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.
For example, as the larger global consumers of soy—food producers and protein producers—become more conscious of the impact of their supply chains on the environment, they are increasingly demanding proof that their soy is not being sourced from areas subject to deforestation. And they’re willing to change suppliers and increase their costs to avoid that climate impact.
Over the short to medium terms, we actually see solid support even for “dirty” commodities such as coal and oil. For one thing, capital is generally being withdrawn from the fossil fuel industry faster than the current reduction in demand. For commodities whose availability is declining the fastest, such as oil liquids and natural gas, this process could drive price spikes.
Investment in the clean-energy transition will provide another demand support pillar for fossil fuels, because the transition will require sizable amounts of steel and cement, whose processes contribute to carbon emissions. A lot of marginal diesel fuel is needed to move those heavy materials around, too.
If we also include the necessary capital expenditure to protect physical plants and supply chains against higher temperatures and rising sea levels, building materials could see a big demand boom.
The Supply-Side Impact
From the supply-side perspective, a major transitional risk for some commodities is rising costs, both capital costs and operating costs, driven by the growing focus on protecting the environment. For example, commodity producers are required to pay taxes on carbon emissions in an increasing number of jurisdictions, and those taxes are likely to head in one direction only: up.
Notwithstanding prior rollbacks in the US, regulatory mandates to protect resources are intensifying. Chile continues its effort, for example, to enact a glacier protection law, along the lines of an earlier Argentinean legislation. It would require a broad inventory of geo-forms, and would forbid activities—namely major Andean copper mining projects—that would negatively impact them. Many firms face the prospect of often-costly equipment upgrades or replacements to reduce carbon emissions.
This increasingly forceful regulatory environment will continue to raise supply costs. Current and proposed carbon regulations in Europe, for example, could raise the prices of some animal proteins by as much as 41%.1 Fines and penalties for environmental damage are presenting greater risks: in 2020, the US Department of Justice and Environmental Protection Agency fined a concentrated animal feeding operation nearly $3 million for Clean Water Act violations—a record for fines in this category.
The physical risks of climate change are having expansive effects on agriculture. Agricultural operations impact climate change as land use changes and carbon is produced, and climate change in turn affects agriculture. Crop productivity (Display) is at the mercy of rising temperatures and extreme weather patterns. In fact, we’ve recently seen extreme weather events simultaneously impact wheat harvests in Canada, Australia, China, Russia and Ukraine. Producers may adapt where and how they grow crops, but costs will still rise.
