small part of an industry escaping regulation.
For the glass-half-full types, however, comes the important corollary that "even relatively small environmental efficiency improvements by regulated firms can reduce leakage rates significantly".
To understand this better, we can look at a real-world example.
In California, the oil firm
BP
produces coke as a byproduct of oil refining. As an efficient business operator, it sells the coke to anyone who wants to burn it as fuel, but as California has strict emissions regulations, most of the buyers are offshore (carbon leakage). Earlier this year, however, BP teamed up with the mining company
Rio Tinto
and the utility
Southern California Edison
in a
project
to transform the coke into hydrogen and carbon dioxide, use the hydrogen for power generation and capture and store the carbon dioxide.
The project is supported by state and federal funding. If it works out (an environmental efficiency improvement), BP will export less coke.
The example is instructive because it illustrates how actions by one or a few jurisdictions can counteract the carbon leakage caused by uneven international regulation.
The Oxford study suggests that unilateral carbon regulation may have a wide range of outcomes, but in many relevant situations could have beneficial effects that are only partially offset by increased emissions from unregulated firms: "Global carbon emissions can indeed be expected to decrease as a consequence of unilateral regulation."
The study also contends that carbon leakage will be higher when outside firms are relatively dirtier and inside firms have fewer profitable opportunities to switch to cleaner production technologies. This again suggests that, in the absence of an international agreement, governments could effectively use incentives programmes to progress towards environmental goals.
The need for government incentives would disappear if the world adopted uniform environmental regulation to produce a level playing field. But in the context of developed and developing nations bickering over the financial responsibility for addressing climate change, this may be too panglossian a dream.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Investing success often hinges on discipline and perspective. As markets fluctuate, remember these guiding principles:
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- Strategic patience: Understand why you’re investing and allow time for your strategies to unfold.