This presentation was delivered to the ExecutiveCommittee of an electric utility. Its purpose is toexplore climate change risk in the absence of clearclimate change policy. Observers commonlyconclude that without policy there’s little risk forutilities, but that is a particularly risky assumptionfor utility executives to make.

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Source: 2011 World Economic Forum Global Risks Survey

Climate change has beenrepeatedly identified by theWorld Economic Forum as aleading risk facing business.

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This graphic flags theinteractive nature of keyelements of climate changerisk, pointing out the keyquestion of what will comefirst, the chicken(s) or theegg(s).

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To set the science stage - the temperature of eachplanet in the solar system is determined by the samesmall set of well understood variables.

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We know (no debate) that naturally occurringgreenhouse gases (GHGs) keep the Earth 59o Fwarmer than it would otherwise be. Without GHGs,the Earth would be a frozen planet.

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Nitrous oxide

Water vapor

Carbon dioxideMethane

Sulfur hexafluoride

We know how GHGs warm the earth’satmosphere. Note that water vapor isa powerful greenhouse gas, but theamount of water vapor in theatmosphere depends on temperature.There is no way to intentionallyinfluence water vapor levels, which iswhy policy targets the others.

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278 ppm = = 59o F

The term “greenhouse effect” suggests an almost solid wall of GHGs. In reality, the pre-industrial CO2 concentration of 278 parts per million is the equivalent of just one of the reddots shown here against the total surface area of the slide. In other words, one dot of CO2

per “slide area” of atmosphere is responsible (a bit simplistically) for the planet being 59o Fwarmer than it otherwise would be. That’s known, and suggests a planet quite sensitive toGHGs. The uncertainties surrounding climate change involve what will happen totemperatures as CO2 becomes two, three, or four dots on the slide. It’s by no means alinear relationship, and it’s a complicated question to answer in detail. But the commonsense answer is obvious, and the basic physics have been understood for more than 100years (see next slide).

= ?o F+

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A Changing Atmosphere

150 100 50 0

Thousands of Years ago

Predicted Levelof Business-as-Usual Scenarioin 2100

Current Level

Pre-IndustrialLevel

CurrentTemperature

There is no controversy regarding the rate ofaccumulation of CO2 in the atmosphere, orthe nearly vertical nature of today’s CO2

growth rate when put into the context of theice core record of the last 200,000 years.

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2

Required Reductions:

20 GT From Today’s Levels?

50 GT From Business asUsual Emssions in 2050?

What would it mean to try andstabilize the atmosphericconcentration of CO2? It would meanshifting global emissions from thetrajectory on the left to the trajectorybelow (ultimately a >90% reduction).That’s not going to happen soon, andeven if it did the concentration of CO2

would stabilize at about 450 ppm (up

from 400 ppm today).

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One Gigaton (a GT or 1 billion tons) is equivalent to more than 15x allthe CO2 avoided each year by all the world’s wind farms. A GT is a bignumber, and today’s CO2 emissions exceed 30 GTs.

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A Tragedy of the Commons occurs when multiple partieshave an incentive to over-use a resource. Such tragediesare common – fisheries are a great example under “catchit or lose it” thinking. Climate change is another, wherecontributors bear only a fraction of the costs of theiractions. Allocating common property rights is one solution,and underlies the notion of fishing quotas and emissionspermits.

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Climate change is far more than a Tragedy ofthe Commons. Several characteristics of theclimate change issue and discussion arereflected in this Wordle chart.

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Number of Days Over 100ºF

Recent Past

Higher Emissions Scenario, 2080-2099

Lower Emissions Scenario, 2080-2099

One measure of climate change is how muchmore common will hot days become in the U.S.

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Many scientistssay climatechange isprogressing morerapidly thanpredicted just 15years ago.

Source: 2011. Degrees of Risk – Defining a Risk ManagementFramework for Climate Security

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Source: 2011. Degrees of Risk – Defining a Risk Management Framework for Climate Security

We tend toassumeuncertainty cutsboth ways. But thedistribution of riskis actually muchmore skewed, asalso suggested bythe acceleration ofkey “climatechange indicators.”

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Source: 2011. Degrees of Risk – Defining a Risk Management Framework for Climate Security

The best case “today” is 2-3o C ofglobal temperature change by 2100,but “business as usual” is muchhigher (5-8o C).

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“Black swan” is a metaphor for big but generally unanticipatedoutcomes. When it comes to climate change, scientists say weshould expect a lot of “black swans.”

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We’ve seen many environmental blackswans, from the London Fog to burningrivers and the ozone hole. Many led tofundamental policy and regulatory change.

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Last time T was 2ºCabove 1900 levels,sea levels were 4-6 mhigher than today.

Last time T was 3ºCabove 1900 levels,sea levels were 20-30 m higher thantoday

Source: IPCC

No one is predictingthat sea levels willchange so dramaticallyin the near term, butthey could rise muchfaster than generallyanticipated.The worstcase is currently put atabout 16 feet by 2100.

70% chance already committed to 2ºC.

Committed to 3ºC by ???

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Earth’s climate has fluctuated over the last 500,000 years, with generally through natural“forcing” variables like solar intensity that act over thousands of years. Today, the “forcing” byGHGs is more than an order of magnitude greater than anything seen before. What will happen?

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Our societies, agricultural systems, and other support systemshave evolved within an extremely narrow global temperaturerange for 10,000 years. By moving outside that band, blackswan events become more likely and more damaging.

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Climate Impacts

Climate PolicyPermanent Change

One way to think about the accumulation of GHGs in the atmosphere is as “climate stress.” Asin earthquakes, this stress must eventually be released, in this case through climate change.But the impacts will be permanent. Will climatequakes cause major shifts in climate policy?

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There are many ways thatclimate change and climatepolicy can materially affectelectric utilities, although theirregulated status adds a layer ofcomplication to assessing risk.

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Climate Risk Impacts on Utility Welfare (Stock price or other measure)

As discussed earlier, societal climate risk is best visualizedas a risk distribution. The same idea applies to climate riskat the corporate level, but different utilities will face quitedifferent risk (and opportunity) distributions (based ongeneration mix and many other variables).

__+

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NPV of Strategy

Climate Change Near Term?

Policy Scenario

Carbon Price?

Climate Change (Future)

$$

$$

$$

$$

$$

Decision Tree analysis isa useful way to analyzecomplex risk patterns.What’s notable aboutclimate risk is how few ofthe potential brancheswe tend to focus on (thepurple cells here –shown in next slide).

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Most corporate climate strategies are premised on a very small number of thepotential branches shown in the larger decision tree. The boxes shown here are thepurple boxes from the prior slide. Most corporate climate strategies assume littlechange between the past and the future, both in terms of climate change itself, andclimate policy. Assuming that the future will mirror the past is a common psychologicaltrait, and a common shortcoming of risk management strategies.

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• No/Little Climate Change

• No/Modest GHG Targets

• Low/Modest Carbon Prices

What If We ConsideredScenarios in whichClimate Change isActually Tackled?

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Electric utility outcomes that would be interpreted asBlack Swans include more severe droughts, coolingwater shortages, disruptive technologybreakthroughs, aggressive climate policy, civildisobedience aimed at fossil fuel generation, andsurprise litigation outcomes.

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Source: 2011. Degrees of Risk – Defining a Risk Management Framework for Climate Security

Key climate change “tippingpoints” scientists haveidentified are shown here. Butmany of them are notreflected in climate modelingforecasts because they arenot well enough understoodto be reliably modeled.

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The politics of climate change, so intractabletoday, could turn on a dime under Black Swanoutcomes. What’s considered politicallyrealistic tomorrow could be radically differentfrom what is considered politically realistictoday. That’s what scenario planning is for.

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Physical Impacts?

• Direct temperature impacts

• Direct ocean acidification impacts

• Feedback mechanisms (albedo, clathrates)

• Supply chain disruptions

• Complex interactions (food, refugees, security)

Brand/Stakeholder Impacts?

• CSR and sustainability expectations

• Corporate and product footprints

• Investor perceptions

• Greenwashing risk

• Market share and competitiveness

Policies and Measures Impacts?

• Carbon pricing (taxes, cap and trade)

• Emissions reduction mandates

• Efficiency and renewable energy mandates

• Technology incentives/mandates

• Land use management incentives/mandates

• Indirect supply chain impacts

Three categories of climate risk are briefly profiled here. Any one ofthe many variables listed can lead to material corporate impacts.

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How May Climate Change and Climate Change Policy Evolve?

Will I Win Or Lose In A Carbon-Constrained World?

When and How Will I Be Regulated?

How Much Will Compliance Cost?

Do I Face Brand-Related Risk or Opportunity?

Can A Carbon Management Strategy Materially Reduce Risks?

Which Risk Management Measures are Likely to be Most Robust?

Can I Position Myself At Reasonable Cost (Relative To Benefit)?

What Are The Risks If I Act Too Early Or Too Late?

How Much Risk Is There In Making Long-term Capital Deployment Decisions?

Can I Create Competitive Advantage For Myself, And How?

What Are the Uncertainties I Need to be Aware of?

These are some of thekey questions we havefound companies facewhen considering howto manage climaterisks, and developchange mitigation andadaptation strategies.There is no one-sizefits all assessment ofrisk or opportunity.And no one-size fits allanswer to “what todo?”

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Framing the Risk Management Environment

Climate Change

ERMBusiness Continuity RMProject RM

RM

One way to frame climatechange risk is to relate it toother risk management (RM)paradigms, includingEnterprise RM, Project RM,and Business Continuity RM.Climate risk is best thought ofa “cloud risk.”

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Customized Climate Risk Formula (0-10 Continuum)

0 10

Variousresponses, fromoffsets to R&D

Ramp-Up ofTechnology

Plays

Technologyinterventions,from efficiency

to CO2 injection

Planningand strategydevelopment

Operationaladjustments,

includingcontracting

changes

Risk-Based Milestones (Triggers) and Pre-Approved Responses

Tracking Climate Risk Signposts (Policy, Science, Opinion, Technology)

Risk management outputs above are linked to changes in therisk environment. Different companies will develop very differentpositioning strategies based on their own risk environment.

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Can We Mitigate Tail Risk?

Will This Reduce Material Climate Change and Policy Impacts in Near Term?

Will This Deliver Near-Term Shareholder Value?

Impact on Corporate Welfare (Stock price or other measure)

Risk cannot be eliminated, but the distribution can bechanged, reducing bad tail risk, and potentially creating newopportunities on the other side of the risk distribution. Toomuch is unknown about the future to be positive how aspecific risk management strategy will play out, but riskmanagement makes a lot of sense.

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Impact on Corporate Welfare (Stock price or other measure)

Generation Mix Positioning Strategy

SmartgridAdvanced Efficiency

Advanced Efficiency

Smartgrid

Electric Transport

Climate Branding

Pro-active Adaptation

Technology Tracking

Stakeholder Education

Stakeholder Communications

Low Carbon Teaming

Carbon Pricing

Swanwatching

The most productive climate risk management will often focus on the“tails” of the risk distribution. It is usually much easier to cut off the mostdangerous part of the “tail” than to fundamentally shift (or eliminate) risk.Shown here are a variety of measures that can shorten tail risk.

Some riskmanagementmeasures canshift the riskdistribution tothe right.

We hope you’ve foundthis presentationuseful and interesting.We welcome yourquestions andsuggestions.

To further explore riskand climate risk pleasevisit our website andblogs.