Three significant events in the last fortnight point
towards a sea change in the way that investment markets will increasingly look
at fossil fuels. The first is just a headline. Even oil barons are giving up
on fossil fuels. The second is a new report
by the US National Academies of
Sciences, Engineering, and Medicine. This draws much stronger
connections between climate change and the frequency of extreme weather events,
something that notoriously cautious scientists have hitherto been reluctant to
claim with confidence. The third is a straightforward analysis from the Oxford
Martin School of facts and figures on carbon emissions, pointing out the risk to
any new investment in fossil fuel power generation without carbon capture. It
is a “stark warning … on the
probability that ‘2°C capital stock’ will be reached in 2017.”
Rockefeller
charity takes ethical stance on fossil fuels
The Rockefeller
Family Fund, the charitable vehicle of one part of the family, announced last
month that it would be divesting its shares in coal producers and oil and gas
explorers, including ExxonMobil, today’s of
the Rockefeller money machine, Standard Oil. This is a repudiation of the
fossil fuels that were the foundation of the family fortunes. By itself the
action of a single charitable organisation may appear of limited consequence,
but as an indicator of future investor sentiment, it will be symbolic. For reasons unconnected with ethical
principle, other serious investment funds, including pension funds are also
taking a long hard look at the impact of climate concerns, and the risk to long
term investments which may be forced to close before the end of their “economic”
life. The reasons relate to the second
and third of our recent events.
[see FT’s US investment correspondent, Stephen Foley, 3 April 2016]
Responsibility for extreme
climate related events
The second news item, the
US National Academies Report, is important for its potential political impact.
It explores the controversial question of event attribution due to the impact
of climate change. Nick Butler [FT,
28 March] asks whether events such
as the 2003 Paris heatwave (killing 3,000), floods on the Somerset levels in in
the winter of 2013/14, or the wildfires of western Russia in 2010 (killing
56,000) can be confidently attributed to climate change. The report suggests that
at least for some extreme events, notably heat, there is a causal connection.
It is not the first such attribution. Myles Allen of the University of Oxford was the first to
propose the use of Probabilistic Event Attribution to quantify the contribution
of human influences on climate to specific individual weather events.
For some physicists and
engineers this may merely confirm an instinctive intuition that complex systems
with more energy (ie heat) will tend to be more chaotic, and the report remains
quite cautious and nuanced. But the tendency to ignore climate change, as a far
distant phenomenon that need not concern us now, will be weakened if locally
catastrophic impacts start to be seen as immediate. As Butler says, if the
linkages become more obvious, the public demand for action will grow.
He adds: “In
politics, if a risk cannot easily be removed or managed the temptation is to
look for someone to blame. In legal terms this will be translated into the
concept of liabilities. If you are a shareholder in an energy business you
might like to ask your company’s view of the issue.” As a practical matter,
legal liabilities for climate change may seem rather hard to establish, but I
would not underestimate the abilities of US law firms in this area. It is
certainly another question for investors.
New fossil fuel plants for
power generation will turn into stranded assets
The third event is a
report from the Oxford Martin School, by Professor
Cameron Hepburn and others, that reiterates the observation that we are
uncomfortably close to the point where the world’s energy system commits the
planet to exceeding the carbon budget for emissions consistent with a “safe”
climate change target of 2°C increase. The report goes on to argue that, even
on quite favourable assumptions for other sectors, any new fossil generating
plant built after 2017 will, unless it allows for carbon capture and given the
longevity of power plant, commit us to exceeding the global budget.
So if we actually propose
to take the Paris agreements seriously, and if we do not then we face the
prospect of a dangerously uncertain global future, we need to recognise that any
such plant will need to be retired well before the end of what investors would
normally consider to be its economic life. In other words it would be a
stranded asset.
There are many
qualifications that might be added to what are inevitably broad brush
projections. The assumptions may be too optimistic, both on greenhouse gas reduction
in other sectors, or on the degree of “safety” provided by the notional carbon
budget. Other, older, fossil plant (without CCS) might be retired earlier. And
allowing for a carbon capture retrofit introduces a loophole.
But the general direction
of travel is clear. “Far from having years to work out how to
curb the risks of climate change, we face a moment of truth.” [Martin Wolf,
FT, 5 April 2016]. The regulatory and
policy risk for new fossil plant will be huge, and such plant depends on
revenue guarantees over periods of up to 30 or 40 years. This will be a really
serious concern for investors and make the investments much harder to finance
at any realistic cost of capital.
Nor can the owners of
the stranded assets expect much sympathy. To quote a colleague, “surely the
sight of stranded assets will be seen as a sign of successful climate policy”. (re-published on the Oxford Martin School website)
No comments:
Post a Comment