Climate Change: The Commodities Dimension

Commodities, by virtue of their fungibility and broad uses, have infiltrated nearly every facet of human life, making the world enormously reliant on their ready availability. But as climate change advances—and the effort to slow it gains momentum—this vital relationship will be affected in wide-ranging ways—some obvious at the surface, others not.

Climate risk is broadly measured in two ways: The first is physical risk, such as rising seas that endanger physical plants and facilities or warmer temperatures that can alter crop yields. The second is transitional risk from the evolution toward a carbon-free economy, such as changing consumer preferences, evolving regulation, legal issues and new technologies.

Tackling the full scope of climate change’s impact on commodities would require a much longer format. So, this piece focuses on distinguishing the supply and demand impacts on key commodity categories. For both forces, the impact of climate change is transmitted through both physical and transitional channels.

The Demand-Side Impact

As the world gears up for the push to reduce carbon emissions, one segment of the commodity world under the spotlight includes coal and fossil fuels. Simply put, as the world weans itself from heavy-carbon-emitting fuel sources, demand for these energy stalwarts will steadily decline. This process will eventually knock higher cost producers out of the mix, with real prices—and profitability—falling.

On the other side of the transitional-demand coin, some commodity segments will benefit, as demand rises for inputs that enable decarbonization (Display). For example, industrial metals such as lithium and copper, critical in enabling the low-carbon transition, will see growing demand, even as oil demand flattens. The world will need more of these metals, which may force buyers to higher-cost sources, putting upward pressure on prices.

Demand Expected to Grow for Decarbonization Enablers

Many factors will play a role in shifting commodity demand: sovereign agreements to reduce carbon emissions, the regulatory landscape and fiscal commitment to support the transition. Changing preferences among consumers will also fundamentally alter demand to favor more climate-friendly products.