Will One or Two Degrees Make A Difference In Emerging Markets?

By Martin Hutchinson

In the West, combating global warming is a cause both popular and fashionable, spelling political death to those who oppose it. In emerging markets, attitudes are generally very different, and there’s money to be made knowing why.

Tata Motors of India recently announced that they will introduce an automobile costing 100,000 rupees (just under $2,500) in 2008. It will be sold in several emerging markets, but won’t have the emission controls and other features demanded in Europe and the United States.

Tata expects to sell 250,000 automobiles a year initially, but that may soon prove an underestimate. The cheapest automobile on the market currently costs about $4,000, so Tata is offering transportation at a 40% lower cost. In India, where economic growth is running about 8% per annum, a consumer who would normally be able to afford an automobile in 2013 will be able to afford a new Tata in 2008. That’s a huge new market.

In terms of greenhouse gases a Tata may emit as large a volume as the average current automobile. It will of course be a small car, and thus use less gasoline, but on the other hand it won’t have Western emission controls, and it is most unlikely to be maintained to U.S. or European standards. Given the cost of automobile repair, it’s likely that there will be a great deal of home repair work, as with the Ford Model T in the 1920s.

Which brings us to the conflict. Wealthy westerners are mostly concerned about global warming, and prepared to pay taxes and additional costs to combat it. Clearly, if global warming turns out to be really serious – say 5 degrees Celsius within the lifetime of people now alive — emerging market consumers will be equally concerned. After all, they mostly live in hot countries, and will thus be most severely affected by the higher temperatures and lower rainfall that such a change would bring.

However if as currently seems likely, global warming is a matter of an additional 1-2 degrees Celsius by 2100, with only a small chance of a more severe problem, consumer attitudes are likely to differ quite markedly. For the West, particularly the affluent opinion formers, an additional carbon tax, or more expensive automobiles caused by new-technology engines, may well be a reasonable price to pay to protect against modest and long term global warming.

The middle class in emerging markets, with incomes in the $5,000-$20,000 range, will have a very different view. An extra $2,000 on the price of an automobile due to new engine technology is to them prohibitive, it would prevent them getting access to transportation, a pretty basic human need. The cost of protecting against global warming is similar for them and the Western affluent, but they have much more basic other needs that have a higher priority.

Thus emerging market consumers and their governments will oppose expensive actions against global warming. That means that either little will be done until and unless the problem seems likely to become really serious, or that Western countries will act alone, as they did with the 1998 Kyoto protocol.

In the former case there’s not much to be done other than buying oceanfront property in Greenland, as a hedge.

In the latter case, Western economies will burden themselves with large extra costs to address the problem of global warming. Meanwhile emerging markets will not be burdened with such costs. This will be good for the living standards in emerging markets, but bad for our own, as more and more Western industries become uncompetitive.

That’s probably a good reason to hedge your US and European stock portfolios with shares from much poorer countries. They may not stay much poorer!