Climate challenge will heat up the global economy, Barclays predicts

Climate change will boost the global economy and dominate financial markets over the next 25 years, a leading investment bank has predicted.

In a new report, Barclays Capital challenges the conventional wisdom that global warming will have a devastating impact on economic growth. It believes the need to increase energy capacity by 50 per cent by 2035, while simultaneously reducing dependence on hydrocarbons, will spark an "energy revolution" reminiscent of the technology revolution which led to the dot.com boom.

"If ever the time were ripe for such an energy revolution, it is now," said Tim Bond, global head of asset allocation at Barclays Capital, and author of the report. "And like all historical adoptions of general purpose technologies, the process should prove immensely stimulative to economic growth."

Mr Bond says that those who couch the climate change debate in terms of the cost to growth are underestimating the impact of an energy revolution. Last year's Stern Review concluded that if temperatures rise by five degrees celsius, up to 10 per cent of global output could be lost.

"All of the historical changes in energy supply - from dung to wood to coal to oil - were stimulative for the economy concerned. Every major technological change was accompanied or followed by faster economic growth." he said. Like every revolution, there will be winners and losers, with the energy sector set to reap the biggest rewards.

In the meantime, current uncertainty over US climate change policy may be deterring energy investment, the report says. Until public opinion forces the US administration to address the issue, energy scarcity will intensify and prices will continue to soar. Indeed, futures markets suggest that oil prices, already at levels last seen during the 1970s oil shock in inflation-adjusted terms, will keep rising due to a worsening supply/demand imbalance. The same is true for the other hydrocarbon, coal.

"The impact of the replacement, restructuring and expansion of our energy infrastructure cannot be ignored," Mr Bond said. "Just as the personal computer cannot be un-invented, neither can the impending energy revolution."

The report is contained in Barclays Capital's annual Equity Gilt Study, which shows that equities were far and away the best-performing financial asset in 2006, as the stock market rally continued. Last year, money invested in stocks and shares grew by 11.4 per cent, still less than the 19 per cent growth seen in 2005.

In contrast, money invested in gilts shrank by 4.4 per cent as rising inflation wiped out nominal returns. Corporate and index-link bonds also suffered, falling by 4.5 per cent and 2.1 per cent respectively. Cash returns edged up by 0.4 per cent.

Barclays Capital calculated than an investor who put £100 in the stock market in 1899 would now be sitting on £25,022 if all income had been reinvested and adjusted for inflation. The same money invested in gilts would now be worth £323. If the £100 had been kept in cash, it would have swelled to just £286, it said.