tag:theconversation.com,2011:/ca/topics/stranded-assets-13772/articlesStranded assets – The Conversation2022-11-11T13:13:50Ztag:theconversation.com,2011:article/1939442022-11-11T13:13:50Z2022-11-11T13:13:50ZHow the energy crisis is pressuring countries’ climate plans – while some race to renewables, others see wealth in natural gas, but drilling benefits may be short-lived<figure><img src="https://images.theconversation.com/files/495049/original/file-20221114-14-gb8km7.jpg?ixlib=rb-1.1.0&rect=1750%2C575%2C3575%2C2300&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A pipeline in Tunisia supplies natural gas from Algeria to Italy. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-employee-works-at-the-tunisian-sergaz-company-that-news-photo/1239979404">Fethi Belaid/AFP via Getty Images</a></span></figcaption></figure><p>Russia’s war on Ukraine has cast a shadow over this week’s meetings of world leaders at the <a href="https://www.g20.org/bali-summit/">G-20 summit</a> in Bali and the <a href="https://cop27.eg/">United Nations climate change conference</a> in Egypt.</p>
<p>The war has dramatically disrupted energy markets the world over, leaving many countries vulnerable to price spikes amid supply shortages.</p>
<p>Europe, worried about keeping the heat on through winter, is outbidding poor countries for natural gas, even paying premiums to <a href="https://energiesnet.com/another-lng-tanker-took-a-dramatic-u-turn-in-pursuit-of-higher-prices/">reroute tanker ships</a> after Russia cut off most of its usual natural gas supply. Some countries are <a href="https://www.npr.org/2022/09/27/1124448463/germany-coal-energy-crisis">restarting coal-fired power plants</a>. Others are looking for ways to expand fossil fuel production, including <a href="https://www.bloomberg.com/news/articles/2022-11-07/tanzania-to-sign-key-40-billion-lng-project-accords-next-month?sref=Hjm5biAW">new projects in Africa</a>. </p>
<p>These actions are a long way from the countries’ <a href="https://www.un.org/en/climatechange/net-zero-coalition">pledges just a year ago to rein in fossil fuels</a>, and they’re likely to further increase greenhouse gas emissions, at least temporarily.</p>
<p>But will the war and the economic turmoil prevent the world from meeting the Paris climate agreement’s <a href="https://unfccc.int/most-requested/key-aspects-of-the-paris-agreement">long-term goals</a>?</p>
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<img alt="Kerry leans toward Scholz and raises a finger as if to point while seated during the UN climate conference." src="https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=409&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=409&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=409&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=514&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=514&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494583/original/file-20221110-19-5m6qpc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=514&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">U.S. climate envoy John Kerry speaks with German Chancellor Olaf Scholz at the U.N. climate change conference, known as COP27, on Nov. 7, 2022, in Egypt.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/november-2022-egypt-scharm-el-scheich-german-chancellor-news-photo/1244584482">Michael Kappeler/picture alliance via Getty Images</a></span>
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<p>There are reasons to believe that this may not be the case. </p>
<p>The answer depends in part on how wealthy countries respond to a focus of this year’s climate conference: fulfilling their pledges in the Paris Agreement to provide support for low- and middle-income countries to build clean energy systems. </p>
<h2>Europe speeds up clean energy plans</h2>
<p>A key lesson many countries are taking away from the ongoing energy crisis is that, if anything, the <a href="https://www.iea.org/reports/renewables-2021/executive-summary">transition to renewable energy</a> must be pushed forward faster. </p>
<p>I work with countries as they update <a href="https://unfccc.int/ndc-information/nationally-determined-contributions-ndcs">national climate pledges</a> and have been involved in evaluating the <a href="https://doi.org/10.1038/s41467-022-31734-1">compatibility of global emissions reduction scenarios</a> with the Paris Agreement. I see the energy crisis affecting countries’ plans in different ways.</p>
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<p>About <a href="https://www.iea.org/data-and-statistics/charts/total-primary-energy-supply-by-fuel-1971-and-2019">80% of the world’s energy</a> is still from fossil sources. <a href="https://unctad.org/topic/trade-analysis/chart-3-november-2021">Global trade</a> in coal, oil and natural gas has meant that even countries with their own energy supplies have felt some of the pain of <a href="https://www.iea.org/news/natural-gas-markets-expected-to-remain-tight-into-2023-as-russia-further-reduces-supplies-to-europe">exorbitant prices</a>. In the U.S., for example, natural gas and electricity prices are higher than normal because they are increasingly tied to international markets, and the U.S. is the <a href="https://www.eia.gov/todayinenergy/detail.php?id=53719">world’s largest exporter</a> of liquefied natural gas. </p>
<p>The shortage has led to a scramble to find fossil fuel suppliers in the short term. European countries have offered to help African countries <a href="https://www.dw.com/en/germany-senegal-gas-plan-sparks-outcry-from-environmentalists/a-62673733">produce more natural gas</a> and have <a href="https://www.dw.com/en/qatar-to-help-germany-cut-reliance-on-russian-gas-says-minister/a-61191584">courted authoritarian regimes</a>. The Biden administration is <a href="https://www.npr.org/2022/03/19/1086925726/gas-prices-oil-crude-drilling">urging companies to extract more oil and gas</a>, has tried to <a href="https://www.aljazeera.com/news/2022/10/12/biden-vows-consequences-for-saudi-arabia-after-oil-output-cuts">pressure Saudi Arabia</a> to produce more oil, and considered <a href="https://www.nytimes.com/2022/10/12/world/americas/venezuela-us-sanctions.html">lifting sanctions against Venezuela</a>.</p>
<p>However, Europe also has a growing <a href="https://ec.europa.eu/eurostat/cache/infographs/energy_dashboard/endash.html?geo=EU27_2020&year=2020&language=EN&detail=1&nrg_bal=&unit=MTOE&chart=chart_two&modal=0">renewable energy supply</a> that has helped <a href="https://ember-climate.org/press-releases/eus-record-growth-in-wind-and-solar-avoids-e11bn-in-gas-costs-during-war/">cushion some of the impact</a>. A quarter of the European Union’s electricity comes from solar and wind, <a href="https://ember-climate.org/press-releases/eus-record-growth-in-wind-and-solar-avoids-e11bn-in-gas-costs-during-war/">avoiding billions of euros</a> in fossil fuel costs. Globally, <a href="https://www.iea.org/reports/world-energy-investment-2022/overview-and-key-findings">investments in the clean energy transition increased</a> by about 16% in 2022, the International Energy Agency estimates.</p>
<h2>Developing countries face complex challenges</h2>
<p>If Russia’s invasion of Ukraine is a wake-up call to accelerate the clean energy transition in wealthier countries, the situation is much more complex in developing countries. </p>
<p>Low-income countries are being <a href="https://www.undp.org/press-releases/global-cost-living-crisis-catalyzed-war-ukraine-sending-tens-millions-poverty-warns-un-development-programme">hit hard by the impact of Russia’s war</a>, not only by high energy costs, but also by decreases in <a href="https://www.aljazeera.com/news/2022/2/17/infographic-russia-ukraine-and-the-global-wheat-supply-interactive">grain</a> and <a href="https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=104023">cooking oil</a> exports. The more these countries are dependent on foreign oil and gas imports for their energy supply, the more they will be exposed to global market gyrations. </p>
<p>Renewable energy can reduce some of that exposure.</p>
<p>The costs of solar and wind energy have <a href="https://ourworldindata.org/cheap-renewables-growth#the-price-decline-of-electricity-from-renewable-sources">dropped dramatically in the past decade</a> and now represent the cheapest sources of energy in most regions. But <a href="https://www.iea.org/commentaries/for-the-first-time-in-decades-the-number-of-people-without-access-to-electricity-is-set-to-increase-in-2022">advances in expanding access to clean electricity</a> have been set back by the war. <a href="https://www.iea.org/data-and-statistics/data-tools/cost-of-capital-observatory">Borrowing costs can also be a barrier</a> for low-income countries, and those costs will increase as countries raise interest rates to fight inflation.</p>
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<p>As part of the Paris Agreement, wealthy countries were supposed to make good on promises to make US$100 billion per year <a href="https://doi.org/10.1038/d41586-021-02846-3">available for climate finance</a>, but the actual amounts provided have <a href="https://www.oxfam.org/en/press-releases/true-value-climate-finance-third-what-developed-countries-report-oxfam">fallen short</a>. </p>
<p>To achieve the Paris Agreement targets, <a href="https://doi.org/10.1038/s41467-022-31734-1">coal, oil and natural gas consumption must decrease dramatically</a> in the next decade or two. International cooperation will be necessary to help poorer countries expand energy access and transition to <a href="https://unfccc.int/process/the-paris-agreement/long-term-strategies">low-emissions development pathways</a>.</p>
<h2>Africa’s fossil fuels and stranded asset risks</h2>
<p>A number of developing countries have their own fossil fuel resources, and some in Africa have been calling for <a href="https://www.weforum.org/agenda/2022/06/gas-energy-africa-iea/">increasing production</a>, although not without <a href="https://www.powershiftafrica.org/latest/press-releases/outrage-as-african-leaders-expected-to-push-for-fossil-fuel-investment">pushback</a>. </p>
<p>Without a strong alternative <a href="https://www.nature.com/articles/s41560-022-01152-0">within local contexts for sustainable energy resources</a>, and with wealthy countries scrambling for fossil fuels, developing countries will exploit fossil resources – just as the wealthiest countries have done for over a century. For example, <a href="https://www.bloomberg.com/news/articles/2022-11-07/tanzania-to-sign-key-40-billion-lng-project-accords-next-month?sref=Hjm5biAW">Tanzania’s energy minister</a>, January Makamba, told Bloomberg during the U.N. climate conference that his country expects to sign agreements with Shell and other oil majors for a $40 billion liquefied natural gas export project.</p>
<p>While this intersection of interests could <a href="https://www.wsj.com/articles/solar-wind-force-poverty-on-africa-climate-change-uganda-11635092219">boost some developing countries</a>, it can also set up future challenges.</p>
<p>Encouraging the construction of new fossil-fuel infrastructure in Africa – presumably to be earmarked for Europe in the short to medium term – may help ameliorate some near-term supply shortages, but <a href="https://www.mckinsey.com/industries/oil-and-gas/our-insights/the-future-of-african-oil-and-gas-positioning-for-the-energy-transition">how long will those customers need the fuel</a>? And <a href="https://www.hrw.org/news/2017/06/15/equatorial-guinea-oil-wealth-squandered-and-stolen">how much of that income will benefit the people</a> of those countries?</p>
<p>The IEA sees <a href="https://www.iea.org/reports/world-energy-outlook-2022/executive-summary">natural gas demand plateauing</a> by 2030 and oil and coal demand falling, even without more ambitious climate policies. Any <a href="https://climateactiontracker.org/publications/massive-gas-expansion-risks-overtaking-positive-climate-policies/">infrastructure built today</a> for short-term supplies risks becoming a <a href="https://www.imf.org/external/pubs/ft/fandd/2017/03/cust.htm">stranded asset</a>, worthless in <a href="https://doi.org/10.1038/s41467-022-31734-1">a low-emissions world</a>.</p>
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<img alt="Layer chart shows natural gas use leveling off in the 2020s while coal and oil demand fall." src="https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=500&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=500&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=500&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=628&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=628&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494535/original/file-20221109-16841-mviuk5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=628&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The International Energy Agency’s projections show natural gas demand plateauing soon.</span>
<span class="attribution"><a class="source" href="https://www.iea.org/data-and-statistics/charts/fossil-fuel-demand-in-the-stated-policies-scenario-1900-2050">IEA 2022</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>Encouraging developing countries to take on debt risk to invest in fossil fuel extraction for which the world will have no use would potentially do these countries a great disservice, taking advantage of them for short-term gain. </p>
<p>The world has made progress on emissions in recent years, and the worst warming projections from a decade ago seem to be <a href="https://doi.org/10.1038/d41586-020-00177-3">highly unlikely</a> now. But <a href="https://www.carbonbrief.org/scientists-compare-climate-change-impacts-at-1-5c-and-2c/">every tenth of a degree</a> has an impact, and the current “business-as-usual” path still <a href="https://climateactiontracker.org/">leads the planet toward</a> warming levels with climate change costs that are hard to contemplate, especially for the most vulnerable countries. The outcomes from the climate conference and <a href="https://www.thejakartapost.com/adv/2022/11/11/g20-ministers-envision-joint-commitment-on-energy-transition-acceleration-at-bali-summit.html">G-20 summit</a> will give an indication of whether the global community is willing to accelerate the transition.</p>
<p><em>This article was updated Nov. 14, 2022, with the G-20 summit start.</em></p><img src="https://counter.theconversation.com/content/193944/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Brecha has received funding from the European Union to do research on energy access in developing countries. He has also been affiliated with the nonprofit think tank Climate Analytics and worked with developing countries on NDC revisions, funded through the German government. All views expressed here are his own. </span></em></p>Natural gas projects in Africa might help reduce supply shortages temporarily, but they could soon become stranded assets.Robert Brecha, Professor of Sustainability, University of DaytonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1837062022-05-26T15:01:29Z2022-05-26T15:01:29ZWho really owns the oil industry’s future stranded assets? If you own investment funds or expect a pension, it might be you<figure><img src="https://images.theconversation.com/files/465531/original/file-20220526-13-wdtgf0.jpg?ixlib=rb-1.1.0&rect=170%2C0%2C5038%2C3368&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More countries are discouraging fossil fuel use, but the industry is still pumping.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-off-shore-oil-platform-off-the-coast-in-huntington-beach-news-photo/1217468918">Leonard Ortiz/MediaNews Group/Orange County Register via Getty Images</a></span></figcaption></figure><p>When an oil company invests in an expensive new drilling project today, it’s taking a gamble. Even if the new well is a success, future government policies designed to slow climate change could make the project unprofitable or force it to shut down years earlier than planned.</p>
<p>When that happens, the well and the oil become what’s known as <a href="https://www.lloyds.com/strandedassets">stranded assets</a>. That might sound like the oil company’s problem, but the company isn’t the only one taking that risk.</p>
<p>In a <a href="https://www.nature.com/articles/s41558-022-01356-y">study published May 26, 2022</a>, in the journal Nature Climate Change, <a href="https://scholar.google.com/citations?user=9xh8Po0AAAAJ&hl=en">we</a> <a href="https://scholar.google.com/citations?user=1gais1MAAAAJ&hl=en">traced</a> the ownership of over 43,000 oil and gas assets to reveal who ultimately loses from misguided investments that become stranded.</p>
<p>It turns out, private individuals own over half the assets at risk, and ordinary people with pensions and savings that are invested in managed funds shoulder a surprisingly large part, which could exceed a quarter of all losses.</p>
<h2>More climate regulations are coming</h2>
<p>In 2015, almost every country worldwide signed the <a href="https://www.un.org/en/climatechange/paris-agreement">Paris climate agreement</a>, committing to try to hold global warming to well under 2 degrees Celsius (3.6 F) compared to pre-industrial averages. Rising global temperatures were already contributing to <a href="https://theconversation.com/heat-waves-hit-the-poor-hardest-a-new-study-calculates-the-rising-impact-on-those-least-able-to-adapt-to-the-warming-climate-175224">deadly heat waves</a> and <a href="https://theconversation.com/climate-change-and-wildfires-how-do-we-know-if-there-is-a-link-101304">worsening wildfires</a>. Studies showed the <a href="https://www.ipcc.ch/">hazards would increase</a> as greenhouse gas emissions, primarily from fossil fuel use, continue to rise.</p>
<p>It’s clear that meeting the Paris goals will <a href="https://www.iea.org/reports/net-zero-by-2050">require a global energy transition</a> away from fossil fuels. And many countries are developing climate policies designed to encourage that shift to cleaner energy. </p>
<p>But the oil industry is still launching new fossil fuel projects, which suggests that it doesn’t think it will be on the hook for future stranded assets. U.N. Secretary-General António Guterres called a <a href="https://www.euronews.com/green/2022/04/10/seven-new-oil-and-gas-projects-approved-since-ipcc-report-called-for-an-end-to-fossil-fuel">recent wave of new oil and gas projects</a> “<a href="https://www.un.org/press/en/2022/sgsm21228.doc.htm">moral and economic madness</a>.”</p>
<figure class="align-center ">
<img alt="Teenagers play in the water of the Caspian sea - one young man is flipping another, with several Soviet oil rigs behind them." src="https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&rect=0%2C19%2C4387%2C2946&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=510&fit=crop&dpr=1 754w, https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=510&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/465401/original/file-20220525-12-1uqbl2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=510&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Much of the stranded asset risk falls on individuals.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/teenagers-from-a-boxing-school-take-part-in-a-training-news-photo/478734696">Kirill Kudryavtsev/AFP via Getty</a></span>
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<h2>How risk flows from oil field to small investor</h2>
<p>When an asset becomes stranded, the owner’s anticipated payoff won’t materialize. </p>
<p>For example, say an oil company buys drilling rights, does the exploration work and builds an offshore oil platform. Then it discovers that demand for its product has declined so much because of climate change policies that it would cost more to extract the oil than the oil could be sold for.</p>
<p>The oil company is owned by shareholders. Some of those shareholders are individuals. Others are companies that are in turn owned by their own shareholders. The lost profits are ultimately felt by those remote owners.</p>
<p>In the study, we modeled how demand for fossil fuels could decline if governments make good on their recent emissions reduction pledges and what that would mean for stranded assets. We found that <a href="https://www.nature.com/articles/s41558-022-01356-y">$1.4 trillion in oil and gas assets</a> globally would be at risk of becoming stranded.</p>
<p>Stranded assets mean a wealth loss for the owners of the assets. We traced the losses from the oil and gas fields, through the extraction companies, on to those companies’ immediate shareholders and fundholders, and again their shareholders and fundholders if the immediate shareholders are companies, and all the way to people and governments that own stock in the companies in this chain of ownership. </p>
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<p>It’s a complex network.</p>
<p>On their way to ultimate owners, much of the loss passes through financial firms, including pension funds. Globally, pension funds that invest their members’ savings directly into other companies own <a href="https://www.ft.com/content/435a9384-8711-4b99-95a8-d55e962343c6">a sizable amount</a> of those future stranded assets. In addition, many <a href="https://www.investopedia.com/terms/d/definedcontributionplan.asp">defined contribution pensions</a> have investments through fund managers, such as BlackRock or Vanguard, that invest on their behalf.</p>
<p>We estimate that total global losses hitting the financial sector – including through cross-ownership of one financial firm by another – from stranded assets in oil and gas production could be as high as $681 billion. Of this, about $371 billion would be held by fund managers, $146 billion by other financial firms and $164 billion could even affect bondholders, often pension funds, whose collateral would be diminished.</p>
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<p>U.S. owners have by far the largest exposure. Ultimately, we found that losses of up to $362 billion could be distributed through the financial system to U.S. investors.</p>
<p>Some of the assets and companies in an ownership chain are also overseas, which can make the exposure to risk for a fund owner even more difficult to track.</p>
<h2>Someone will get stuck with those assets</h2>
<p>Our estimates are based on a snapshot of recent global share ownership. At the moment, with <a href="https://money.com/gas-prices-near-record-high-2022/">oil</a> and <a href="https://www.reuters.com/markets/commodities/europe-asia-gas-buyers-switching-long-term-supplies-beat-volatile-prices-2022-05-25/">gas</a> prices near record highs due to supply chain problems and the Russian war in Ukraine, oil and gas companies are paying splendid dividends. And in principle, every shareholder could sell off their holdings in the near future.</p>
<p>But that does not mean the risk disappears: Someone else buys that stock.</p>
<p>Ultimately, it’s like a game of musical chairs. When the music stops, someone will be left with the stranded asset. And since the most affluent investors have sophisticated investment teams, they may be best placed to get out in time, leaving less sophisticated investors and defined contribution pension plans to join the oil and gas field workers as losers, while the managers of the oil companies unfold their golden parachutes.</p>
<p>Alternatively, powerful investors could successfully lobby for compensation, as has happened repeatedly in the <a href="https://www.cga.ct.gov/PS98/rpt%5Colr%5Chtm/98-R-0392.htm">U.S.</a> and <a href="https://www.cleanenergywire.org/news/german-govt-adopts-coal-exit-fixes-hard-coal-compensation">Germany</a>. One argument would be that they couldn’t have anticipated the stricter climate laws when they invested, or they could point to governments asking companies to produce more in the short-term, as happened recently <a href="https://www.politico.com/news/2022/03/09/granholm-calls-oil-companies-increase-production-00015802">in the U.S.</a> to substitute for Russian supplies.</p>
<p>However, divesting right away or hoping for compensation aren’t the only options. Investors – the owners of the company – can also pressure companies to shift from fossil fuels to renewable energy generation or another choice with growth potential for the future.</p>
<p>Investors not only may have the financial risk, but also the related financial responsibility, and ethical choices may help preserve both the value of their investments and the climate.</p><img src="https://counter.theconversation.com/content/183706/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregor Semieniuk has previously received funding from the UK Research Councils and the ClimateWorks Foundation.</span></em></p><p class="fine-print"><em><span>Philip Holden has been funded through UK Research Councils, the European Commission and the Leverhulme Trust. </span></em></p>A study found $1.4 trillion in oil and gas industry assets would be at risk if governments follow through on their pledges to deal with climate change.Gregor Semieniuk, Assistant Research Professor of Economics, UMass AmherstPhilip Holden, Senior Lecturer in Earth System Science, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1712092021-12-02T16:00:15Z2021-12-02T16:00:15ZClimate transition delay could cost the UK trillions<figure><img src="https://images.theconversation.com/files/435333/original/file-20211202-19469-1hadkim.jpg?ixlib=rb-1.1.0&rect=0%2C5%2C3391%2C2517&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Mark Burrows (Nottingham, UK) / shutterstock</span></span></figcaption></figure><p>From power plants to coffee cups or your childhood home, everything that makes up the economy has a life expectancy. Much of what we make and consume lasts just weeks, months or years. However, lots of infrastructure instead lasts lifetimes, binding future generations into pathways chosen long before them. The dilemma this poses is the quintessential story of climate change, but it is not just about traditional capital assets: people matter in this story too.</p>
<p>Over recent decades governments, companies and individuals have made sizeable investments in carbon-dependent infrastructure that they expected would pay out returns for many years to come. But as the climate crisis looms, retaining this infrastructure is rapidly becoming incompatible with new imperatives. To abandon these investments prematurely – to create what are known as “stranded assets” – means taking an economic hit. Crucially, the longer we wait to set aside these investments, the larger this “carbon bubble” grows, and the larger the economic hit will be.</p>
<p>Colleagues and I have investigated this issue. Our research (published as a preliminary <a href="https://www.rebuildingmacroeconomics.ac.uk/timescales-and-investment-dynamics-">working paper</a> with a journal article forthcoming) sheds new light on the trillion pound risk posed to the UK’s economy by its growing carbon bubble.</p>
<p>We find that if – a very hypothetical if – all new economic assets (buildings, machines, vehicles and so on) were exclusively zero carbon from 2022 onwards while the existing economy continued to be retired at its natural rate, the UK would still miss its climate target of <a href="https://www.gov.uk/government/publications/net-zero-strategy">net zero by 2050</a>. </p>
<p>To reach that target, nearly £11 trillion in planned returns on investment may need to be discarded before 2050. This means oil rigs abandoned, factories shut down, and airports closed, no matter how much has been invested in them or how recently. To put this in perspective, this number is equivalent to 35% of the current size of the UK economy.</p>
<p>However, if new investment in the carbon-emitting economy continues until 2030, just eight years later, this number balloons to over £19 trillion. </p>
<p>The shorter the time left to transition to net zero, the greater the irresponsibility of creating new carbon-intensive infrastructure, and the greater the pain of changing path.</p>
<h2>The capital asset most at risk: people</h2>
<p>Our research is not the first to estimate the potential magnitude of stranded assets, though it is the first to use <a href="https://www.rebuildingmacroeconomics.ac.uk/timescales-and-investment-dynamics-">our methodology</a> of assigning expected lifetimes to everything in the economy. In the stranded asset debate it is easily overlooked that estimates for the total capital value of economies are dominated not by what you might expect – houses, cars, computers or office blocks – but by what is dryly referred to as “human capital”.</p>
<p>According to 18th-century economist Adam Smith, such capital <a href="https://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book02/ch01.htm">represents</a> “the acquired and useful abilities of all the inhabitants or members of the society”. Just like other parts of the economy, humans have working lifetimes too: on average, these are about 40 years. Humans are therefore not only the largest part of the economy but also a long-lasting part.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Industrial landscape at night" src="https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=335&fit=crop&dpr=1 600w, https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=335&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=335&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=421&fit=crop&dpr=1 754w, https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=421&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/435336/original/file-20211202-13-yqqkt0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=421&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Steelworks could be converted to make wind turbines.</span>
<span class="attribution"><span class="source">Christopher Willans / shutterstock</span></span>
</figcaption>
</figure>
<p>If society changes quicker than it can retrain and relocate existing workers or provide new workers, it will see significant disruption through unemployment and labour shortages. A rapid transition to net zero inevitably risks swathes of workers in energy, transport and resource extraction suddenly looking for new work, and while some steelmakers may produce wind turbines just as easily as oil rigs, aeroplane pilots may not be remotely as equipped to drive trains.</p>
<p>Therefore we include human capital in our analysis of the financial risk to the economy. With human capital making a particularly large contribution to the overall capital value of developed countries like the UK, we find it to be significantly at risk from a rapid last-minute transition to net zero. Of a transition that kicks off in 2030, over £14 trillion of the £19 trillion capital risk will take the form of workers rather than objects.</p>
<p>This calls for us to not only demand an urgent, managed transition instead of a delayed, hasty one, but it also underlines the need for this to be a <a href="https://theconversation.com/the-left-behind-climate-fight-podcast-part-3-transcript-170225">“just” transition</a>, which directs resources towards the skills, education and finance needed for the industries of the future.</p>
<h2>Action in this decade, not the next</h2>
<p>The recent UN <a href="https://www.unep.org/resources/emissions-gap-report-2021">emissions gap report</a> warned that while a 30% reduction in projected carbon emissions by 2030 is needed to see a 2°C world, and a 55% reduction for 1.5°C, current pledges have us on course for a mere 7.5% reduction. Across the world, countries are seeking to buy time before taking the decisive action that will be necessary. </p>
<p>The preliminary findings presented here are still in review, and much more work must be done to understand the financial risks of a rapid economic transition. However, one thing is clear: decisive action cannot be put off any longer because the risk to both capital and workers will only continue to grow.</p><img src="https://counter.theconversation.com/content/171209/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dan Chester has received funding from ESRC's Rebuilding Macroeconomics network for his project Timescales and Investment Dynamics in the Economy. He is employed as a caseworker for a Labour Member of Parliament.</span></em></p>Workers, not objects, make up most of the capital at risk from climate change.Dan Chester, PhD Candidate, Lancaster Environment Centre, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1617262021-07-19T12:07:22Z2021-07-19T12:07:22ZThe next big financial crisis could be triggered by climate change – but central banks can prevent it<figure><img src="https://images.theconversation.com/files/410464/original/file-20210708-13-zrifc3.jpg?ixlib=rb-1.1.0&rect=0%2C77%2C5200%2C3378&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Both climate change and policies to prevent it can rattle the economy.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/residential-houses-next-to-oil-refinery-at-wilmington-news-photo/129370063?adppopup=true">Citizen of the Planet/Education Images/Universal Images Group via Getty Images</a></span></figcaption></figure><p>In 2008, as <a href="https://www.theguardian.com/business/2008/dec/28/markets-credit-crunch-banking-2008">big banks began failing</a> across Wall Street and the housing and stock markets crashed, the nation saw how crucial financial regulation is for economic stability – and how quickly the <a href="https://irle.berkeley.edu/what-really-caused-the-great-recession/">consequences can cascade</a> through the economy when regulators are asleep at the wheel.</p>
<p>Today, there’s another looming economic risk: climate change. Once again, how much it harms economies will depend a lot on how financial regulators and central banks react.</p>
<p>Climate change’s impact on economies isn’t always obvious. Mark Carney, the former governor of the Bank of England, <a href="https://www.theguardian.com/environment/2015/sep/29/carney-warns-of-risks-from-climate-change-tragedy-of-the-horizon">identified a series of climate change-related risks</a> in 2015 that could shake the financial system. The rising costs of extreme weather, lawsuits against companies that have contributed to climate change and the falling value of fossil fuel assets could all have an impact. </p>
<p>Nobel Prize-winning U.S. economist Joseph Stiglitz agrees. In a recent interview, he argued that the impact of a sharp rise in <a href="https://sg.news.yahoo.com/us-economist-joseph-stiglitz-warns-220915613.html">carbon prices</a> – which governments charge companies for emitting climate-warming greenhouse gases – could trigger another financial crisis, this time starting with the fossil fuel industry, its suppliers and the banks that finance them, which could spill over into the broader economy.</p>
<p>Our research as <a href="https://sites.google.com/site/stefanocarattini/">environmental</a> <a href="https://sites.gsu.edu/gheutel/">economists</a> and <a href="https://gmelkadze.weebly.com/">macroeconomists</a> confirms that both the effects of climate change and some of the policies necessary to stop it could have important implications for financial stability, if preemptive measures are not undertaken. Public policies addressing, after years of delay, the fossil fuel emissions that are driving climate change could devalue energy companies and cause investments held by banks and pension funds to tank, as would abrupt changes in consumer habits.</p>
<p>The good news is that regulators have the ability to address these risks and clear the way to safely implement ambitious climate policy.</p>
<h2>Climate-stress-testing banks</h2>
<p>First, regulators can require banks to publicly disclose their risks from climate change and stress-test their ability to manage change.</p>
<p>The Biden administration recently introduced an <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/">executive order on climate-related financial risk</a>, with the goal of encouraging U.S. companies to evaluate and publicly disclose their exposure to climate change and to future climate policies. </p>
<p>In the United Kingdom, large companies already <a href="https://www.gov.uk/government/publications/academy-trust-financial-management-good-practice-guides/streamlined-energy-and-carbon-reporting">have to disclose their carbon footprints</a>, and the U.K. is pushing to have all major economies follow its lead. </p>
<p>The European Commission also proposed new rules for companies to report on climate and sustainability in their investment decisions across a broad swath of industries in its new <a href="https://ec.europa.eu/info/publications/210706-sustainable-finance-strategy_en">Sustainable Finance Strategy</a> released on July 6, 2021. This strategy builds on a previous plan for sustainable growth from 2018. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Jerome Powell and Mark Carney talk at a conference at Jackson Hole, Wyoming, with mountains behind them." src="https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=550&fit=crop&dpr=1 754w, https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=550&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/410468/original/file-20210708-19-pggxhx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=550&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mark Carney (right), former head of the Bank of England, has been warning about the economic risks of climate change for several years. The U.S. Federal Reserve, chaired by Jerome Powell (left), has recently begun discussing it as well.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FederalReserveJacksonHole/333e30ae5b1345daac5a692206f312c8/photo">AP Photo/Amber Baesler</a></span>
</figcaption>
</figure>
<p>Carbon disclosure represents a crucial ingredient for “<a href="https://www.scientificamerican.com/article/how-a-climate-stress-test-can-foresee-collapsing-banks/">climate stress tests</a>,” evaluations that gauge how well-prepared banks are for potential shocks from climate change or from climate policy. For example, <a href="https://www.bloomberg.com/news/articles/2021-05-18/boe-s-breeden-says-banks-are-unprepared-for-150-carbon-price">a recent study by the Bank of England</a> determined that banks were unprepared for a carbon price of US$150 per ton, which it determined would be necessary by the end of the decade to meet the international <a href="https://theconversation.com/why-the-us-rejoining-the-paris-climate-accord-matters-at-home-and-abroad-5-scholars-explain-153783">Paris climate agreement</a>’s goals. </p>
<p>The <a href="https://www.reuters.com/article/us-climate-change-ecb/ecb-stress-testing-broader-economy-over-climate-risk-de-guindos-idUSKBN2BA0MY">European Central Bank</a> is conducting stress tests to assess the resilience of its economy to climate risks. In the United States, the Federal Reserve recently established the <a href="https://thehill.com/policy/finance/544548-fed-to-form-committee-focused-on-climate-risks-to-financial-system">Financial Stability Climate Committee</a> with similar objectives in mind. </p>
<h2>Monetary and financial policy solutions</h2>
<p>Central banks and academics have also proposed several ways to address climate change through monetary policy and financial regulation. </p>
<p>One of these methods is “<a href="https://www.reuters.com/article/ecb-policy-climate/green-qe-would-only-help-climate-a-little-ecb-paper-finds-idUKKBN28O22C">green quantitative easing</a>,” which, like <a href="https://www.bankofengland.co.uk/monetary-policy/quantitative-easing">quantitative easing</a> used during the recovery from the 2008 recession, involves the central bank buying financial assets to inject money into the economy. In this case, it would buy only assets that are “green,” or environmentally responsible. Green quantitative easing could potentially <a href="https://web.stanford.edu/%7Epiazzesi/How_unconventional_is_green_monetary_policy.pdf">encourage investment</a> in climate-friendly projects and technologies such as renewable energy, though researchers have suggested that the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3748330">effects might be short-lived</a>.</p>
<p>A second policy proposal is to modify existing regulations to recognize the risks that climate change poses to banks. Banks are usually subject to <a href="https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/2020-economic-commentaries/ec-202005-evolution-bank-capital-requirements.aspx">minimum capital requirements</a> to ensure banking sector stability and mitigate the risk of financial crises. This means that banks must hold some minimum amount of liquid capital in order to lend. </p>
<p>Incorporating environmental factors in these requirements could improve banks’ resilience to climate-related financial risks. For instance, a “<a href="https://www.banque-france.fr/en/intervention/green-finance-new-frontier-21st-century">brown-penalizing factor</a>” would require higher capital requirements on loans extended to carbon-intensive industries, discouraging banks from lending to such industries.</p>
<figure class="align-center ">
<img alt="A refinery and wet road during a severe rain storm." src="https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&rect=0%2C254%2C2836%2C1630&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/410463/original/file-20210708-15-15d9qve.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Reducing fossil fuel use to slow climate change will affect oil industry assets, like refineries, pipelines and shipping, as well as the industry’s suppliers.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-oil-refinery-is-seen-before-the-arrival-of-hurricane-news-photo/839116986">Joe Raedle/Getty Images</a></span>
</figcaption>
</figure>
<p>Broadly, these existing proposals have in common the goal of reducing economy-wide carbon emissions and simultaneously reducing the financial system’s exposure to carbon-intensive sectors.</p>
<p>The Bank of Japan <a href="https://www.boj.or.jp/en/announcements/release_2021/rel210716b.pdf">announced a new climate strategy</a> on July 16, 2021, that includes offering no-interest loans to banks lending to environmentally friendly projects, supporting green bonds and encouraging banks to disclosure their climate risk. </p>
<p>The Federal Reserve has begun to study these policies, and it has <a href="https://www.reuters.com/article/us-usa-fed-brainard/fed-intensifies-climate-risk-focus-with-new-panel-scenario-analysis-idUSKBN2BF2GQ">created a panel</a> focused on developing a climate stress test.</p>
<h2>Lessons from economists</h2>
<p>Often, policymaking trails scientific and economic debates and advancements. With financial regulation of climate risks, however, it is arguably the other way around. Central banks and governments are proposing new policy tools that have not been studied for very long.</p>
<p>A few research papers released within the last year provide a number of important insights that can help guide central banks and regulators.</p>
<p>They do not all reach the same conclusions, but a general consensus seems to be that financial regulation <a href="https://www.nber.org/papers/w28525">can help address large-scale economic risks</a> that abruptly introducing a climate policy might create. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3658126">One paper</a> found that if the climate policy is implemented gradually, the economic risks can be small and financial regulation can manage them.</p>
<p>Financial regulation can also help <a href="https://www.nber.org/papers/w28525">accelerate the transition</a> to a cleaner economy, research shows. One example is subsidizing lending to climate-friendly industries while taxing lending to polluting industries. But <a href="https://www.nber.org/papers/w28525">financial regulation alone will not be enough</a> to effectively address climate change.</p>
<p>Central banks will have roles to play as countries try to manage climate change going forward. In particular, prudent financial regulation can help prevent barriers to the kind of aggressive policies that will be necessary to slow climate change and protect the environments our economies were built for.</p><img src="https://counter.theconversation.com/content/161726/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Garth Heutel receives funding from the Alliance for Market Solutions.</span></em></p><p class="fine-print"><em><span>Givi Melkadze receives funding from the Alliance for Market Solutions.</span></em></p><p class="fine-print"><em><span>Stefano Carattini receives funding from the Alliance for Market Solutions, the Department of Energy (United States), and the Swiss National Science Foundation.</span></em></p>It isn’t just the effects of climate change that could destabilize the financial system, it’s also fossil fuel assets losing value. The good news is that central banks can fix it.Garth Heutel, Associate Professor of Economics, Georgia State UniversityGivi Melkadze, Assistant Professor of Economics, Georgia State UniversityStefano Carattini, Assistant Professor in Economics, Georgia State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1625912021-06-13T20:07:00Z2021-06-13T20:07:00ZEven without new fossil fuel projects, global warming will still exceed 1.5°C. But renewables might make it possible<figure><img src="https://images.theconversation.com/files/405828/original/file-20210611-21747-1bh4l41.jpg?ixlib=rb-1.1.0&rect=15%2C31%2C5295%2C3264&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The International Energy Agency (IEA) last month made global headlines when it <a href="https://www.iea.org/reports/net-zero-by-2050">declared</a> there is <a href="https://theconversation.com/international-energy-agency-warns-against-new-fossil-fuel-projects-guess-what-australia-did-next-161178">no room</a> for new fossil fuel investment if we’re to avoid catastrophic climate change. </p>
<p>However, our new research suggests the horse may have already bolted. We <a href="http://fossilfueltreaty.org/exit-strategy">found</a> even if no new fossil fuel projects were approved anywhere in the world, carbon emissions set to be released from existing projects will still push global warming over the dangerous 1.5°C threshold.</p>
<p>Specifically, even with no new fossil fuel expansion, global emissions would be 22% too high to stay within 1.5°C by 2025, and 66% too high by 2030.</p>
<p>However, keeping global warming under 1.5°C is still achievable with rapid deployment of renewables. Our research found solar and wind can <a href="http://fossilfueltreaty.org/exit-strategy">supply the world’s energy demand</a> more than 50 times over. </p>
<h2>The stunning potential of wind and solar</h2>
<p>While our findings were alarming, they also give us a new reason to be hopeful. </p>
<p>We analysed publicly available oil, gas and coal extraction data, and calculated the future production volume. We worked under the assumption no new fossil fuel extraction projects would be developed, and all existing projects would see production declining at standard industry rates.</p>
<p>We found fossil fuel projects already in the pipeline will, by 2030, produce 35% more oil and 69% more coal than what’s consistent with a pathway towards a 1.5°C temperature rise. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Power station at night" src="https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405829/original/file-20210611-22322-r46mnm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Fossil fuels account for over 75% of carbon dioxide emissions.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>Fossil fuels are the main driver of climate change, accounting for more than 75% of carbon dioxide emissions. Continuing to expand this sector will not only be catastrophic for the climate, but also for the world’s economy as it locks in infrastructure that will become <a href="https://theconversation.com/4-reasons-why-a-gas-led-economic-recovery-is-a-terrible-na-ve-idea-145009">stranded assets</a>. </p>
<p>Ultimately, it’s not enough to simply keep fossil fuels in the ground. To meet our climate goals under the Paris Agreement, we must phase down existing production. </p>
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Read more:
<a href="https://theconversation.com/4-reasons-why-a-gas-led-economic-recovery-is-a-terrible-na-ve-idea-145009">4 reasons why a gas-led economic recovery is a terrible, naïve idea</a>
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<p>Solar and wind power technologies are already <a href="https://www.forbes.com/sites/mikescott/2020/04/30/solar-and-wind-costs-continue-to-fall-as-power-becomes-cleaner/?sh=1c37cded785f">market ready and cost competitive</a>. And as our analysis confirms, they’re ready to be scaled up to meet the energy demands of every person on the planet.</p>
<p><a href="https://rd.springer.com/chapter/10.1007/978-3-030-05843-2_7">We mapped all the potential areas</a> where wind and solar infrastructure can be built, and the energy potential across six continents.</p>
<p>Even after applying a set of robust, conservative estimates that take environmental safeguards, land constraints and technical feasibility into account, we found that solar and wind energy could meet the world’s energy demand from 2019 — 50 times over.</p>
<p>It’s clear we don’t need new fossil fuel development to ensure 100% energy access in the future.</p>
<h2>Australia’s laggard status</h2>
<p>In Australia, the Morrison government refuses to set new emissions reduction targets, and continues to fund <a href="https://theconversation.com/government-owned-firms-like-snowy-hydro-can-do-better-than-building-600-million-gas-plants-161180">new fossil fuel projects</a>, such as a A$600 million gas plant in the New South Wales Hunter Valley. </p>
<p>Despite Australia’s laggard status on climate change, there are <a href="https://theconversation.com/spot-the-difference-as-world-leaders-rose-to-the-occasion-at-the-biden-climate-summit-morrison-faltered-159295">positive moves</a> elsewhere around the world. </p>
<p>The progress was evident ahead of the G7 summit this past weekend, where climate change was firmly on the agenda. Ahead of the summit, <a href="https://www.bbc.com/news/science-environment-57203400%22%22">environment ministers</a> worldwide agreed to phase out overseas fossil fuel finance and end support for coal power.</p>
<p>And in <a href="https://theconversation.com/four-seismic-climate-wins-show-big-oil-gas-and-coal-are-running-out-of-places-to-hide-161741">recent weeks</a>, three global fossil fuel giants – Shell, Chevron and ExxonMobil – faced legal and shareholder rebukes over their inadequate action on climate change. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/four-seismic-climate-wins-show-big-oil-gas-and-coal-are-running-out-of-places-to-hide-161741">Four seismic climate wins show Big Oil, Gas and Coal are running out of places to hide</a>
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<p>Coming on top of all that, the IEA last month set out a <a href="https://www.iea.org/reports/net-zero-by-2050">comprehensive roadmap</a> to achieve net-zero emissions by 2050. It included a stark warning: no new fossil fuel projects should be approved.</p>
<h2>Natural carbon storage is key</h2>
<p>However, the IEA’s findings contradict our own on several fronts. We believe the IEA underestimated the very real potential of renewable energy and relied on problematic solutions to fill what it sees as a gap in meeting the carbon budget. </p>
<p>For example, the IEA suggests a sharp increase in bioenergy is required over the next 30 years. </p>
<p>This would require biofuels from energy <a href="http://www.cleantech.guide/p/354/">plantations</a> — planting crops (such as rapeseed) specifically for energy use. </p>
<p>But conservationists estimate the <a href="https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2017)608660">sustainable potential</a> for biofuels is lower. They also say high volumes of bioenergy might interfere with land use for food production and protected nature conservation areas. </p>
<p>Our research found the exact opposite is needed: <a href="https://www.mdpi.com/1996-1073/14/8/2103/htm">rapid phase out of deforestation</a> and significant reforestation alongside the decarbonisation of the energy sector. </p>
<p>Bioenergy should be produced predominantly from agricultural and organic waste to remain carbon neutral. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/international-energy-agency-warns-against-new-fossil-fuel-projects-guess-what-australia-did-next-161178">International Energy Agency warns against new fossil fuel projects. Guess what Australia did next?</a>
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<p>Likewise, the IEA calls for an extreme expansion of carbon capture and storage (CCS) projects — where carbon dioxide emissions are captured at the source, and then pumped and stored deep in the ground. </p>
<p>In its roadmap, the IEA expects CCS projects to grow from capturing 40 million tonnes of carbon dioxide (as is currently the case), to 1,665 million tonnes by 2030. </p>
<p>This is quite unrealistic, because it means betting on expensive, unproven technology that’s being deployed <a href="https://www.bloomberg.com/news/features/2020-12-07/exxon-s-xom-carbon-capture-project-stalled-by-covid-19">very slowly</a> and is often plagued by <a href="https://reneweconomy.com.au/chevron-faces-100m-bill-for-excess-emissions-after-wa-government-refuses-ccs-waiver-42253/">technical issues</a>.</p>
<p>Establishing natural carbon sinks should be prioritised instead, such as keeping forest, mangrove and seagrass ecosystems better intact to draw carbon dioxide from the atmosphere. </p>
<h2>Phasing out early</h2>
<p>As a wealthy country, Australia is better placed than most to weather any economic disruption from the energy transition. </p>
<p>Our research shows Australia should phase out fossil fuels early and urgently. The Australian government should also ensure communities and people reliant on fossil fuel industries are helped through the transition. </p>
<p>We must also support poorer countries highly dependent on fossil fuels, particularly in the Asia-Pacific region.</p>
<p>There is new international momentum for climate action, and the future of the fossil fuel industry looks increasingly dire. The technologies to make the transition are ready and waiting – now all that’s needed is political will.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/tracking-the-transition-the-forgotten-emissions-undoing-the-work-of-australias-renewable-energy-boom-162506">Tracking the transition: the ‘forgotten’ emissions undoing the work of Australia's renewable energy boom</a>
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<img src="https://counter.theconversation.com/content/162591/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sven Teske received research funding from the Leonardo Di Caprio Foundation, the European Climate Foundation and the Stand-Earth Foundation. This research was produced in cooperation with the Fossil Fuel Non-Proliferation Treaty Initiative.</span></em></p><p class="fine-print"><em><span>Sarah Niklas received research funding from the Leonardo DiCaprio Foundation, the European Climate Foundation (ECF) and the Stand.Earth Foundation. </span></em></p>Keeping global warming under 1.5°C is still achievable with rapid deployment of renewables. A new report found solar and wind can supply the world’s energy demand more than 50 times over.Sven Teske, Research Director, Institute for Sustainable Futures, University of Technology SydneySarah Niklas, Research Consultant, Institute for Sustainable Futures, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1265442019-11-08T11:29:36Z2019-11-08T11:29:36ZSaudi Aramco’s $1.5 trillion IPO flies in the face of climate reality<p>The largest oil and gas producer, Saudi Aramco, is due to become the world’s most valuable publicly listed company. The Saudi government <a href="https://www.theguardian.com/business/2019/nov/03/saudi-oil-giant-aramco-gets-go-ahead-for-17-trillion-stock-listing">is planning</a> to sell a small fraction of the firm’s shares on the Riyadh stock exchange before seeking a listing for 5% of the firm on an international market.</p>
<p>The company is so big that this would be the largest ever initial public offering (IPO) and could value the whole company at around US$1.5 trillion. This is less than the government’s hoped-for valuation of US$2 trillion, but would still make Aramco 50% larger than Microsoft, Apple or Amazon (which are all valued at about US$1 trillion).</p>
<p>And yet the future doesn’t look good for oil. The threat of climate change means most countries are looking for ways to reduce their use of fossil fuels and many investors are trying to reduce the number of oil company stocks they hold. So why is the company considered so valuable? A closer look at the data suggests the market sees Aramco as a short-term money maker but with much worse long-term prospects.</p>
<p>Saudi Aramco has annual profits of about US$100 billion and has promised to pay annual dividends of <a href="https://www.bloomberg.com/news/articles/2019-10-10/aramco-s-long-delayed-mega-ipo-is-finally-set-to-hit-the-market">US$75 billion</a>. The company is <a href="https://theconversation.com/how-the-aramco-ipo-will-make-history-and-transform-saudi-arabias-economy-75759">committed to infrastructure development</a> in the Gulf and, even though it has a cash surplus, it <a href="https://uk.reuters.com/article/us-aramco-bond-demand/aramco-sells-12-billion-bonds-out-of-record-100-billion-demand-idUKKCN1RL0NF">borrowed US$12 billion</a> to fund future infrastructure via a long-term bond. </p>
<p>While this sounds like the company is in a strong position, the numbers actually reveal a more complicated situation. Other large public oil companies such as Shell typically pay shareholders a dividend of 6% on their investment value. If Aramco pays a similar percentage and its total dividends reach around US$75 billion, then the actual value of the company could be closer to US$1.25 trillion.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=434&fit=crop&dpr=1 754w, https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=434&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/300845/original/file-20191108-194650-6hp8nt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=434&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Oil’s long-term prospects are declining.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/3d-illustration-oil-pump-jacks-on-365191952?src=0f8b13ca-ed41-472d-af96-43e1c52063fd-1-3">Egorev Artem/Shutterstock</a></span>
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<p>Of course that would still make the company the most valuable in the world. But there’s another problem. A 6% return on investment from buying shares in the company represents the success of the company now. But the return from the company’s long-term bond represents what the market expects the company’s future prospects to be, and right now the bond yield is about <a href="https://www.wsj.com/articles/saudi-aramco-bonds-slide-after-record-debut-11558011360">4% a year</a>. When the bond yield is less than the yield from shares, it implies that prospects for capital growth are lower than in other sectors and that investors view oil as a declining industry.</p>
<p>The problem for Aramco and other oil firms is that climate change and <a href="https://www.weforum.org/agenda/2019/08/how-falling-demand-for-oil-is-set-to-transform-international-relations">falling demand</a> has turned their oil reserves into “<a href="https://theconversation.com/why-stranded-assets-matter-and-should-not-be-dismissed-51939">stranded assets</a>”. This means they could be worth much less than investors expected and perhaps even become worthless. Global investors are not looking to increase the proportion of their portfolios devoted to oil and gas firms. Many, particularly sovereign wealth funds <a href="https://www.theguardian.com/business/2019/jun/12/worlds-biggest-sovereign-wealth-fund-to-ditch-fossil-fuels">such as Norway’s</a>, are <a href="https://theconversation.com/financial-markets-are-almost-off-cigarettes-will-they-now-kick-the-oil-habit-50293">decarbonising their investments</a>. </p>
<p>Aramco’s difficult flotation comes in the middle of this process. With its high prospective yield, Aramco may well be attractive to “sin stock” investors who are happy to benefit from large short-term gains in socially unacceptable companies. But investors that buy in for financial or strategic reasons risk being left with stocks that become increasingly unmarketable. Who wants to be the last fund holding oil?</p>
<h2>Uncertain future</h2>
<p>What’s more, the Saudi government will have to keep selling further shares in Aramco to fund its ambitions to transform its economy away from dependence on oil. This will depress Aramco’s share price, causing future valuations to occur on even worse terms. If it has proved difficult for the company to get the first valuation it wanted, what will happen later if the first sale doesn’t go well?</p>
<p>Aramco’s IPO could be viewed as the <a href="https://www.ft.com/content/40b44b66-cf30-11e9-b018-ca4456540ea6">privatisation and transformation</a> of Gulf infrastructure assets and the company has started making <a href="https://theconversation.com/oil-companies-are-thinking-about-a-low-carbon-future-but-arent-making-big-investments-in-it-yet-122365">investments in renewables</a>. However oil companies have a <a href="https://theconversation.com/seven-climate-change-myths-that-big-oil-continues-to-perpetuate-92088">poor record</a> when it comes to making real change in this direction.</p>
<p>At the beginning of the 18th century, Wall Street was one of the locations in the US <a href="https://1776reloaded.org/joomla30/index.php/unlearn/united-states-corp-imposter/385-wall-street-was-once-a-slave-market">that traded slaves</a>. Soon we may look back and find it just as alien that markets were trading investments related to oil combustion at the beginning of the 21st century.</p>
<p><em>This article has been amended to state Saudi Aramco’s annual profits are US$100 billion, not revenue as originally stated.</em></p>
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<img alt="" src="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=140&fit=crop&dpr=1 600w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=140&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=140&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=176&fit=crop&dpr=1 754w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=176&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=176&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=Imagineheader1126544">Click here to subscribe to our climate action newsletter. Climate change is inevitable. Our response to it isn’t.</a></em></p><img src="https://counter.theconversation.com/content/126544/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Shackleton does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Saudi government’s oil firm is set to become the world’s biggest public company, but investors are already betting against its long-term prospects.Mark Shackleton, Professor of Finance, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1110172019-03-26T22:34:30Z2019-03-26T22:34:30ZThe future of renewable infrastructure is uncertain without good planning<figure><img src="https://images.theconversation.com/files/265891/original/file-20190326-36270-1wn7c5r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">These photovoltaics panels provide this village with energy now, but they could become obsolete when the main grid arrives. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>In 2005, a small hydropower plant was installed in the Sukajaya district of West Java, Indonesia. This was an off-the-grid project, owned by the community, that provided electricity locally through a mini-grid to about 150 households mainly for lighting. But after 10 years <a href="https://www.researchgate.net/publication/329333506_Sustainability_of_Renewable_Off-Grid_Technology_for_Rural_Electrification_A_Comparative_Study_Using_the_IAD_Framework">the plant was discontinued</a> when the community was connected to the recently expanded central grid. </p>
<p>This is the story for many such projects in the region, including solar-powered residential systems. Over and over again, the value of renewable energy investments is lost as the installations are left abandoned as the grid arrives. In Indonesia alone, more than 150 villages have <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/29018/134326.pdf?sequence=6&isAllowed=y">abandoned mini-grid projects</a> since late 2000s. </p>
<p>While <a href="https://www.nature.com/articles/s41558-018-0182-1">investing in fossil fuel-based energy has become riskier</a>, there are also unique investment risks with small-scale renewable systems. In developing countries, in many sites relying on off-grid or mini-grid electricity, this infrastructure faces the risk of becoming a “stranded asset” — abandoned infrastructure that no longer holds value — which may work against efforts to limit climate change. </p>
<p>This is a significant issue for the <a href="https://www.iea.org/access2017/">1.1 billion people that still do not have access to any electricity</a> globally. According to the <a href="https://www.iea.org/publications/freepublications/publication/WEO2017SpecialReport_EnergyAccessOutlook.pdf?fbclid=IwAR1K3v-OrHoJhsv-EyFni4a_3aJa-b-KfH5gA3x_DS8KHhXcTvyl0SmVE20">International Energy Agency</a>, to achieve 100 per cent electrification by 2030, we need to rely heavily on solutions that do not depend on a central electrical grid. In highly unelectrified regions like sub-Saharan Africa, nearly three-quarters of the new connections must come from off-grid and mini-grid systems. </p>
<h2>Threatened renewables</h2>
<p>Traditionally, the dominant approach to electrifying regions without electricity has been to extend the centralized grid into those regions. Most of these grids are run on fossil fuels such as coal, which still <a href="https://www.worldenergy.org/wp-content/uploads/2016/10/World-Energy-Resources-Full-report-2016.10.03.pdf">remains the dominant electricity fuel source globally</a>.</p>
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<img alt="" src="https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265885/original/file-20190326-36270-1bdwu51.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A wind farm in the Seychelles.</span>
<span class="attribution"><span class="source">IRENA/flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>However, in recent decades, off-grid technologies based on renewable energy such as solar photovoltaics, wind power or hydropower have received a lot of attention for their ability to easily electrify remote communities. This has happened in the form of mini-grids, smaller versions of a large transmission grid, that connect tens or hundreds of households, or off-grid standalone systems for a single or a few households. </p>
<p>But mini-grid and off-grid developments are threatened by the arrival of the main grid, because customers will readily <a href="https://linkinghub.elsevier.com/retrieve/pii/S0305750X15312316">defect to the main grid</a>. This compromises the expectations of the mini-grid developers and sellers of standalone systems. </p>
<p><a href="http://documents.worldbank.org/curated/en/258101549324138093/pdf/134326-ESMAP-P154383-PUBLIC-4-2-2019-15-30-28-ESMAPMiniGridsArrivalofMainGrid.pdf">A study</a> of mini-grids in three developing countries in Asia shows that this phenomenon is widespread. <a href="https://linkinghub.elsevier.com/retrieve/pii/S0305750X15312316">In another study</a>, one mini-grid investor in India noted that the government did not give him: </p>
<blockquote>
<p>“…the assurance that if you do these projects is the grid going to reach there in one year, three years, five years? So there is no solidity in all of that.” </p>
</blockquote>
<p>In fact, in a recent <a href="https://www.undp.org/content/undp/en/home/librarypage/environment-energy/low_emission_climateresilientdevelopment/derisking-renewable-energy-investment/drei--off-grid-electrification--2018-.html">report by the UN Development Program (UNDP)</a>, grid expansion has been identified as one of the key barriers facing off-grid and mini-grid development.</p>
<h2>Options for developers</h2>
<p>There are two options for developers to partially save their assets, when the grid arrives.</p>
<p>Off-grid and mini-grid developers can partially protect their investments by letting go of the electricity generation related assets — like the power plant or generator, but keep the distribution power lines in place. </p>
<p>In Cambodia, for example, which had mainly diesel-based mini-grid systems, when the main electrical grid was expanded, larger <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/29018/134326.pdf?sequence=6&isAllowed=y">mini-grids were integrated into it</a>. This allowed the mini-grid developers to change their business model and become small-scale power distributors. Unfortunately, this approach often eliminates the clean-energy benefits that come from mini-grids running on renewable energy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265978/original/file-20190326-36264-li5pcr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">In September 2015, the town of Les Côteaux in the south of Haiti switched on its lights for the first time after a mini-grid was installed.</span>
<span class="attribution"><span class="source">UNEP/Marc Lee Steed</span></span>
</figcaption>
</figure>
<p>Another option is to abandon the distribution network and use the generation system to feed power back to the main grid. For example, in Sri Lanka, three <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/29018/134326.pdf?sequence=6&isAllowed=y">hydropower projects became small-scale power producers</a>. These are low success rates, however, and an NGO had to do significant work to convert the three projects. </p>
<h2>Policy fixes</h2>
<p>But these courses of action <a href="https://doi.org/10.1016/j.worlddev.2016.12.029">cannot happen in the absence of appropriate regulations</a>. Competition from a future centralized grid can be <a href="http://cse.ucpress.edu/content/early/2018/11/16/cse.2017.000737">avoided through integrated planning for electrification</a>.</p>
<p>Both grid and decentralized systems (off-grid and mini-grid) can be used together successfully if governments work towards the <a href="http://erdelab.forestry.ubc.ca/2018/11/the-twin-imperatives-of-global-energy-transitions/">twin imperatives</a> of universal electricity access and emissions reductions. By creating <a href="https://www.undp.org/content/undp/en/home/librarypage/environment-energy/low_emission_climateresilientdevelopment/derisking-renewable-energy-investment/drei--off-grid-electrification--2018-.html">off-grid zones</a> and <a href="https://www.mdpi.com/1996-1073/11/4/813/htm">non-overlapping service areas</a>, they can reduce the investment risk for decentralized solutions. They can then focus on enhancing the operation and maintenance capacity of local systems. </p>
<p>Decentralized energy has been hailed in many developed countries as the harbinger of <a href="https://www.sciencedirect.com/science/article/pii/S1364032114009149">democratization of energy</a>. But the picture is very different in developing countries. </p>
<p>Electrification using conventional means, growing consumption levels and simultaneous reliance on decentralized solutions without planning, may mean many small-scale low-carbon projects get discarded, and leave consumers, investors and governments in a fix. </p>
<p>Since deploying renewables is considered one of the most important ways to mitigate the climate change crisis, understanding their vulnerability and mitigating these vulnerabilities are indispensable for any bold climate action.</p><img src="https://counter.theconversation.com/content/111017/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hisham Zerriffi is a member of the board of the Institute for Energy and Environmental Research.</span></em></p><p class="fine-print"><em><span>Sandeep Pai and Vikas Menghwani do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Small-scale renewable energy projects can power rural areas not connected to the main grid. But investors may hesitate if future electrification remains unpredictable.Vikas Menghwani, PhD Candidate, University of British ColumbiaHisham Zerriffi, Associate Professor, Forest Resources Management, University of British ColumbiaSandeep Pai, Ph.D. Student & Public Scholar, Institute for Resources, Environment and Sustainability, University of British ColumbiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/914422018-02-09T17:03:31Z2018-02-09T17:03:31ZThe EU wants to fight climate change – so why is it spending billions on a gas pipeline?<figure><img src="https://images.theconversation.com/files/205470/original/file-20180208-180813-ifievy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:TAP_in_Albania.jpg">Albinfo/Wikipedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Over the past few years there has been <a href="https://www.enelgreenpower.com/media/news/d/2017/12/renewables-exponential-growth">exponential growth</a> in clean energy investment – while fossil fuel assets are increasingly considered to be <a href="https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf">risky</a>. Yet, on February 6, the European Investment Bank, the EU’s long-term lending institution, voted to provide a <a href="http://www.eib.org/infocentre/press/releases/all/2018/2018-030-eib-backs-eur-6-5-billion-energy-sme-transport-and-urban-investment">€1.5 billion loan</a> to the controversial Trans Adriatic Pipeline (TAP).</p>
<p>The TAP is the Western part of a larger Southern Gas Corridor proposal that would ultimately connect a large gas field in the Caspian Sea to Italy, crossing through Azerbaijan, Turkey, Greece and Albania. And while gas might be cleaner than coal, it’s still a fossil fuel. </p>
<p>So how does the EU’s support for this major project fit in with its supposed goal of addressing climate change?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The proposed Trans Adriatic Pipeline will run nearly 900km from Greece to Italy.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Trans_Adriatic_Pipeline.png">Genti77 / wiki</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Influencing investors</h2>
<p>A key problem is the message this sends to the private sector, where renewable energy is increasingly seen as a good investment. Technologies once perceived as too risky and too expensive are now delivering worthwhile returns thanks to reduced costs and breakthroughs in energy storage. The price of electricity generated by solar, wind or hydro is now comparable with the national grid. Over the past decade, investor meetings have shifted from discussing whether the transition to a low carbon economy will start before 2050, to whether it will be completed in the same period. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"949194987337650176"}"></div></p>
<p>But there is still not enough money being spent on renewables. While clean energy investment in 2017 <a href="https://about.bnef.com/blog/runaway-53gw-solar-boom-in-china-pushed-global-clean-energy-investment-ahead-in-2017/">topped US$300 billion for the fourth year in a row</a>, this is far short of what is needed to unlock the technology revolution necessary to tackle climate change. There is clearly a gap between what is required and what is being delivered. </p>
<p>The private sector will continue to invest significant capital into energy projects over the next few decades, so one issue facing policy makers is how to influence investors away from fossil fuels and <a href="https://www.sciencedirect.com/science/article/pii/S0301421511005064">towards renewable projects</a>. To really scale up investment into renewable infrastructure, <a href="http://www.unepfi.org/fileadmin/documents/Investment-GradeClimateChangePolicy.pdf">long-term and stable policy is required</a> – which investors <a href="https://www.sciencedirect.com/science/article/pii/S0959652615006277">see as clearly lacking</a>. </p>
<p>By funding the Trans Adriatic Pipeline, the EU’s investment bank is hardly signalling to the private sector that governments are committed to a green energy transition. </p>
<h2>Risky business</h2>
<p>If Europe really was to follow through and successfully switch to green energy – and such a transition is partially underway – then the pipeline project may even represent a risk to public finances.</p>
<p>Studies on climate change point to the need for a greater sense of urgency and ambition and, to stay within its “carbon budget” under current agreed emissions targets, the EU needs to be <a href="http://www.foeeurope.org/sites/default/files/extractive_industries/2017/can_the_climate_afford_europes_gas_addiction_report_november2017.pdf">fossil fuel free by 2030</a>. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/HSKcvoBKYxc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>So any large oil and gas infrastructure projects with investment returns beyond 2030 are saddled with risk. In just a decade or two, super-cheap solar and wind power could mean that gas pipelines such as TAP would no longer make financial sense and would become worthless “<a href="https://www.carbontracker.org/terms/stranded-assets/">stranded assets</a>”. Yet TAP backers are touting economic benefits for countries such as <a href="http://www.oxfordeconomics.com/Media/Default/economic-impact/economic-impact-home/Economic-Impact-trans-Adriatic-Pipeline.pdf">Albania</a> extending to 2068 – well beyond the date when Europe must entirely ditch fossil fuels.</p>
<p>The EU’s official stance is to hail natural gas as a cleaner “bridge fuel” between coal and renewables. But <a href="http://science.sciencemag.org/content/343/6172/733.summary">high leakage rates</a> and the <a href="http://www.climatechange2013.org/images/uploads/WGIAR5_WGI-12Doc2b_FinalDraft_All.pdf">potent warming impact</a> of methane (the primary constituent of natural gas) means that the Southern Gas Corridor’s climate footprint may be <a href="https://bankwatch.org/publication/smoke-and-mirrors-why-the-climate-promises-of-the-southern-gas-corridor-don-t-add-up">as large, or larger, than equivalent coal</a>. Abundant natural gas is also highly likely to <a href="http://iopscience.iop.org/article/10.1088/1748-9326/9/9/094008/meta">delay the deployment of renewable technologies</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"952216497123835906"}"></div></p>
<p>For the first decade of this century Europe prided itself on leading the political debate on tackling climate change. Now, it appears to be losing its boldness. To drive through a new technology revolution, the public sector needs to lead from the front and take bold decisions about its energy strategy.</p>
<p>A gas pipeline is not a technology of the future. If California can release <a href="https://www.youtube.com/watch?v=HSKcvoBKYxc">YouTube videos</a> describing the importance of considering stranded assets during this energy transition, and New York City can announce plans to <a href="https://twitter.com/NYCMayor/status/952216497123835906">divest from fossil fuels</a>, then maybe it is time for the EU to turn off the TAP.</p><img src="https://counter.theconversation.com/content/91442/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aled Jones does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The European Investment Bank’s funding of the Trans Adriatic Pipeline will harm the climate and makes little financial sense.Aled Jones, Professor & Director, Global Sustainability Institute, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/810812017-07-27T01:58:05Z2017-07-27T01:58:05ZHow electric vehicles could take a bite out of the oil market<figure><img src="https://images.theconversation.com/files/179831/original/file-20170726-7204-1mm3iwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sales of electric vehicles are growing fast, especially in Europe.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/free-recharging-station-146626955">Sopotnicki/Shutterstock.com</a></span></figcaption></figure><p>When will cars powered by gas-guzzling internal combustion engines become obsolete? Not as soon as it seems, even with the latest automotive news out of Europe.</p>
<p><a href="https://www.media.volvocars.com/global/en-gb/media/pressreleases/210058/volvo-cars-to-go-all-electric">First, Volvo announced</a> it would begin to phase out the production of cars that run solely on gasoline or diesel by 2019 by only releasing new models that are electric or plug-in hybrids. <a href="http://money.cnn.com/2017/07/06/technology/france-cars-gas-electric-diesel/index.html">Then, France</a> and <a href="https://www.bloomberg.com/news/articles/2017-07-25/u-k-to-ban-diesel-and-petrol-cars-from-2040-daily-telegraph">the U.K.</a> declared they would ban sales of gas and diesel-powered cars by 2040. Underscoring this trend is data from Norway, as electric models amounted to <a href="https://electrek.co/2017/07/04/electric-car-norway-tesla-model-x/">42 percent of Norwegian new car sales</a> in June. </p>
<p><a href="http://www.resilience.org/stories/2015-08-31/europe-oil-consumption-peaked-2005/">European demand for oil</a> to propel its passenger vehicles has been falling for years. Many experts expect a sharper decline in the years ahead as the shift toward electric vehicles spreads across the world. And that raises questions about whether surging electric vehicle sales will ultimately cause the global oil market, which has grown on average by 1 to 2 percent a year for decades and now totals <a href="https://www.iea.org/about/faqs/oil/">96 million barrels per day</a>, to decline after hitting a ceiling. </p>
<p>Energy experts call this concept “peak oil demand.” We are debating when and if this will occur. </p>
<h2>A forecast with caveats</h2>
<p>The International Energy Agency (IEA), which represents 29 oil-importing industrial countries, produces bellwether forecasts that foresee electric cars phasing in slowly. Its baseline projection envisions <a href="https://www.iea.org/publications/freepublications/publication/global-ev-outlook-2017.html">140 million electric vehicles</a> on the world’s roads by 2040, or about 7 percent of all passenger vehicles at that point. In comparison, only two million electric vehicles are operating today – 0.2 percent of the <a href="http://www.greencarreports.com/news/1093560_1-2-billion-vehicles-on-worlds-roads-now-2-billion-by-2035-report">1.2 billion</a> on the road. The IEA estimates this shift will save nearly two million barrels per day of oil, relative to its business-as-usual projection of the world using at least 70 million barrels of oil per day for transportation by 2040. That consumption level would mark a 30 percent increase from roughly 54 million barrels now.</p>
<p>If electric vehicles sales grow faster than the IEA expects, that projection might miss the mark. Should that happen, would global oil demand flatten or decline?</p>
<p>Our research at the Institute of Transportation Studies at the <a href="https://its.ucdavis.edu/blog-post/what-happens-when-demand-for-oil-peaks/">University of California, Davis</a> shows that encouraging electric vehicle purchases is just one way policymakers can help phase out oil consumption – one key to reducing the greenhouse gas emissions that stoke climate change and health-threatening pollution.</p>
<p>Given the dominance of internal combustion engine passenger vehicles, which include cars, SUVs and light trucks, replacing them all with <a href="http://www.sciencedirect.com/science/article/pii/S0301421510002739">electric models</a> will take decades. Automobiles are durable goods that typically remain on the road for 10 to 15 years. Not all drivers will buy a new car, let alone an electric one, soon.</p>
<p>In other words, even if (hypothetically) all new car sales were to instantly turn electric, it would likely be sometime after 2030 before gasoline cars would disappear. Besides, passenger vehicles consume only about 26 percent of the oil used worldwide. Given these stubborn realities and the fact that electric vehicles still represent a tiny portion of new-car sales, reaching a peak in oil demand by 2040 would require more than widespread conversion to electric-powered cars.</p>
<p>But together with other trends taking shape, electric vehicle growth could potentially revolutionize transportation enough for oil consumption to stop growing within this time frame.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/179839/original/file-20170726-30152-1rjjtiu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Waymo, the self-driving car company owned by Google’s parent Alphabet, is teaming up with rideshare company Lyft.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/TEC-Waymo-Lyft/09db258a44bb40a788cd104d70065416/7/0">AP Photo/Eric Risberg</a></span>
</figcaption>
</figure>
<h2>Ride-sharing and oil</h2>
<p>Even if all of Europe mandated that only plug-in vehicles could be sold, starting in 2030, and China followed suit by 2035, that wouldn’t bring about peak oil demand by 2040. According to our research, global oil consumption would keep growing until as late as 2050, in part because so many cars and trucks running on gasoline and diesel – especially in developing countries – will remain in use.</p>
<p>To see if oil demand could still peak by the middle of this century, if not sooner, we recently began preliminary research modeling the effect of urban sustainability policies on oil demand in the future. This is an important area of analysis since <a href="https://www.usmayors.org/2017/06/02/mayors-undeterred-by-paris-climate-accord-withdrawal/">U.S. mayors</a> and municipal leaders from around the world <a href="https://apnews.com/fbb2bab100734ec194e4976ae9c17ac4">reaffirmed</a> their commitment to climate-change action after President Donald Trump decided to back out of the Paris climate accord. </p>
<p>Using a set of scenarios regarding potential technological and policy interventions in work we will publish soon, we modeled different future oil market demand conditions. We focused on four major trend lines: vehicle electrification, ride-sharing services like Uber and Lyft, more sustainable freight that runs on alternative fuels or reduces vehicle miles traveled through computer-assisted optimization, and urban car-free zones. </p>
<p>We found that making more car-free pedestrian areas in big cities would make a huge dent in global oil demand. This practice – already common in cities like Copenhagen and Madrid in Europe and Chendu, China – could make oil demand max out by 2030, as long as enough governments aggressively encouraged drivers to switch to electric cars and mandated more fuel efficiency for road-based freight.</p>
<p>Trucks don’t last as long as cars, and many countries are considering policies to encourage the use of <a href="http://www.reuters.com/article/china-lng-transport-idUSL4N0AL6UI20130228">natural gas</a>, <a href="https://www.forbes.com/sites/alanohnsman/2017/04/19/toyota-rolls-out-hydrogen-semi-ahead-of-teslas-electric-truck/#1912e4db582b">hydrogen</a> or <a href="http://www.truckinginfo.com/channel/fuel-smarts/news/story/2017/01/real-world-electric-highway-tests-begin-in-sweden.aspx">electric vehicles</a> for heavy-duty trucking.</p>
<p>Commercial ride-sharing might also pare oil demand by reducing the number of miles driven overall if it encourages carpooling. This industry could, in addition, hasten the shift to electric vehicle dominance if – as widely reported – it begins to rely on a fleet of autonomous (driverless) vehicles, which would <a href="https://www.usatoday.com/story/money/cars/2016/09/19/why-most-self-driving-cars-electric/90614734/">predominantly be electric</a>. </p>
<p>But ride-sharing could fail to reduce fuel demand in the short term if people wind up taking more trips and traveling more miles in passenger cars and relying less on the bus, transit or city train than they used to. Some research suggests that could be happening. For example, scholars at University of California, Berkeley found that a third of the riders they surveyed in San Francisco used these services <a href="http://www.sciencedirect.com/science/article/pii/S0967070X15300627?via%3Dihub">instead of public transportation</a> – not to replace trips in taxis or their own cars.</p>
<p>In short, there is no guarantee that more ride-sharing means we’ll burn less oil.</p>
<h2>What cities can do</h2>
<p><a href="https://its.ucdavis.edu/blog-post/how-to-combine-three-revolutions-in-transportation-for-maximum-benefit-worldwide/">In another study</a>, our team at UC Davis teamed up with the Institute for Transportation and Development Policy, an independent global nonprofit, and modeled three urban transportation policy scenarios. We found that global new vehicle sales in 2040 will total between 600 million, if ride-sharing and transit flourish, and 2.1 billion vehicles, should the ride-sharing industry stall – a huge difference. </p>
<p>Metropolitan policymakers can use other tools. Creating car-free zones, making parking expensive and levying congestion taxes and road usage fees are some examples. </p>
<p>Overall, we believe there is a reasonable chance global oil consumption will peak by 2040. Especially given the growing preference of city dwellers to live in places with <a href="http://www.smartertransport.uk/smarter-cambridge-transport-urban-congestion-enquiry/">less congestion and pollution</a>, a shift away from cars with internal combustion engines – and from cars in general – looks not only likely but inevitable. It also seems fairly likely that <a href="http://oilprice.com/Energy/Oil-Prices/Are-Supermajors-Spooked-By-Peak-Oil-Demand.html">any company betting</a> on the continued growth of oil sales will be disappointed.</p>
<p>Goldman Sachs says the world could pass this milestone sooner. Researchers at the U.S. investment powerhouse predict that with widespread reliance on electric cars, slower economic growth and a decline in (largely petrochemical-based) <a href="https://www.ellenmacarthurfoundation.org/publications/the-new-plastics-economy-rethinking-the-future-of-plastics">plastic production</a>, global oil demand could <a href="http://uk.reuters.com/article/research-crude-goldman-idUKL3N1KF3ER">max out by 2030</a>. </p>
<p>However long it takes, shifting to electric vehicles might not make oil demand level off or decline on its own. But plug-in vehicles, combined with other policies, trends and technologies, will clearly take a toll.</p>
<p><em>This article has been updated to correct the number of electric vehicles the International Energy Agency includes in its baseline scenario.</em></p><img src="https://counter.theconversation.com/content/81081/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Myers Jaffe receives funding for research on alternative fuels in the state of California from the California Air Resources Board and California Energy Commission (CEC). She is a researcher at the Institute of Transportation Studies at UC Davis which receives funding from a consortium of automotive and energy companies. She has also contributed to a recently published study by the climate advocacy firm Ceres on the benefits of 2 degrees scenario analysis in the energy industry. </span></em></p><p class="fine-print"><em><span>Some of Lewis Fulton's work relevant to this article has been funded by ClimateWorks and by the STEPS consortium, a funding pool based on grants from a range of corporations and other organizations. There was no direct involvement from any of these foundations, corporations or other organizations in the drafting of this article.</span></em></p>Shifting to plug-in cars wouldn’t be enough to max out global oil consumption by 2040. But it could help make that happen if cities pitch in and ride-sharing doesn’t crowd out public transportation.Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, DavisLewis Fulton, Co-director, STEPS (Sustainable Transportation Energy Pathways), University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/769502017-05-03T03:54:46Z2017-05-03T03:54:46ZThe government is swimming against the tide on Westpac’s Adani decision<p>The Australian government’s <a href="http://www.afr.com/business/mining/canavan-slams-westpac-wimps-over-adani-loan-ban-20170428-gvuzbz">strident</a> <a href="http://www.skynews.com.au/news/politics/federal/2017/05/01/pm--disappointed--by-westpac-s-adani-decision.html">criticism</a> of Westpac for not financing the <a href="http://www.abc.net.au/news/2016-12-05/what-we-know-about-adani-and-the-carmichael-mine-project/8094244">Adani Carmichael coal mine</a> is out of step with the economics. As the cost of renewable energy falls and its adoption increases, fossil fuels are becoming a riskier investment. </p>
<p>It’s not just Westpac. This shift is reflected right across the finance industry. The big four Australian banks have all declined to finance this mine, as have many large international financial institutions.</p>
<p>The Commonwealth Bank quit as the project’s financial adviser in <a href="http://www.smh.com.au/business/mining-and-resources/adani-and-commonwealth-bank-part-ways-casting-further-doubt-on-carmichael-coal-project-20150805-gisd1l.html">August 2015</a>. NAB ruled out financing the mine in <a href="http://www.abc.net.au/news/2015-09-03/nab-rules-out-funding-adanis-$16bn-carmichael-coal-mine/6747298">September 2015</a>. ANZ effectively ruled out financing in <a href="https://www.theguardian.com/business/2015/oct/06/anz-will-not-finance-dirty-coal-plants-and-pledges-10bn-for-clean-energy">October 2015</a> and again, more firmly, in <a href="http://www.theaustralian.com.au/business/financial-services/anz-effectively-rules-out-funding-adanis-carmichael-coalmine/news-story/59b2a756082a5cd2c61cf9959debff95">December 2016</a>. </p>
<p>Big overseas financiers <a href="https://www.theguardian.com/business/2015/aug/10/standard-chartered-quits-controversial-queensland-coal-mining-project">Standard Chartered</a>, <a href="https://www.theguardian.com/business/2015/apr/08/galilee-basin-coalmines-australian-banks-under-pressure-after-french-lenders-rule-out-funding">Barclays, Royal Bank of Scotland, Citi, HSBC, Morgan Stanley, Société Générale, Crédit Agricole</a>, <a href="https://www.theguardian.com/environment/2014/oct/28/us-banks-vow-not-to-fund-great-barrier-reef-coal-port-say-activists">JP Morgan Chase, Deutche Bank</a> and <a href="http://www.abc.net.au/news/2015-04-09/french-banks-rule-out-fund-adani-galilee-basin-coal-mine/6380172">BNP Baripas</a> have also already abandoned or made clear their lack of support for the mine. </p>
<p>Adani’s coal was to be used to generate electricity in India, recently seen as the future for the product given <a href="https://www.nytimes.com/2017/01/18/world/asia/china-coal-power-plants-pollution.html?_r=1">China’s shift away from coal</a>. But Indian demand for coal is slipping. Its <a href="http://www.cea.nic.in/reports/committee/nep/nep_dec.pdf">new National Electricity Plan</a> has non-fossil fuels rising from the current 30% to 56% of installed power capacity by 2027. </p>
<p>The Indian government itself now thinks it may not need any new coal power plants <a href="http://onlinelibrary.wiley.com/store/10.1002/2017EF000542/asset/eft2201.pdf;jsessionid=294A469AFBC1E042B4CB83CE5D97E52A.f01t02?v=1&t=j288d2to&s=9efd828b5d2e187fd1327b157472a19ea4668a29">for at least a decade</a>.</p>
<p>As mines require a huge initial investment that pays itself off over many years, this increases the risk that the Carmichael mine will become a “<a href="https://theconversation.com/why-stranded-assets-matter-and-should-not-be-dismissed-51939">stranded asset</a>”.</p>
<h2>Shifting economics of coal</h2>
<p>Sure, financial institutions are under pressure from customers and activists to avoid investments that damage the climate. But for these institutions, such pressures only make a difference at the margin. For them it is the poor economics of coal that is fundamental. </p>
<p>The long-term prospects of coal are weakened by the rapid changes in technology and the deterioration of the climate outlook. </p>
<p><a href="http://reneweconomy.com.au/solar-price-hits-record-low-of-2-42ckwh-and-may-fall-further-32358/">Solar energy prices</a> have fallen more rapidly than most expected, and battery <a href="http://www.nature.com/nclimate/journal/v5/n4/full/nclimate2523.html#affil-auth">technology</a> and <a href="http://www.abc.net.au/news/2017-02-14/solar-batteries-like-tesla-exploding-in-popularity/8259830">use</a> is rapidly improving. </p>
<p>A <a href="http://science.sciencemag.org/content/356/6334/141.full">recent study</a> found that solar energy is on a trajectory to supply at least 3 terawatts (TW) of power globally by 2030, and potentially up to 10TW if certain barriers to installation can be overcome. For comparison, the world’s total electricity capacity from all sources as of 2014 was <a href="https://www.cia.gov/library/publications/the-world-factbook/fields/2236.html#xx">just 6TW</a>.</p>
<p>Financiers’ minds may be focused still further by the fact that, if anything, scientists appear to have <a href="http://geology.rutgers.edu/images/Hayhoe2016_-_ERL_-_Climate_Surprises.pdf">underestimated</a> the effects of climate change on sea levels, polar ice caps, and <a href="https://www.nacarbon.org/nacp/documents/WWR_Nov_2015_Hope.pdf">methane emissions from thawing permafrost</a> and <a href="http://onlinelibrary.wiley.com/store/10.1002/2015GL066501/asset/grl53907.pdf;jsessionid=1126736F4242800F91496F22646FF501.f01t03?v=1&t=j273adlr&s=45da540e654d47f87f10354091c6b201d48cda44">lakes</a>. </p>
<h2>From short- to long-term thinking</h2>
<p>The fact that the financial industry is reluctant to fund the Carmichael mine is just one example of the phenomenon described in a <a href="http://aodproject.net/active-ownership/">report by the Asset Owners Disclosure Project (AODP)</a> as “a fundamental power shift … from short-termers to long-termers”. </p>
<p>There are several reasons for this, besides the changing economics of renewable technology, the worsening climate outlook, and the shifting policies in countries like China and India.</p>
<p><a href="https://books.google.com.au/books?id=PdCOCgAAQBAJ&pg=PA176&dq=peetz+murray+climate+tools&hl=en&sa=X&ved=0ahUKEwjn4e_MttDTAhXGi5QKHZofBSYQ6AEILDAB#v=onepage&q=peetz%20murray%20climate%20tools&f=false">New tools are being developed</a> to enable investors to quantify the impact of climate on their investments. In financial circles, the more things can be counted, the more they count.</p>
<p>Superannuation funds and overseas pension funds need to invest over long periods of time, and so are now forced to <a href="http://booksandjournals.brillonline.com/content/journals/10.1163/15691497-12341402">invest with climate change in mind</a>. They can’t afford to have a stranded asset on their books. </p>
<p>Reinsurers - essentially large firms that provide insurance for insurance companies - <a href="http://iopscience.iop.org/article/10.1088/1755-1307/6/39/392021/pdf">face the same issue</a>. They need to minimise exposure to <a href="http://www.preventionweb.net/news/view/51176">extreme weather events</a>, which are increasingly influenced by climate change.</p>
<p>Fund managers are <a href="http://nordsip.com/2017/03/06/lombard-odier-launches-climate-bond-fund-with-aim/">creating financial products</a> to enable investment in climate change adaptation. And some investors are <a href="http://aodproject.net/active-ownership/">taking more control</a> over their investments, rather than leaving them in the hands of fund managers, so they can give appropriate priority to climate issues. </p>
<p>This is not to say that financiers around the world are uniformly reacting to climate issues. The <a href="http://aodproject.net/country-index/">AODP report</a> shows that, on average, European and Australian asset owners and fund managers have done well in acting on climate risk, whereas American, Middle Eastern and (until now) Chinese ones have done poorly. </p>
<p>It’s also <a href="http://www.emeraldinsight.com/doi/full/10.1108/S2043-9059%282013%290000005013">not true that finance has uniformly abandoned short-termism</a>. “Climate-interested investors” currently account for just a third of the ownership of the world’s very large corporations.</p>
<p>But no one is going to make even short-term profits out of the Adani coal mine, with its huge upfront capital investment, unless they get a substantial subsidy from the taxpayer. And the long-term prospects look grim.</p>
<p>Those who <a href="http://www.theaustralian.com.au/national-affairs/climate/resources-minister-matthew-canavan-says-westpacs-decision-on-coal-is-illogical/news-story/8069414de846ed7725a343e7b20abcac">argue</a> that Westpac’s decision was “illogical” are swimming against both the financial and technological tides.</p><img src="https://counter.theconversation.com/content/76950/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Peetz receives funding from the Australian Research Council and, as a university employee, has undertaken research over many years with occasional financial support from governments from both sides of politics, employers and unions, including the Mining and Energy Division of the Construction, Forestry, Mining and Energy Union. The research for the project behind this article, on finance and climate change, was funded within the university.</span></em></p><p class="fine-print"><em><span>Georgina Murray has received funding from the Australian Research Council and, as a university employee, has undertaken research over many years with occasional financial support from others, including the Mining and Energy Division of the Construction, Forestry, Mining and Energy Union. The research for the project behind this article, on finance and climate change, was funded within the university.</span></em></p>As the cost of renewable energy falls, funding a new mine is a risky investment.David Peetz, Professor of Employment Relations, Griffith UniversityGeorgina Murray, Associate Professor in Humanities, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/725622017-02-16T03:20:34Z2017-02-16T03:20:34ZAre fossil fuel companies telling investors enough about the risks of climate change?<p>Prior to President Donald Trump taking office, <a href="https://ag.ny.gov/sites/default/files/2016.10.26_ny_v._pwc_and_exxon_decision_and_order.pdf">there was a push</a> to require oil and gas companies to inform their investors about the risks of climate change. As governments step up efforts to regulate carbon emissions, the thinking goes, fossil fuel companies’ assets could depreciate in value over time. </p>
<p>The Securities and Exchange Commission, for example, <a href="http://www.wsj.com/articles/sec-investigating-exxon-on-valuing-of-assets-accounting-practices-1474393593">was probing</a> how ExxonMobil discloses the impact of that risk on the value of its reserves. And <a href="http://www.sasb.org/investors-sec-sustainability-disclosure/">disclosure advocates</a> <a href="http://www.cdsb.net/news">have been pressing</a> the agency to <a href="https://www.institutionalinvestor.com/article/3558720/investors-endowments-and-foundations/michael-bloomberg-pushes-companies-to-reveal-climate-risk.html">take more decisive action</a>. </p>
<p>Now that Republicans control Congress and the White House, will the SEC reverse course? And should it? </p>
<p>The Trump administration’s apparent skepticism regarding climate change may portend such a change in direction. And Congress’ <a href="http://www.cnn.com/2017/01/31/politics/oil-industry-regulations/">decision to roll back transparency rules for U.S. energy companies</a> in the <a href="https://www.wsj.com/articles/republicans-are-poised-to-roll-out-their-roll-back-of-dodd-frank-law-1486315341">Dodd-Frank Act</a> suggests transparency policy more broadly is being loosened. </p>
<p>The terms of this debate, however, remain premised on the notion that investors don’t have enough information to accurately assess the impact of climate change on company value. A growing body of academic research, including our own, suggests they already do and that a compromise path that improves the terms and conditions for voluntary disclosure might be optimal.</p>
<h2>‘Stranded’ assets</h2>
<p>Such a change in direction would be good news for ExxonMobil in its fight with the SEC over climate change disclosure. </p>
<p>Last year, <a href="http://www.nytimes.com/2016/10/29/business/energy-environment/exxon-concedes-it-may-need-to-declare-lower-value-for-oil-in-ground.html">ExxonMobil announced</a> that 4.6 billion barrels of oil and gas assets – 20 percent of its current inventory of future prospects – may be too expensive to tap. That would be the largest asset write-down in its history. So far, the company <a href="http://www.reuters.com/article/us-exxon-mobil-results-idUSKBN15F1JR">has written down</a> US$2 billion in expensive, above-market cost natural gas assets. More write-downs – this time possibly oil sands – may be forthcoming.</p>
<p>It’s not clear how much of that are tied to the risks of climate change, but some took it <a href="https://www.ft.com/content/1d719e1e-9f41-11e6-86d5-4e36b35c3550">as evidence</a> that the fossil fuel industry is not doing enough to inform investors about those risks.</p>
<p>Disclosure advocates in the United States and Europe have been urging oil and gas companies to say more about the potential for their booked assets to become “stranded” over time. <a href="https://www.theguardian.com/environment/2015/mar/03/bank-of-england-warns-of-financial-risk-from-fossil-fuel-investments">Stranded assets</a> are mainly oil and gas reserves that might have to stay in the ground as a result of a combination of new efficiency technologies and policy actions that seek to limit greenhouse gas emissions.</p>
<p>The <a href="http://fortune.com/2016/01/15/decline-us-coal-industry/">collapse in coal equities last year</a> highlighted that concern. Intensifying price competition from cleaner energy sources such as natural gas and solar energy and the increasing cost of developing cleaner coal overwhelmed the industry’s already declining revenue.</p>
<p>Whatever policy direction the SEC takes on climate risk, it is unlikely to deter those investors who believe the present system of voluntary and mandatory disclosure has failed to provide them with sufficient information on the risks of climate change. And some market participants, such as <a href="http://www.huffingtonpost.ca/2015/09/30/mark-carney-climate-change_n_8222008.html">Bank of England Governor Mark Carney</a>, worry that the underreporting of climate change information is creating a big risk for financial markets – a carbon bubble – that could lead to a major market failure.</p>
<p>Currently, the SEC requires mandatory disclosure of all “<a href="http://irwebreport.com/20110121/when-information-is-material/">material</a>” information, while everything else is voluntary. This system has created a <a href="https://www.pagriffin.com/papers/GHGpaper_march_2016_final.pdf">vast amount</a> of <a href="http://dx.doi.org/10.1016/j.jaccpubpol.2013.02.002">publicly available information</a> on the costs and risks of climate change. </p>
<p>But as the recent ExxonMobil revelations highlight, the market clearly does not have all information. There are good reasons for this. For competitive reasons and business survival, certain company information is kept confidential and private. </p>
<p>The courts and the SEC have always acknowledged a company’s right to privacy regarding certain information. Companies, moreover, argue it could be harmful to shareholders if disclosed prematurely. An appropriate balance is required.</p>
<h2>Costs of carbon</h2>
<p>Our own research confirms that financial markets already price climate risk into oil and gas company stocks based on company reports and <a href="https://ir.citi.com/E8%2B83ZXr1vd%2Fqyim0DizLrUxw2FvuAQ2jOlmkGzr4ffw4YJCK8s0q2W58AkV%2FypGoKD74zHfji8%3D">other data available</a> from public and proprietary sources. These data allow investors to estimate reasonably accurately the effects of climate change on companies, including the expectation of write-downs.</p>
<p>For example, our work suggests that investors first began pricing in this kind of data as early as 2009, <a href="http://www.sciencedirect.com/science/article/pii/S0140988315002546">when the scientific climate change evidence</a> about stranded assets first became known. Our <a href="http://www.pagriffin.com/papers/GHGpaper_march_2016_final.pdf">latest research</a>, soon to be published in <a href="http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1911-3846">Contemporary Accounting Research</a>, shows that the share price of the median company in the Standard & Poor’s 500 reflects a penalty of about $79 per ton of carbon emissions (based on data through 2012). This penalty considers all S&P 500 companies, not just oil and gas firms. Importantly, this research also shows that investors are able to assess this penalty from company disclosures and the noncompany information available on climate change risk.</p>
<p>This penalty comprises the expected cost of carbon mitigation and the <a href="https://www.pagriffin.com/papers/GHGpaper_march_2016_final.pdf">possible loss of revenue</a> from cheaper energy sources.</p>
<p>Exxon, for its part, says <a href="http://www.climatechangenews.com/2016/10/19/exxon-ceo-world-needs-oil-of-five-saudi-arabias-by-2040/">it prices the cost of long-term carbon</a> internally at $80 a ton, matching our market model. </p>
<h2>The right mix</h2>
<p>All this begs the question of what level of additional mandatory disclosure is needed to improve the “total mix of information available” for investors on which to base decisions. </p>
<p>With climate change a pressing concern, investors certainly have a right to demand more disclosure, and we agree with that. But at what cost? </p>
<p>Indeed, the cost of disclosure can be significant, and it’s not just the direct out-of-pocket costs that policymakers should consider when drawing up <a href="https://wagner.house.gov/media-center/press-releases/wagner-regulatory-reform-bill-passes-us-house">new regulations</a>. Indirect costs, such as forcing oil and gas companies to disclose vital confidential information to rivals, could be particularly burdensome to particular companies. And society could pay a heavy price if new rules lead companies to make unwise operating or investment decisions or postpone investment unnecessarily. Energy costs could increase or supplies decrease because of miscalculations. </p>
<p>Additionally, the private sector is trying to fill the gap on its own. Moody’s Investor Service, for example, <a href="https://www.moodys.com/research/Moodys-to-use-greenhouse-gas-emission-reduction-scenario-consistent-with--PR_351269">announced</a> in June that it will now independently assess carbon transition risk as part of its credit rating for companies in 13 sectors, including oil and gas.</p>
<h2>SEC voluntary disclosure program</h2>
<p>Given these and other factors, rather than mandate any new disclosures now, we urge the SEC to first implement a voluntary program along the lines of <a href="https://www.sec.gov/spotlight/fcpa/sec-report-questionable-illegal-corporate-payments-practices-1976.pdf">its successful 1976 program</a> for the disclosure of sensitive foreign payments (like bribes). The <a href="http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1970/1977_1103_AdvisoryDisclosure.pdf">SEC’s report</a> on this program showed no harm to the stock prices of participants after they disclosed payments. </p>
<p>In fact, it is often the lack of participation that invites a negative stock price response, as markets often view nondisclosing businesses as those with something to hide.</p>
<p>This voluntary program also helped pave the way for the <a href="https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act">Foreign Corrupt Practices Act of 1977</a>, which <a href="https://www.justice.gov/opa/blog/criminal-division-launches-new-fcpa-pilot-program">formalized</a> the accounting requirements for bribery payments to foreign officials. </p>
<p>We would hope that a voluntary disclosure program for climate change would achieve a similar goal: that is, formal SEC disclosure requirements that consider the interests of all parties. </p>
<p>Such a program could initially target a defined group, such as the 50 largest SEC-registered oil and gas firms. That would give the SEC and private organizations like Moody’s the additional hard data and experience needed to examine the costs, benefits and financial market impacts of climate change risk disclosures.</p>
<p>Doing this would pave the way for more permanent rule-making to better serve the needs of investors, companies and, ultimately, the public.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/should-oil-companies-like-exxon-be-forced-to-disclose-climate-change-risks-66961">article originally published</a> on Nov. 2, 2016.</em></p><img src="https://counter.theconversation.com/content/72562/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Myers Jaffe also serves as a senior advisor for energy and sustainability for Office of the Chief Investment Officer of the University of California. She recently published a study on methodologies for 2 degree scenario analysis for Ceres, an NGO that advocates for sustainability leadership. Her research at the University of California Davis is funded by grants from California government agencies, the Sloan Foundation and an industry consortium including automobile and oil and gas companies.
</span></em></p><p class="fine-print"><em><span>Paul Griffin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Trump administration may reverse a recent push to require oil companies to disclose more information about climate change risks to investors. Is that a good thing?Paul Griffin, Professor of Management, University of California, DavisAmy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/669612016-11-03T02:06:58Z2016-11-03T02:06:58ZShould oil companies like Exxon be forced to disclose climate change risks?<p><a href="http://www.nytimes.com/2016/10/29/business/energy-environment/exxon-concedes-it-may-need-to-declare-lower-value-for-oil-in-ground.html">Exxon Mobil announced</a> on Oct. 28 that it may have to take the largest asset write-down in its history. The company said that 4.6 billion barrels of oil and gas assets – 20 percent of its current inventory of future prospects – may be too expensive to tap. </p>
<p>Some took Exxon’s statement <a href="https://www.ft.com/content/1d719e1e-9f41-11e6-86d5-4e36b35c3550">as evidence</a> that the fossil fuel industry is not doing enough to inform investors about climate change risk. As governments step up efforts to regulate carbon emissions, the thinking goes, fossil fuel companies’ assets are worth less. </p>
<p>It follows the opening of a <a href="http://www.wsj.com/articles/sec-investigating-exxon-on-valuing-of-assets-accounting-practices-1474393593">Securities and Exchange Commission (SEC) investigation</a> into how Exxon discloses the impact of that risk on the value of its reserves. That probe and <a href="https://ag.ny.gov/sites/default/files/2016.10.26_ny_v._pwc_and_exxon_decision_and_order.pdf">others</a> build on the claim that the present system of voluntary and mandatory disclosure has failed investors by not providing enough information on the risks of climate change. <a href="http://www.sasb.org/investors-sec-sustainability-disclosure/">Disclosure advocates</a> <a href="http://www.cdsb.net/news">are pressing</a> the SEC to <a href="https://www.institutionalinvestor.com/article/3558720/investors-endowments-and-foundations/michael-bloomberg-pushes-companies-to-reveal-climate-risk.html">take more decisive action</a>. </p>
<p>But what’s the proper policy that balances the need for disclosure with its costs and impact on confidentiality? </p>
<p>This debate matters not only to investors but to the public as well. <a href="http://www.huffingtonpost.ca/2015/09/30/mark-carney-climate-change_n_8222008.html">Bank of England Governor Mark Carney</a> and others worry that the underreporting of climate change information is creating a big risk for financial markets – a carbon “bubble” – that could lead to a major market failure. Some, like Carney, are worried about a financial crisis similar to 2008-2009.</p>
<p>All this is premised, however, on the notion that investors don’t already have enough information to accurately price in the impact of climate change. A growing body of academic research, including our own, however, suggests markets have access to substantial climate risk information, and that the SEC and others would be wise to tread carefully.</p>
<h2>The problem of stranded assets</h2>
<p>Regulators in both the United States and Europe have been urging oil and gas companies to say more about the potential for their booked assets to become “stranded” over time. </p>
<p><a href="https://www.theguardian.com/environment/2015/mar/03/bank-of-england-warns-of-financial-risk-from-fossil-fuel-investments">Stranded assets</a> are mainly oil and gas reserves that might have to stay in the ground as a result of policy actions that seek to limit greenhouse gas emissions. Those limits hinge on keeping global warming to no more than 2 degrees Celsius over preindustrial levels, although some have warned that even warming of 2 degrees is <a href="https://theconversation.com/a-matter-of-degrees-why-2c-warming-is-officially-unsafe-42308">unsafe.</a></p>
<p>The <a href="http://fortune.com/2016/01/15/decline-us-coal-industry/">collapse in coal equities</a> last year highlighted that concern. Intensifying price competition from cleaner energy sources such as natural gas and solar energy and the increasing cost of developing “clean coal” to satisfy government criteria overwhelmed the industry’s already declining revenue.</p>
<p>In the U.S., the SEC and the New York attorney general are pressing Exxon hard to disclose more of this information in its financial statements. Both inquiries raise the fundamental issue of whether the current system has, in fact, <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">failed investors</a> and the public at large.</p>
<h2>Full disclosure</h2>
<p>Currently, the SEC requires full disclosure of all information deemed “<a href="http://irwebreport.com/20110121/when-information-is-material/">material</a>” for investors in companies’ regulatory filings, while everything else is voluntary. </p>
<p>It is far from obvious how much the current system is failing to price risks accurately. As Exxon’s disclosure shows, the market already has a lot of information. And new details are quickly absorbed. </p>
<p>Exxon’s share price fell 2.5 percent after the write-down, but that was <a href="https://www.ft.com/content/1d719e1e-9f41-11e6-86d5-4e36b35c3550">more likely a reaction to the sharp drop</a> in third-quarter profit from a year earlier. It was hardly an extreme reaction that suggested investors were taken aback by the asset disclosure.</p>
<p>While that gave investors more clarity about how Exxon is valuing its oil sands assets, information on the risks of that investment had already been widely available from a <a href="https://insideclimatenews.org/news/29092016/exxon-mobil-change-change-investigation-oil-sands-tar-sands-alberta-canada-sec">variety of sources</a>. And regardless of what Exxon says, its share price will partially reflect the disclosures of rival companies. Chevron and Chesapeake, for example, <a href="http://www.bloomberg.com/news/articles/2016-09-16/n-y-said-to-be-probing-exxon-s-valuation-of-oil-reserves">have already cut the value of their oil and gas reserves</a> by billions of dollars, while Total, <a href="http://www.statoil.com/en/NewsAndMedia/News/2016/Pages/17aug-ncs2030.aspx">Statoil</a> and <a href="http://www.conocophillips.com/sustainable-development/environment/climate-change/Pages/default.aspx">ConocoPhillips</a> have volunteered information on how they incorporate climate change risk into their strategies. </p>
<p>A growing body of academic research also supports this view, concluding that, in general, investors are already pricing stocks based on the <a href="https://www.pagriffin.com/papers/GHGpaper_march_2016_final.pdf">vast amount</a> of <a href="http://dx.doi.org/10.1016/j.jaccpubpol.2013.02.002">publicly available information</a> on the costs and risks of climate change. </p>
<p>As the Exxon revelation highlights, however, the market clearly does not have all information. There are good reasons for this. For competitive reasons and business survival, certain company information is kept confidential and private. Companies argue it could be harmful to shareholders if disclosed prematurely. </p>
<p>But the fact that Exxon’s stock did not collapse when it volunteered its write-down news is also evidence that it knew what the markets already knew: namely, that its oil sands operations were risky and expensive. </p>
<h2>Costs of carbon</h2>
<p>The stock market reaction to Exxon’s possible write-down is also an indication that the climate-related market crisis <a href="https://www.theguardian.com/environment/2014/dec/01/bank-of-england-investigating-risk-of-carbon-bubble">that some fear</a> is not around the corner. </p>
<p>Our research confirms that financial markets already price much of this climate risk into oil and gas company stocks based on company reports and a vast array of data from public and proprietary sources. These data allow investors to estimate reasonably accurately the effects of climate change on companies, including the expectation of write-downs.</p>
<p>For example, our work suggests that investors first began pricing in this kind of data as early as 2009, <a href="http://www.sciencedirect.com/science/article/pii/S0140988315002546">when the scientific climate change evidence</a> about stranded assets first became known. <a href="http://www.pagriffin.com/papers/GHGpaper_march_2016_final.pdf">Our latest research shows</a> that the share price of the median company in the Standard & Poor’s 500 reflects a penalty of about US$79 per ton of carbon emissions (based on data through 2012). This penalty considers all S&P 500 companies, not just oil and gas firms. </p>
<p>This penalty comprises the expected cost of carbon mitigation and the <a href="https://www.pagriffin.com/papers/GHGpaper_march_2016_final.pdf">possible loss of revenue</a> from cheaper energy sources.</p>
<p>Exxon, for its part, says <a href="http://www.climatechangenews.com/2016/10/19/exxon-ceo-world-needs-oil-of-five-saudi-arabias-by-2040/">it prices the cost of long-term carbon</a> internally at $80 a ton, matching our market model. </p>
<h2>The right mix</h2>
<p>All this begs the question of what level of additional mandatory disclosure is needed to improve the “total mix of information available” for investors on which to base decisions. </p>
<p>With climate change a pressing concern, investors certainly have a right to demand more disclosure, and we agree with that. But at what cost? </p>
<p>Indeed, the cost of disclosure can be significant, and it’s not just the direct out-of-pocket costs that policymakers should consider when drawing up <a href="https://www.congress.gov/bill/114th-congress/house-bill/5429">new regulations</a>. Indirect costs, such as forcing oil and gas companies to disclose vital confidential information to rivals, could be particularly burdensome to particular companies. And society could pay a heavy price if new rules lead companies to make unwise operating or investment decisions or postpone investment unnecessarily. Energy costs could increase or supplies decrease because of miscalculations. </p>
<p>Additionally, the private sector is trying to fill the gap on its own. Moody’s Investor Service, for example, <a href="https://www.moodys.com/research/Moodys-to-use-greenhouse-gas-emission-reduction-scenario-consistent-with--PR_351269">announced</a> in June that it will now independently assess carbon transition risk as part of its credit rating for companies in 13 sectors, including oil and gas.</p>
<p>Given these and other factors, rather than mandate any new disclosures now, we urge the SEC to first implement a voluntary program along the lines of <a href="https://www.sec.gov/spotlight/fcpa/sec-report-questionable-illegal-corporate-payments-practices-1976.pdf">its successful 1976 program</a> for the disclosure of sensitive foreign payments (like bribes). The <a href="http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1970/1977_1103_AdvisoryDisclosure.pdf">SEC’s report</a> on this program showed no harm to the stock prices of participants after they disclosed payments. </p>
<p>In fact, it is often the lack of participation that invites a negative stock price response, as markets often view nondisclosing businesses as those with something to hide.</p>
<p>This voluntary program also helped pave the way for the <a href="https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act">Foreign Corrupt Practices Act of 1977</a>, which <a href="https://www.justice.gov/opa/blog/criminal-division-launches-new-fcpa-pilot-program">formalized</a> the accounting requirements for bribery payments to foreign officials. </p>
<p>We would hope that a voluntary disclosure program for climate change would achieve a similar goal. That is, formal disclosure requirements that consider the interests of all parties. </p>
<p>Such a program could initially target a defined group, such as the 50 largest SEC-registered oil and gas firms. That would give the SEC and private organizations like Moody’s the hard data and experience needed to examine the costs, benefits and financial market impacts of climate change risk disclosures.</p>
<p>Doing this would pave the way for more permanent rule-making to better serve the needs of investors, companies and, ultimately, the public.</p><img src="https://counter.theconversation.com/content/66961/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Myers Jaffe also serves as a senior advisor for energy and sustainability for Office of the Chief Investment Officer of the University of California. She recently published a study on methodologies for 2 degree scenario analysis for Ceres, an NGO that advocates for sustainability leadership. Her research at the University of California Davis is funded by grants from California government agencies, the Sloan Foundation and an industry consortium including automobile and oil and gas companies. </span></em></p><p class="fine-print"><em><span>Paul Griffin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The SEC and others are pressing Exxon to disclose more climate change risks to investors. But new research suggests shareholders are already pricing in those costs on their own.Paul Griffin, Professor of Management, University of California, DavisAmy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/519392015-12-09T13:59:07Z2015-12-09T13:59:07ZWhy stranded assets matter and should not be dismissed<figure><img src="https://images.theconversation.com/files/105039/original/image-20151209-15558-1f07221.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will fossil fuels soon be all at sea?
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>Whatever the outcome of the climate talks in Paris, one thing is certain: climate change will result in assets becoming “stranded”. And, despite the claims of various naysayers, investors should be prepared.</p>
<p>Assets become stranded all the time and this is often the result of the relentless process of “creative destruction” in dynamic economic systems. New technologies replace old ones, new companies outcompete incumbents, and this constant process changes societies. Think horses and carriages being replaced by trains and automobiles, landlines being superseded by mobile phones, or the problems faced by companies such as <a href="http://www.bbc.co.uk/news/business-27238877">Kodak and Nokia</a>.</p>
<p>Physical climate change is already affecting asset values in a wide range of sectors and this is one reason why inflation-adjusted weather-related losses in the insurance sector have been increasing. They have grown from an average of around US$10 billion per annum in the 1980s to around US$50 billion per annum <a href="http://www.bankofengland.co.uk/pra/Documents/supervision/activities/pradefra0915.pdf">over the past decade</a>. And societal responses to climate change, which include policies to tackle carbon pollution, the development of low carbon technologies, and changes in what society deems to be acceptable, are also impacting asset values. </p>
<p>Renewables are <a href="http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/Stranded%20Generation%20Assets%20-%20Working%20Paper%20-%20Final%20Version.pdf">reshaping power markets</a>, electric vehicles and hybrids are beginning <a href="http://www.usatoday.com/story/tech/columnist/2015/09/24/auto-industry-ripe-disruption/72735930/">to disrupt the car sector</a>, and the fossil fuel divestment campaign is managing to stigmatise fossil fuel companies, making it harder for them <a href="http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/SAP-divestment-report-final.pdf">to recruit and retain good people</a>. There is also now the threat that some company directors could actually be sued for causing climate change <a href="http://www.bankofengland.co.uk/pra/Documents/supervision/activities/pradefra0915.pdf">or be held liable</a> for not responding adequately to climate risk.</p>
<p>These risks are only likely to grow in significance. Yet some are still not convinced. Two lines of objection have been overwhelmingly popular. </p>
<p>The first is to raise doubts about the idea that there is “unburnable carbon” or a “carbon bubble”. The second line of objection is that investors and companies already price these risks effectively. These objections are potentially very costly, as they encourage inaction and unpreparedness among investors, companies, and governments. </p>
<h2>The carbon bubble</h2>
<p>We shouldn’t rely on the assumption that the world will stick to a 2°C carbon budget, <a href="http://s02.static-shell.com/content/dam/shell-new/local/corporate/corporate/downloads/pdf/investor/presentations/2014/sri-web-response-climate-change-may14.pdf">objectors point out</a>, so we shouldn’t be so sure that fossil fuel reserves that would take us beyond that limit will become stranded assets.</p>
<p>These objectors may be right to be sceptical about the 2°C constraint, but when it comes to stranded assets, they entirely miss the point. They are attacking a straw man. </p>
<p>This straw man is a wilful conflation of “stranded assets” with “unburnable carbon”. The latter being one potential driver of asset stranding, but obviously not the only one. The straw man argument is great for those who want to discredit concerns about stranded assets (for example, some fossil fuel companies), as it is easier for them to secure traction attacking an effective 2°C policy commitment as unlikely, than say falling costs of renewables, electricity storage, air pollution regulations, or water stress. The reason for this is that the former has yet to happen, but the latter factors are already transforming markets and stranding assets. It is easier to attack an unprecedented scenario than facts on the ground.</p>
<p>Even the claim that a 2°C pathway is impossible is not true. Though probably quite unlikely, a 2°C pathway is not something you can discount entirely. If it did come to pass, it would have significant implications for investors, companies, and governments. Given that 2°C is a <a href="http://www.unep.org/publications/ebooks/emissionsgapreport/chapter1.asp">stated international objective</a>, it makes sense as a useful analytical starting point. </p>
<p>But 2.5, 3, 4, 5, or 6°C pathways will also have significant and systemic implications. And of course not achieving 2°C will itself also have significant impacts on asset values across the global economy. Whichever way you look at it, action or inaction on climate change will strand assets. You can think that a 2°C policy induced carbon constraint is unlikely and many people do, but this does not mean stranded asset issues vanish. </p>
<h2>Forward planning</h2>
<p>The second line of objection is that investors and companies have levels of foresight and analysis that mean they are already pricing in these risks and <a href="http://www.dieterhelm.co.uk/sites/default/files/EFN%20Stranded%20Assets%20%E2%80%93%20a%20deceptively%20simple%20idea.pdf">so we need not worry</a>. But the idea that investors and companies know about these risks and have a better understanding of them than anyone else is also wrong. </p>
<p>Even at the best of times, relatively simple risks can be mispriced and known risks can be left ignored. This is often because of biases, misaligned incentives, and <a href="http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/wp-investment-consultants.pdf">endemic short termism</a>.</p>
<p>These problems are exacerbated when the risks in question are novel, and where the data, analytical tools, and methodologies are missing. Add to the mix a lack of viable options to hedge risk, and there is plenty of scope for markets to be getting risk management wrong. </p>
<p>This is exactly what is happening with respect to environment-related risks – they are new, understanding them is complex, the data is sparse, and the risks are non-linear. Avoiding them is difficult even if you observe them, as investors are incentivised to track benchmarks and less exposed investments are relatively illiquid and immature.</p>
<p>We should therefore beware the stranded asset straw man. Asset stranding does not solely hinge on a 2°C carbon budget and it never did; nor are markets getting risk management right.</p><img src="https://counter.theconversation.com/content/51939/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Stranded Assets Programme at the University of Oxford receives external funding and funders are listed here: <a href="http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/partners.php">http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/partners.php</a>
</span></em></p>Whatever the outcome of the COP21 Paris climate talks, climate change will result in assets becoming ‘stranded’.Ben Caldecott, Director, Stranded Assets Programme, Smith School of Enterprise and the Environment, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/487332015-11-10T19:22:50Z2015-11-10T19:22:50ZThe danger of stranded assets lurks for unwary coal producers<p>The prevailing mainstream commentary of the Australian coal sector is that its future is secure.</p>
<p>Any lost demand from China for Australian exports will be replaced by demand from India. Other growth markets such as South East Asia will also fill the gap. Shifts in demand for renewable energy are not material to the outlook. </p>
<p>But some key trends sketch out a different story.</p>
<p>In 2014, thermal coal use in China fell 2.9% on the previous year’s consumption. In 2014, the Chinese economy grew 7.4% and electricity production grew 3.8% via everything but coal: solar, wind, hydro, nuclear and biomass. In <a href="http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/12/CL-1.pdf">fact</a>, China’s coal fired power generation was down 3%.</p>
<p>Chinese coal imports dropped by 11% over 2014 and a further 38% in the first four months of 2015 due to the government prioritising sourcing coal domestically to assist local producers who are losing money, as well as the contractionary cycle. </p>
<p>Australian coal producers <a href="http://www.minerals.org.au/news/global_coal_boom_to_continue_says_minerals_council_of_australia">remain optimistic</a> though that demand from India will compensate. However this demand is unlikely to eventuate. In just a few years, India’s coal demand will be met by domestic sources and by 2017 they expect to stop importing coal altogether. They are also ramping up production of their renewable energy industry to transform the way India sources electricity. It is also important to note that many regional areas in India do not have grid infrastructure, and are therefore unable to benefit from coal-fired power generation without significant capital investment.</p>
<p>The recent International Energy Agency (IEA) <a href="http://www.iea.org/publications/freepublications/publication/WEO2015_SouthEastAsia.pdf">report</a> predicts South-East Asia coal demand will triple in the next 25 years and <a href="http://www.afr.com/business/mining/coal/australias-coal-exports-set-to-rise-as-southeast-asia-demand-surges-20151013-gk7sms?stb=twt">commentators are suggesting</a> that this changes the outlook for Australian producers. But South-East Asia represents 6% of world traded coal in 2014, so finding a small growth market will do nothing to offset the collapse in price in the main markets. Further, China, Japan and India are 50% of the world traded coal market and all three have peaked. That is why the coal price is down a further 20% this year.</p>
<p>Only a few companies are undertaking assessments of the risk of stranded assets, to understand the potential implications on their business. In October 2015, BHP Billiton produced a detailed <a href="http://www.bhpbilliton.com/%7E/media/5874999cef0a41a59403d13e3f8de4ee.ashx">analysis</a> assessing the possibility for reduced demand of their resources due to the transition to clean technology and the risks that climate change pose to its asset portfolio. </p>
<p>The report predicts the continuing climb of the world’s energy demand, in line with GDP growth. While this is historically the case, <a href="http://www.carbontracker.org/wp-content/uploads/2014/09/Coal-Demand-IEEFA.pdf">many countries are beginning to decouple</a> the two indexes. If these emergent trends continue, energy demand will still rise, but not as significantly as predicted.</p>
<p>BHP asserts that its coal assets will be safe due to their high quality and low price. This is also true, but the assessment doesn’t take into account the potential for governments to protect their domestic coal industries, avoiding imports, as China and India are doing.</p>
<p>BHP’s analysis of renewables is based around the assumption that uptake of renewables will be forced by government policy. The report does not consider that the continued drop in renewable technology prices will see deployment grow independent of subsidy and potential increase in growth rates, beyond historic trends. There is growing analyst consensus that there will be mass-market uptake of battery storage over the next five years. This is also predicted to dramatically increase the growth rate for deployment of renewables.</p>
<p>Last month, Bank of England governor Mark Carney <a href="http://www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx">warned</a> that the vast majority of the world’s fossil fuel reserves could become stranded assets if scientist’s estimates on how we cannot afford to burn these reserves proved approximately correct. Many were surprised that a mainstream banker was articulating the view that this has the potential destabilise existing energy markets and shake up countries’ economies.</p>
<p>Mining and energy companies are starting to feel the pinch. Glencore is the story of the Titanic. In May 2015, they <a href="http://www.glencore.com/assets/sustainability/doc/sd_reports/2014-Sustainability-Report.pdf">assessed</a> their stranded-asset-risk at zero. Not 10%, or 1.5%, but no chance whatsoever. </p>
<p>Glencore is <a href="http://www.wsj.com/articles/glencore-shares-regain-more-lost-ground-1443688643?alg=y">now in financial trouble</a> due to a combination of too much debt, off balance sheet leverage and low resource prices, particularly coal. Six months ago the company told investors at the Annual General Meeting that there was “<a href="http://www.glencore.com/investors/shareholder-centre/agm/">no risk</a>” that its assets would become stranded. </p>
<p>Glencore’s grim financial situation and reasons for it shares some <a href="http://www.bloomberg.com/news/articles/2015-08-26/peabody-said-to-hire-lazard-as-adviser-for-debt-restructuring">similarities</a> to that of US coal mining company, Peabody Energy Corporation.</p>
<p>These company’s often irreverent attitude towards the risk posed by both climate change and renewable energy could be seen by investors as a proxy for how it approaches risk in all other aspects of their business.</p>
<p>In Queensland, the Adani Carmichael coal mine that has just been <a href="http://www.dilgp.qld.gov.au/assessments-and-approvals/carmichael-coal-mine-and-rail-project.html">approved</a> is another example of a coal project that is struggling with finance. Both <a href="http://www.smh.com.au/business/mining-and-resources/national-australia-bank-rules-out-funding-adanis-carmichael-coal-mine-20150902-gjdsfl.html">NAB</a> and the Commonwealth Bank <a href="http://www.smh.com.au/business/mining-and-resources/adani-and-commonwealth-bank-part-ways-casting-further-doubt-on-carmichael-coal-project-20150805-gisd1l.html">backed out</a> of funding roles in the project, and other big multinational financiers, such as JP Morgan, Deutsche Bank, Morgan Stanley and Citibank have said they will not invest. Many see the project as <a href="http://www.smh.com.au/business/mining-and-resources/adanis-carmichael-mine-is-unbankable-says-queensland-treasury-20150630-gi1l37.html">commercially unviable</a> and that given the macro trends around thermal coal, the sector is in structural decline.</p>
<p>It is understandable that companies want to keep their business outlooks positive and not spook their shareholders. It makes sense that they don’t wish to include the complex, knotty issues.</p>
<p>But these issues are why you employ sophisticated risk analysts and they make for a more balanced approach. These recent cases show that ignoring them doesn’t make them disappear.</p>
<p>The hope is that the industry will mature and start thinking in a more nuanced way about these risks. BHP Billiton’s report on this is a good start.</p><img src="https://counter.theconversation.com/content/48733/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jemma Green is a board director at Future Super and on the advisory board of Carbon Tracker.</span></em></p>Only a few coal producers are undertaking risk assessments about the danger of coal assets becoming “stranded”, or unviable.Jemma Green, Research Fellow, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371082015-02-12T03:24:51Z2015-02-12T03:24:51ZUniversities are (slowly) feeling their way forward on divestment<figure><img src="https://images.theconversation.com/files/71734/original/image-20150211-25700-11mukql.jpg?ixlib=rb-1.1.0&rect=2%2C2%2C797%2C594&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The University of Sydney is hoping to chart a path to climate-safe investment.</span> <span class="attribution"><span class="source">University of Sydney</span></span></figcaption></figure><p>Another Australian university has outlined plans to reduce the exposure of its investments to climate change, and is taking a contrasting approach to the Australian National University’s <a href="https://theconversation.com/anus-resources-blacklist-social-activism-or-the-shape-of-things-to-come-32803">high-profile divestment plan</a> announced in October. The University of Sydney on Monday <a href="http://sydney.edu.au/news/84.html?newscategoryid=9&newsstoryid=14575">released plans</a> to reduce the carbon footprint of its investment portfolio by 20% over three years.</p>
<p>That will see the university reduce its carbon footprint to <a href="http://sydney.edu.au/news/84.html?newscategoryid=9&newsstoryid=14576">20% below the average</a> of Australian, international and emerging markets, rather than divesting from a particular sector such as the coal industry. </p>
<p>The stated rationale for this is that “divesting entirely from all companies with an interest in fossil fuels could result in divesting from companies that are also committed to building renewable energy sources. In addition, there are many companies that do not produce fossil fuels who are nonetheless heavy emitters”. This is an approach which the London-based <a href="http://aodproject.net/">Asset Owners Disclosure Project</a> (AODP) acknowledges. </p>
<h2>Universities exposed to climate risk</h2>
<p>The <a href="http://aodproject.net/images/docs/AODP_GUI.pdf">Global University Index</a> recently released by the AODP ranks and rates 278 universities on their efforts to disclose their investments exposed to climate risk. </p>
<p>The <a href="http://aodproject.net/">Project’s</a> objective is to protect members’ retirement savings from the risks posed by climate change. It does this by seeking improvements in disclosure and raising the bar on what is considered best practice. The AODP claims to examine “how asset
owners are preparing for the repricing of climate-exposed assets and the physical impacts on climate change” (see page 20 <a href="http://aodproject.net/images/docs/AODP_GUI.pdf">here</a>). </p>
<p>This is indeed a serious issue. </p>
<p>I struggled somewhat to work out what was done by the AODP, how it was done and what the various ratings mean. All but the top five universities were rated D (meaning that their climate change risk management is “poor”, see page 5 <a href="http://aodproject.net/images/docs/AODP_GUI.pdf">here</a>) or X (no information disclosed by any means). </p>
<p>The top 12 places were taken by US universities, with Charles Sturt being the top Australian University, ranked 13th. The University of Sydney, which was ranked before it unveiled its current plans, is ranked equal-28th and scores a D rating. </p>
<p>A Vice Chancellor (who provided a comment on the basis that it would be anonymous) from a British university with a strong reputation for innovation and commitment to sustainability, but which received an X rating in the index, told me: </p>
<blockquote>
<p>this seems a rather pointless league table, when most universities aren’t in it and of those that are almost all are harangued for not meeting even the basic criteria for the table. In reality while I guess universities recognise that climate change will have investment implications, and indeed may be looking at their investment portfolio in this context, as we are, the logical link from climate change via investments to future pension funding (which is what this organisation is focused on) is fairly obscure in the strategic priorities for most universities.</p>
</blockquote>
<h2>Time for action</h2>
<p>Of course, the issue is broader than universities, although this does not get universities off the hook. </p>
<p><a href="http://www.accaglobal.com/content/dam/acca/global/PDF-technical/sustainability-reporting/tech-tp-ca.pdf">Research</a> published by the Association of Chartered Certified Accountants and the Carbon Tracker Initiative has found that companies don’t typically disclose information on climate change risk that impacts on investors. </p>
<p>Simon O'Connor, CEO of the <a href="http://www.australiansustainability.com.au/home/">Responsible Investment Association Australasia</a> told me:</p>
<blockquote>
<p>Much of the discussion around investors managing climate risk has focused narrowly on the largest of Australia’s super funds. But beyond the large super funds, there are pools of capital across the economy that need to be considering the risks from a changing climate, and subsequent shifts in policy and technologies. </p>
<p>Universities are a case in point, as are a long list of public sector pools of capital - federal, state and territory- as well as funds managed by charities, corporates and individuals. In reality, too few investors are taking this issue seriously enough, as highlighted by the responses to the AODP universities survey.</p>
</blockquote>
<p>There is no doubt that universities, like many other sectors, ought to be doing more. In the case of universities, it is ultimately likely to be students and staff who push for the leadership required to drive the significant change which will inevitably come. </p>
<p>If the AODP is to be a driver of change, I would suggest that it needs to state exactly what it is that universities should do and disclose, and to consider rewarding public commitments that are an important, not to mention difficult, step along the way. </p>
<p>The challenges are abundantly clear from the <a href="https://theconversation.com/divestment-backlash-shows-companies-need-to-improve-sustainability-reporting-33079">criticisms</a> directed at the Australian National University, including from Prime Minister Tony Abbott, over its divestment decision. The University of Sydney’s approach cleverly sidesteps a backlash from the coal industry and its backers.</p>
<p>Last year, the University of Glasgow became the <a href="http://www.theguardian.com/environment/2014/oct/08/glasgow-becomes-first-university-in-europe-to-divest-from-fossil-fuels">first in Europe</a> to divest from fossil fuels. This is not an easy decision for an ancient institution (founded in 1451) with a range of stakeholders who will inevitably have diverse views. </p>
<p>But the University of Glasgow’s commitment is not reflected in its D rating (poor) by the AODP. Points were awarded points for “actual performance”, not commitments – even, apparently, where these commitments have been made public (a form of disclosure, I would argue). </p>
<p>Given the slow pace of change in integrating sustainability and climate risk in universities, it seems unlikely that Sydney University was influenced by its AODP rating. Its approach is a good example to follow. Continued slowness by universities leaves them exposed to reputation risk as well as climate risk.</p><img src="https://counter.theconversation.com/content/37108/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carol A Adams is a former Professor of Accounting and current visiting professor at the University of Glasgow and a part time professor at Monash University.</span></em></p>Another Australian university has outlined plans to reduce the exposure of its investments to climate change, and is taking a contrasting approach to the Australian National University’s high-profile divestment…Carol A Adams, Professor, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/348062014-11-30T18:50:50Z2014-11-30T18:50:50ZThe strengthening economic case for fossil fuel divestment<figure><img src="https://images.theconversation.com/files/65866/original/image-20141130-20565-1krg5m7.jpg?ixlib=rb-1.1.0&rect=45%2C56%2C7508%2C3947&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Investing in fossil fuels for the long term? You might find your plans get pricked.</span> <span class="attribution"><span class="source">klublu/Shutterstock</span></span></figcaption></figure><p>The <a href="https://theconversation.com/outrage-at-anu-divestment-shows-the-power-of-its-idea-32736">controversy</a> ignited by the Australian National University in October, when it decided to sell its shares in seven resources companies, has raised two important questions about divestment from assets such as fossil fuels. </p>
<p>The first is whether divestment is an economically prudent choice, and the second is whether there is anything special about universities that helps to inform their decision.</p>
<p>Any portfolio investment is a bet on the prospects of the company and industry in which the money is invested. For the bet to pay off, the company must do well relative to its competitors but, more importantly, the industry as a whole must also prosper. </p>
<p>So an investment in companies whose primary asset is ownership of fossil fuel reserves is a bet that those reserves will be extracted and sold at a price that exceeds the cost of production.</p>
<h2>Situation heating up</h2>
<p>Extracting and burning the currently known reserves of coal, oil and gas using current technologies would result in catastrophic climate change, <a href="http://www.amazon.com/Four-Degrees-Global-Warming-Australia/dp/0415824583">probably in excess of 4C of warming</a>. This change would see massive species extinction and the destruction or radical transformation of all natural ecosystems and many vulnerable societies. <a href="http://www.rtcc.org/2014/04/01/how-much-worse-is-a-4-degrees-world/">Coral reefs</a>, island and coastal communities, and localised ways of life would all disappear.</p>
<p>Yet investors might still be willing to bet on such an outcome in the hope either that it would be delayed beyond their lifetime or that they and their descendants might be able to insulate themselves from the consequences by somehow radically divorcing themselves from the natural world. More immediately, the high <a href="http://economics.about.com/cs/economicsglossary/g/discount_factor.htm">discount rates</a> typical of financial markets mean that ordinary investment decisions typically take little account of the future beyond the next 50 years anyway. At a discount rate of 6%, it’s not deemed to be worth spending a dollar now to avoid the loss of $15 in 50 years’ time. </p>
<h2>Are universities different?</h2>
<p>This brings us to our second question – do universities necessarily take a longer view? In some respects, the principles of investment appropriate to universities are similar to those for investors in general. They generally want to hold a diversified portfolio to achieve an optimal balance of risk and return. </p>
<p>But a university is an institution that hopes and expects to endure for centuries, and which counts the study of the natural world as a core part of its mission. It makes no sense for such an institution to bet on a course of action that may yield short-term profits but might lead to the end of the university and its mission. An investment strategy for a university must therefore be a bet on a sustainable future. </p>
<p>As will be argued below, the case for divesting from fossil fuel assets is strong for everyone. The long-term perspective that is natural for universities makes it overwhelming. </p>
<h2>The best way forward</h2>
<p>One path to a sustainable future is a fairly rapid transition to an energy system based on non-carbon technologies, such as wind, solar panels and, perhaps, nuclear energy (although this option is receding in many countries, <a href="http://nationalinterest.org/commentary/china-can-make-nuclear-power-work-9815">China being the main exception</a>).</p>
<p>Standard analyses suggest that such a transition would have to be <a href="http://www.roadmap2050.eu">largely completed by 2050</a>. In the transition process, a good deal of carbon would be left in the ground, thus becoming <a href="http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets">stranded assets</a>.</p>
<p>A good deal of carbon would still be burned: standard estimates suggest a remaining budget of <a href="http://www.climatecentral.org/news/ipcc-climate-change-report-contains-grave-carbon-budget-message-16569">just under 500 billion tonnes</a> of carbon dioxide emissions, if the global goal of 2C warming is to be met with 50% probability. </p>
<p>It might seem, therefore, that investments in low-cost, high-quality fossil fuel assets might still be profitable, as these would still be extracted and sold.</p>
<p>However, this analysis fails to take account of prices.</p>
<p>If most fossil fuels are to be left in the ground, the price paid for those fuels (net of carbon taxes or similar charges) must be lower than the cost of extracting them. This in turn means that the price for those resources that are used will be barely sufficient to cover the cost of extraction, with little or nothing left as a return to the asset owners. </p>
<p>To spell out the logic, consider the decline in thermal coal prices over the past four years, from US$140 per tonne to US$70. At this price, most new coal projects are uneconomic, and many existing mines are not covering their extraction, transport and shipping costs. (Australian mines are hanging on because they are committed to pay transport costs anyway, under their take or pay contracts). If low prices are sustained, investments in these projects will be lost.</p>
<p>Mines with lower production costs, say US$40 a tonne, will stay in business. But at this cost the return per tonne of coal, which would have been US$100 four years ago, has now fallen to US$30. So while the price of coal has fallen by half, the value of the coal reserves has fallen (in this example) by 70%.</p>
<h2>Carbon capture collapse</h2>
<p>The other suggested path to a sustainable future is carbon capture and sequestration (or carbon capture and storage, or CCS). This requires that carbon dioxide be captured at the point of combustion, then compressed and transported for permanent storage either underground or in some form of biomass.</p>
<p>In the early 2000s, CCS was widely seen as the most promising technological option for mitigating carbon dioxide emissions. The G8 (the predecessor of the G20) <a href="http://www.iea.org/newsroomandevents/pressreleases/2010/june/name-20283-en.html">committed to an ambitious program in 2008</a>, proposing at least 19 projects by 2020.</p>
<p>CCS was a particularly attractive bet for Australia, as it would maintain the value of our large reserves of coal. Reasonably enough, the Australian government spent more than A$2 billion on it, and <a href="http://www.afr.com/p/business/resources/energy/power_generation/clean_coal_dream_little_more_than_xqVuofnSQQBA0521ylb02H">planned to spend even more</a>. The coal industry also committed large sums to research.</p>
<p>Very little is left of this today. Internationally, only a <a href="http://www.theguardian.com/environment/2014/oct/01/canada-switches-on-worlds-first-carbon-capture-power-plant">single large-scale CCS plant is in operation</a>, and many projects have been cancelled or suspended. In Australia, the publicly funded research program is <a href="http://www.theguardian.com/environment/2014/nov/05/carbon-capture-and-storage-research-budget-slashed-despite-pms-coal-focus">being wound down and the coal industry has frozen its contributions to the task</a>.</p>
<p>Even optimistic assessments such as that <a href="http://www.csiro.au/Portals/Media/2012/Carbon-capture-technology-moves-a-step-closer.aspx">presented by CSIRO</a> note that current carbon capture technology involves the loss of <a href="https://theconversation.com/building-a-future-for-carbon-capture-technology-6782">as much as 30% of the energy generated</a>.</p>
<p>The asset value, net of extraction costs, is reduced even further. A 30% reduction on current coal prices would render even the most easily extracted resources almost worthless. And this is all academic anyway, because there is no large-scale sequestration technology available for the foreseeable future.</p>
<h2>By the numbers</h2>
<p>Leaving aside the ethics of divestment and pursuing a purely rational economic analysis, the cold hard numbers of putting money into fossil fuels don’t look good.</p>
<p>Unless universities are willing to bet on the destruction of the planet they have committed themselves to understanding and preserving, divestment from fossil fuels is the only choice they can make. Forward-thinking investors of all kinds would be wise to follow suit.</p><img src="https://counter.theconversation.com/content/34806/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin is active in the movement for divestment at the University of Queensland.</span></em></p>The controversy ignited by the Australian National University in October, when it decided to sell its shares in seven resources companies, has raised two important questions about divestment from assets…John Quiggin, Professor, School of Economics , The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.