The Winners of Climate Change — Extreme weather

The information for the article below comes from Windfall — The Booming Business of Global Warming, from author McKenzie Funk. Focused on the crucial fact that global warming, along with the humans it affects and who are affecting it, is global, this book means to provide an answer to the increasingly urgent question “What are we doing about climate change?”*


Extreme weather is an opportunity for growth, but it is a growth born of scarcity, of someone else’s crisis—the zero-sum economics of distress. For there to be winners, there also necessarily has to be losers.

Fires

“If you could have a private fire force that would specifically work to save YOUR home in the event of a threatening wildfire, and the price of this protection would be $35,000 (financing available), plus $1,600 per year thereafter, how likely would it be for you to hire them?”
Question from Private firefighting company Golden Valley Fire Suppression’s online survey

The wet will become wetter. The dry will become drier. That which burns will burn more often. Across the globe, the first decade of the new millennium was a decade of fire: Fire in Alaska and Spain and Siberia and Corsica and Bolivia and Indonesia and British Columbia. In New Mexico and Oregon and Colorado and Texas and Arizona. In the Black Hills of South Dakota and the swamplands of North Carolina. In Greece, the worst fires in half a century during the worst drought in millennia. In Australia, the worst fire in recorded history during the worst drought in recorded history. In Russia, fires so destructive that the president said out loud that climate change was real. The largest fires in Georgia’s recorded history, in Florida’s recorded history, and in Utah’s recorded history.

The effects of climate change on wildfire is not limited to the lack of water or the heat of the hottest days. Early spring snowmelt means longer growing seasons, eventually more fuel. Higher average temperatures means summers are effectively longer, and fuels have more time to dry. Warmer winters means parasitic larvae—pine beetles, spruce beetles, bark beetles, tent caterpillars—can flourish and expand their range, killing vast forests, creating more dead, desiccated fuel. If there is sustained drought, trees can’t generate the chemicals to fend off the pests. In the western United States, spring-summer temperatures had risen just 0.87 degree Celsius since the mid-1970s, but the fire season was now seventy-eight days longer.

Also responsible is widespread urbanization. In the 1960s, wildfires burned 100 buildings in an average year in Los Angeles, United States. In the 1990s, they burned 300. In the 2000s, it was 1,500. “Normally, we consider the fuel to be trees and shrubs and brush,” said Chief Sam, head of a private army of for-profit firemen. “But now it’s not just trees. The homes are the fuel.”

In California, United States, already by 2009 thousands of private contractors were battling wilderness forest fires on behalf of government agencies. Of the Forest Service’s $1.5 billion firefighting budget, more than half ended up in the private sector. Firefighting cost the federal government more than twice what it had cost a decade earlier.

Other private firefighting companies contract not for the government, but for the insurance industry, protecting the homes of those customers who are up-to-date with their bills:

  • Firebreak Spray Systems, working for AIG’s insurance division, offers its proprietary system to coat insured customer’s houses with a liquefied chemical retardant
  • Fireprotec clears a defensible space around clients’ homes and offers evacuation services to its richest customers
  • Golden Valley Fire Suppression offers spray-foam services as well as “Land Clearing with use of a goat herd.”

Hurricanes

“People often expect it to be a big negative for insurers. You get a big sell-off of stock. But unless a really serious one comes through, they’ll put the premiums up and actually get the benefit of improved margins.”
Terry Coles, manager at F&C Global Climate Opportunities Fund, explaining how a good hurricane season helps insurance companies hike rates

Global warming poses a grave danger to insurance companies, but it is also something else: free advertising on a biblical scale. Increased risk is a problem only if not hedged or somehow priced in. Otherwise, it is a business opportunity.

When category 5 Hurricane Andrew struck Florida and Louisiana, United States, in 1992, insurers paid out more than $23 billion in claims, or $1.27 for every dollar of premium collected that year. They turned to catastrophe-modeling using a century of weather data to predict future losses, and then they raised premiums accordingly. After category 5 Hurricane Katrina devastated New Orleans in 2005, they paid out more than $40 billion but, thanks to an expanded market and better models, only 71.5 cents per dollar collected. That year, the industry still made $49 billion in profits. It has profited, sometimes more, sometimes less, every year since.

The innovators

Silicon Valley would also be eager to join the insurance industry. The Climate Corporation, founded in 2006, harnesses the power of big data—climate modeling, hyperlocal weather forecasts—to sell crop insurance to farmers in the Midwest and weather insurance to the whole world. By 2011, it had compiled fifty terabytes of raw data and raised more than $60 million from such backers as Google Ventures, Allen & Company, the Skype founders, and the green-tech kingmaker Vinod Khosla, who said it would “help farmers globally deal with the increasingly extreme weather brought on by climate change.”

As the Climate Corporation found new ways to underwrite customers’ bets, its own bets were underwritten by the traditional reinsurance industry. “If we have a loss, the reinsurer covers 100 percent of the loss,” the CEO told a crowd at Stanford. “I mean, venture capitalists don’t want to be betting on the weather. They want to bet on a team that can help other people’s capital bet on the weather.”

Growth is everywhere for the innovative:

  • AIG offers rich policyholders clustered on risky coastlines its Hurricane Protection Unit: men with GPS units and satellite phones appearing on the scene after a storm blew through to evacuate valuable artwork and other possessions.
  • Munich Re—the world’s largest reinsurer, with thirty-seven thousand employees in fifty countries and as much as $5 billion in annual profits— offers protection to investors from carbon-credit defaults, and its weather derivatives helps solar projects hedge against cloudy days, wind projects against calm days.
  • Munich Re hosted a “Climate liability workshop” a day after Little Tujunga Canyon was on fire in Los Angeles. (It might be prudent to phrase policies so as to limit climate liability, they determined.)
  • Reinsurers Willis Group from the UK and RenaissanceRe from Bermuda pour money into hurricane research, the latter also into hurricane modification: weakening storms by seeding the clouds with aerosols or particles of carbon.
  • Liberty Mutual introduced the world’s first insurance policy to protect corporate executives from lawsuits “stemming from the alleged improper release of carbon dioxide,” after the Inuit of Kivalina sued energy companies in July 2008.

Drought

“I expect to see in the near future a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that will exceed the capacity of those for oil and gas today. I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.”
Citigroup’s chief economist Willem Buiter’s vision for the future of water

While there were record floods in China, there were unprecedented droughts in Australia. We still have the exact same amount in our ecosphere, but the ultimate effect of global warming is that percentage that is freshwater is getting smaller, the percentage that is salt water is getting larger, and the maldistribution of freshwater is getting much more severe. The “supply/demand imbalance” for water—fueled by population growth, accelerated by carbon emissions—is only increasing, making the situation ripe for speculation.

For the climate investor, water is the obvious thing. Carbon emissions are invisible. Temperatures are an abstraction. But melting ice, empty reservoirs, lapping waves, and torrential rainstorms are physical, tangible—the face of climate change. Water is what makes it real. After An Inconvenient Truth, during 2007’s record melt in the Arctic Ocean, at least fifteen water mutual funds launched globally, more than doubling the number in existence. In two years, the amount of money under management had ballooned tenfold to $13 billion. Credit Suisse, UBS, and Goldman Sachs hired dedicated water analysts, the latter calling water “the petroleum of the next century” and referring to “major multi-year droughts” in Israel, Australia, and the American West. “At the risk of being alarmist,” Goldman said in a 2008 report, “we see parallels with Malthusian economics.”

Saving every drop of water

“Our prosperity has always been based on water. But those fields are going to die, and then see where the people go.”
René Acuña, director of the Mexicali Economic Development Council, explaining the consequences to Mexicali from having the All-American Canal covered with concrete

A hundred miles east of San Diego, next to the border with Mexico, is the All-American Canal: California’s first and biggest claim on the waters of the Colorado River, the biggest irrigation canal on the planet. For most of a century, the All-American Canal had been lined with dirt, and at least twenty-two billion gallons—enough for 122,000 American households—were lost each year through its porous walls. The Imperial Irrigation District (IID), which controls 20 percent of the Colorado’s flows, would now line the canal with concrete, and San Diego would pay the $290 million in construction costs. The problem was that for most of a century the lost water had, ignoring the international border, percolated up in the Mexicali Valley, supporting the Mexicali agriculture and providing potable water to its million inhabitants. Take it away, and soon hundreds of people would be out of work, tens of thousands of people would be out of drinking water, and sensitive wetlands would be drained. Every drop of water saved would go to the City of San Diego. Most of the city’s water, if history was any guide, would go to keeping four hundred parks and golf courses green. Residents themselves would dump half their water into their yards.

All-American Canal, California During a historic drought in Southern California, the All-American Canal was reengineered in order to get more water to San Diego, less to Mexico. Source: McKenzie Funk

All-American Canal, California
During a historic drought in Southern California, the All-American Canal was reengineered in order to get more water to San Diego, less to Mexico.
Source: McKenzie Funk

Owning the water

“There’s no risk. If some guy doesn’t pay, we still own the water. It’s like you turn off a tap.”
John Dickerson,financial manager at Summit Global Management

California’s sixteen-person Summit Global Management had bought billions of gallons of water in two vital, desiccating river systems: California’s Colorado and Australia’s Murray-Darling. While both systems had experienced unprecedented recent droughts, the fund’s financial managers had experienced the opposite: a flood of money.

Summits’ first water fund, opened in 1999, was up 200 percent after its first decade and had $600 million under management. Similar to its competitors Pictet, Terrapin, and Credit Suisse, Summits had picked stocks within the convoluted $400 billion field of “hydrocommerce”: the business of storing, treating, and delivering water for use in households, manufacturing, and agriculture. They bought:

  • shares of builder-operator multinationals such as France’s Veolia and Suez, its compatriot and major rival in water treatment and desalination
  • diggers of ditches, layers of pipelines, and manufacturers of filters, pumps, meters, membranes, valves, and electronic controls
  • privatized utilities in cities big and small

Summit then took a more significant step in response to creeping global drought. It decided that hydrocommerce—things merely related to water—wasn’t enough. They wanted actual water: “wet water,” as Summit’s financial manager John Dickerson called it. Raw water. The thing itself. Summit’s second hedge fund, the Summit Water Development Group, opened in June 2008 to amass water rights in Australia and the American West. Already the new fund had attracted hundreds of millions of dollars. “The real future,” Dickerson said, “is going to be the direct assets—not through the medium of a utility, not through the medium of a pump company—but the direct, physical water assets.”

Dickerson planned to eventually take the Summit Water Development Group, his “wet water” fund, public—meaning a way for anyone to finally be able speculate on water, plus a big payout for early fund investors who had put up the minimum $5 million buy in. In the meantime, he was playing what he called an “aggregation game.” Across the American West, up and down the Colorado River system, Summit took stakes in private reservoirs with the goal of accumulating enough water to sell as a package to suburban boomtowns within the basin. Once resold, the ditches’ water would be left in the river to be taken up by city pipes.

With a fracking boom and an equally water-intensive hunt for other unconventional oils, petroleum interests were on a water-buying spree. According to one study, energy companies controlled more than a quarter of the upper Colorado basin’s flow, more than half of its water storage. Farther south, in Texas, the onset of fracking corresponded to the driest year in state history, and ranchers and cities alike were priced out of the water market. To frack a single well can take as many as six million gallons. In 2011, petroleum companies drilled twice as many new water wells as they did oil and gas wells. For the Summit Water Development Group, all this was very good news.

The catastrophic drought in Australia’s Murray-Darling basin was also good news for Summit. Australia had liberalized its system, creating what has become the planet’s freest and most bustling water market. In the Murray-Darling, Summit had secured what outsiders estimated to be at least 10,000 megaliters, or 2.6 billion gallons. He planned to become something other than a short-term speculator: a long-term rentier. Once Summit purchased Australian farmers’ water, he said, the firm banked it and leased it right back to them and their neighbors. Returns were already a safe 5 to 6 percent a year.

Water (stock) market

In an era of increasing scarcity, many economists argue, the best way to cut our profligate waste of water is to have active water markets. Trading would provide incentives to conserve and use water efficiently, allowing a scarce resource to flow to the highest-value activities.

Waterfind, Australia’s largest water brokerage, plans to become a true stock market—the Nasdaq of water. Its own software platform allows trades up and down the Murray-Darling. It features exchange rates for different parts of the river system, owing to evaporation and local regulations. These are paper trades, conducted by phone and Internet. Buyer and seller could be hundreds of miles apart. One would turn off his pumps, and the other would turn his on. The water market in 2008, near the peak of the drought, was worth $1.3 billion, and it had been growing by 20 percent a year. The price of a megaliter (equivalent to 264,000 gallons) fluctuated wildly. “In the temporary markets last season,” Waterfind’s PR manager said, “the low was right around $200. The high was right around $1,200.” In general, though, during the drought, the price went up.

The sellers in the burgeoning water markets are family farmers. Small-time ranchers sold to corporate farms or citrus growers or the government; water flowed uphill to cities and vineyards. In 2010, the biggest purchaser was the federal government, on a $3.1 billion run of buybacks for what it called “environmental flows.” By 2030, climate change is expected to decrease local rainfall by 3 percent, decrease surface water flows by 9 percent, and increase evaporation by up to 15 percent. Lining up behind the government were Summit and a growing cast of other funds: Australia’s own Causeway Water Fund and Blue Sky Water Partners, Singapore’s Olam International, Britain’s Ecofin fund, and a company called Tandou Limited, which was owned by a New Zealand corporate raider, the American hedge fund Water Asset Management, and Ecofin.

By 2008, near the end of the decade of drought and historic evisceration of the $35 billion farming sector, on a macro level, Australia’s economy had survived remarkably unhurt, undeniably helped by its water trading system. However, undeniable were also the distortions: Australia, which had been one of the planet’s great exporters of rice and wheat, saw its rice production down to 1 percent of normal, its wheat production to 59 percent. That year, what aid agencies dubbed the “global food crisis” led to protests in Egypt, Senegal, Bangladesh, and dozens of other countries. Adelaide’s wine industry, on the other hand, was still thriving.

Illegal immigrants

“Climate change is best viewed as a threat multiplier which exacerbates existing trends, tensions and instability. There will be millions of ‘environmental’ migrants by 2020 with climate change as one of the major drivers of this phenomenon . . . Europe must expect substantially increased migratory pressure.”
Spanish diplomat Javier Solana, the EU foreign relations chief and former head of NATO

In large part because industrial trawlers from France, Spain, Japan, and other foreign countries have been scouring the coast of northwest Africa since at least 1979, Senegal is running out of fish. Gone are the schools of lucrative tuna and the sharks, left behind are smaller herring, along with unemployed fishermen, many of whom found new work as human traffickers. Migrants would pay nearly $1,000 to be ferried nearly a thousand miles to southernmost Europe. The boats were fishermen’s pirogues, equipped with two engines and two GPS units and packed with dozens of young men. The weeklong crossing sometimes stretched to two weeks when captains got lost, leaving boats desperately short of food and water. In record-breaking 2006, thousands died en route—as many as six thousand, or one every six migrants, according to a Spanish estimate.

Whether the men fleeing for Europe should be considered some of the world’s first climate refugees is debatable, but the many factors, in aggregate, are exactly what Europe fears. Africa would warm 1.5 times faster than the rest of the world, warned the IPCC (Intergovernmental Panel on Climate Change)—and the Western Sahara region would warm the most. Today’s boat people could be but a hint of what is to come. The Continent’s response, notwithstanding its efforts at emissions cuts in Copenhagen and at other climate summits, is also a hint of what is to come. It has been creating a “Fortress Europe,” in the words of Amnesty International—an “armed lifeboat,” in the words of the journalist Christian Parenti. A virtual wall to keep Africans out.

The European effort might be not as conspicuous as the new fence near the All-American Canal along the United States border with Mexico, or as the twenty-one-hundred-mile fence India being completed around sinking Bangladesh, or as the twin fences Israel announced in 2010 to seal off the Sinai from sub-Saharan migrants, but it is comprehensive:

  • pan-European border agency Frontex’s Spanish and Italian patrol boats cruise the Senegalese coast
  • European planes and helicopters run aerial surveillance
  • soon, a satellite link would connect immigration-control centers in Europe and Africa to help track boat people
  • the Continent would be secured by the proposed European Border Surveillance System: a complex of infrared cameras, ground radars, sensors, and aerial drones.

A web of detention centers is rising all over Europe. The controversial Return Directive, a common deportation policy passed by the European Parliament, allows to have migrants held without charge for up to eighteen months before being shipped home. More than two hundred sites spread between two dozen countries, from a former Jewish internment camp in France to an abandoned tobacco factory in Greece to an empty airline hangar in Austria. Together, they have room for as many as forty thousand migrants.

In Britain, most of the prisons are run by private contractors such as the Serco Group, the MITIE Group, and especially G4S, the world’s second-largest private employer, after Walmart. The contractors carry out deportations, too, escorting shackled Nigerians or Angolans or Bangladeshis on a coach-class flight home. Outside the EU, G4S had run Australia’s refugee detention system. In the United States, the prisoner market is dominated by the Corrections Corporation of America, whose lobbyists helped draft Arizona’s controversial 2010 immigration bill, apparently because it was good for the bottom line: the more migrants arrested under the new law, the more demand there would be for the corporation’s jails.

Climate change would only grow the market.

India-Bangladesh border The world's longest border fence is being built around Bangladesh to keep migrants at bay. Source: McKenzie Funk

India-Bangladesh border
The world’s longest border fence is being built around Bangladesh to keep migrants at bay.
Source: McKenzie Funk


*McKenzie Funk spent six years reporting Windfall, traveling around the globe interviewing people who, driven by ideology, fear, or hard-nosed realism—or all three—, thought they were doing the necessary thing to come out ahead in a new, warmed world, people who thought climate change would make them rich.

McKenzie Funk and his book, Windfall

McKenzie Funk and his book, Windfall

Featured image by Official U.S. Navy Page.

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