13 Jan 2015: Analysis

Could Global Tide Be Starting
To Turn Against Fossil Fuels?

From an oil chill in the financial world to the recent U.S.-China agreement on climate change, recent developments are raising a question that might once have been considered unthinkable: Could this be the beginning of a long, steady decline for the oil and coal industries?

by fred pearce

Boom may be turning to bust for fossil fuels. Market forces are combining with the prospect of new limits on carbon emissions from major economies such as China and the United States to prick the carbon bubble. Many analysts are now suggesting that — with prices falling and production costs rising — the coming year could be the moment when investors realize the game is up for the coal and oil industries.

Nations found it hard to make progress at UN climate negotiations in Lima last year, making many observers skeptical of the prospects of a legally-
Pemex oil rig
Omar Torres/AFP/Getty Images
Falling crude prices have hurt oil companies such as Pemex, which operates this rig in the Gulf of Mexico.
binding deal to cut emissions of carbon dioxide as planned in Paris at the end of this year. But, with or without a deal, the tide is turning against investing in fossil fuels, says Jeremy Leggett, one of the most durable climate campaigners of the past quarter-century, who is now chair of Carbon Tracker, a think tank on finance, energy, and climate.

“Watching the wave of investor pressure wash across carbon-fuel capital expenditure in the closing months of 2014, I now think this is how the carbon war can be won,” Leggett, who formerly was science director for Greenpeace and founder of a successful British solar energy company, says. “The way things are shaping up, negotiations in Paris might be playing catch-up to the markets.”

Perhaps the most totemic sign of the times came in September when the Rockefeller Brothers Fund, a philanthropic body set up by the heirs to the
The Bank of England governor has warned that ‘stranded assets’ are a growing risk for fossil fuel companies.
Standard Oil fortune, announced that it would pull its money out of fossil fuels, beginning with coal and tar sands.

But the alarm bells are ringing for the masters of the financial universe, too. The governor of the Bank of England, Canadian banker Mark Carney, warned repeatedly during 2014 that what he termed “stranded assets” are a growing risk for fossil-fuel companies. “The majority of proven coal, oil, and gas reserves may be considered ‘unburnable’ if global temperature increases are to be limited to two degrees Celsius,” he said in a letter to the British parliament’s Environmental Audit Committee in October, referring to the widely accepted temperature threshold for avoiding the worst effects of climate change.

Carney, who is also chairman of the G20 Financial Stability Board, which monitors the global financial system, told a World Bank seminar that financiers in denial about climate change were guilty of creating a “tragedy of horizons.” He announced that in 2015 the Bank of England’s Finance Policy Committee would investigate whether risks to the value of “unburnable” fossil fuels assets could undermine financial stability in the way that sub-prime mortgages crashed the global economy in 2008.

At every level, from macroeconomic management to the day-to-day business of money markets, the tide is turning against fossil fuels.

The first signs of a fossil-fuel bust emerged early last year with growing evidence that the decade-long boom in global coal demand was peaking. As we reported here in June, this is mainly a result of changes in the Chinese economy, where energy efficiency is improving fast, growth is shifting to low-carbon activities, and public anger about smog is forcing the shutdown of coal-fired power plants in Beijing and elsewhere.

This trend was reinforced by the reciprocal climate deal that China struck with the Obama administration in November, under which China agreed to peak its carbon dioxide emissions by 2030 and put a cap on coal burning by 2020. In fact, some analysts now predict that Chinese coal burning could begin to decline as early as next year.

This is a global game-changer. According to the U.S. Energy Information Administration, China was responsible for more than 80 percent of the growth in global coal burning since 2000, and currently burns half of the world’s coal. With coal demand already starting to decline in the U.S. and
From Australia to Mozambique, new coal mines costing billions of dollars are being mothballed.
other developed countries, the coal boom may be over.

Investors are already running for cover. From Australia to Mozambique, new coal mines costing billions of dollars are being mothballed, and major mining firms are getting out of coal, according to Tim Buckley of the Institute for Energy Economics and Financial Analysis. In the most dramatic example, the Anglo-Australian giant Rio Tinto in July sold its stake in the world’s most expensive coal mine in Mozambique — effectively writing off more than $3 billion.

And now the same specter looms for oil. Oil prices have halved since June, with the benchmark Brent crude trading earlier this week at less than $50 a barrel. If such prices are maintained, this would leave many reserves unviable, putting severe strains on even the largest oil companies, according to James Leaton, research director at Carbon Tracker.

Leaton calculates that major companies have earmarked more than a trillion dollars of investment in projects between now and 2025 that require an international oil price of at least $95 a barrel before they make a profit. Most of these high-price reserves are on the industry’s new frontiers — in the Arctic, deep ocean waters, or unconventional sources like the Alberta tar sands, where three major projects were deferred in 2014 because of falling oil prices.

Brazil’s oil giant Petrobras, whose investments in deep-sea oil in the South Atlantic have made it the most indebted company in the world, is reportedly close to going bust. Leaton reports that many of its new offshore fields have a break-even price of $120 a barrel.

Of course oil prices may rise again. Some analysts believe the prices are currently being kept artificially low by over-production in Saudi Arabia, aimed perhaps at scuppering the U.S. shale-oil industry. But many see a long-term trend and expect a rash of business failures, as companies heavily invested in high-cost oil reserves face a world in which demand is
One analyst advises investors to urgently stress-test the business strategies of big oil against ‘carbon risk.’
restricted by growing concern over climate change and prices are tumbling in consequence.

Analyst Mark Lewis of Kepler Cheuvreaux, a Swiss private bank, calculates that to meet emissions targets that could cap global warming at two degrees Celsius will mean lost fossil-fuel revenues of no less than $28 trillion in the coming two decades. He argues that, in a world of climate change, investors should urgently stress-test the business strategies of big oil against “carbon risk.”

Many big oil companies, including Shell, ExxonMobil, and BP, deny that any threat exists. “We do not believe that any of our proven assets will become stranded,” said Shell in May last year in a letter to shareholders. The company said it simply does not believe the world will constrain carbon emissions enough.

But in November, former BP chief executive Lord John Browne said many oil and gas companies were still in denial about climate change because “they do not want to acknowledge an existential threat to their business.”

Oil is in a double bind, says Lewis. If prices are low, then opening up new reserves is unviable; if prices are high, then many customers will switch to alternatives, or simply invest in energy efficiency. Fossil fuel investments could become the “sub-prime assets of the future,” warned British energy secretary Ed Davey. No wonder investors are starting to ask serious questions about the companies they have traditionally regarded as secure places to put their money.

All this looks like great news for the climate. And there are other hopeful signs. The global economy is on a long-term trend to greater efficiency in the use of energy. Carbon emissions for every dollar of GDP are 37 percent below those in 1990. The carbon intensity of the Chinese economy, while still twice that of the United States, has fallen 25 percent in less than a decade.

Meanwhile, as the costs of producing fossil fuels rise, those for renewables are in sharp decline. Solar panels cost only a tenth what they did a decade ago. Only the perpetuation of heavy state subsidies — estimated by the IEA at more than half a trillion dollars a year — has maintained the primacy of fossil fuels.

All this is leading some economists to argue that the idea of nations needing to share the economic “burden” of curbing CO2 emissions is becoming outdated. Fossil fuels are becoming the burden, they say.
Many nations are now making unilateral commitments to curb their carbon emissions.
Nations should be competing to decarbonize their economies as a means to maximise economic growth.

Lord Nicholas Stern of the London School of Economics — author in 2006 of the influential Stern Review of the economics of climate change — told climate negotiators in Lima that “the path to a low-carbon economy can be highly attractive.” Rather than fighting for the right to emit ever more CO2 as their economies grow, poor nations should be demanding “the right to sustainable development,” he said.

Such optimistic thinking has yet to be reflected in the actual climate negotiations, which remain mired in battles about burden sharing. But they do explain why many nations — among them Brazil, Mexico, South Africa, China, the U.S., and the European Union — have made unilateral commitments to curbing their emissions. These commitments are usually based on carbon-intensity targets, which the countries regard as being in their national self-interest. And they also suggest that the fossil-fuel boom is drawing to a close.

Nothing is certain. There are several jokers in the pack. One concern is the explosion of interest in extracting natural gas from shale. While natural gas is much less carbon-intense than coal or oil, a burgeoning industry based on cheap shale gas could easily swamp those gains in the long run.

Another concern is that while China may be taking a lower-carbon path of economic growth, other fast-industrializing nations may not. India remains

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heavily committed to burning coal and has abundant domestic reserves, though the new government of Narendra Modi has announced plans to bring electricity to 400 million rural Indians through mini-grids run on solar energy.

Finally, there is the climate system itself. Even if the world can break its addiction to fossil fuels and peak carbon emissions soon, it could still be too late to prevent devastating climate change. The most recent report on climate science from the UN’s Intergovernmental Panel on Climate Change made clear that we still don’t know how sensitive the climate system is to CO2, nor what disruptive feedbacks may emerge as ecosystems dry out, ice caps disappear, and permafrost melts — all of which could potentially accelerate warming beyond human control.

Human energy systems may be closer than we think to a virtuous tipping point. But nature’s tipping point could yet have the last word.



POSTED ON 13 Jan 2015 IN Biodiversity Business & Innovation Climate Energy Oceans Policy & Politics Policy & Politics Central & South America 

COMMENTS


Citizens Climate Lobby's Fee & Dividend scheme was modelled to reduce CO2 emissions by 52% over 20 years while boosting GDP, Jobs, incomes and health: https://www.dropbox.com/s/up54c6doub3xk3k/REMI-National-SUMMARY_With_Headings.pdf?dl=0

Here's a comparison table of Cap & Trade vs Fee & Dividend (also includes effect of subsidies and regulation): https://www.dropbox.com/s/988nuup9dtgxqmr/Policy%20Instrument%20Comparison%20Table%20v2.pdf?dl=0
Posted by Clive Elsworth on 13 Jan 2015


Not bloody likely. Oil really has no substitute because it is dense, mobile, and the infrastructure to use it is already built.
Posted by Walter Haugen on 14 Jan 2015


Clive -
being a commoner of a democratic monarchy (where no politico is allowed to the top of the heap) and not a citizen of any republic - is the first of my problems with your proposed CCLF&D remedy for AGW.

Rather more problematic is the track record of energy prices since 2000 - which make a nonsense of your proposed remedy. Consider, energy prices globally have doubled and at times quadrupled during this period, yet global fossil carbon emissions have continued their exponential increase - that is, they are now increasing by far more annually than they were in 2000.

So by how many hundreds of percent per decade do you propose that the tax will have to raise fossil energy prices just to start slowing the rate of increase of fossil fuel emissions ?

And how exactly do you propose to get the US establishment, and all other nations, to agree to that plan and then to stick to it ?

The core problem with the CCLF&D remedy - as I hope others may have already pointed out - is that it is a commitment to tax, and not a commitment to participate in a global allocation of tradeable emissions rights under an agreed carbon budget that declines to zero by an agreed year.

While a tax gives a potentially useful revenue stream,
it is of utterly dubious efficacy (as the 2000 to 2014 CO2 rise shows),
it is a gift to those wishing to misrepresent its intention and cause voters to support reneging on it, and, crucially
it offers no demonstrable and robust expression of international equity, without which no treaty is going to endure for the necessary number of decades.

I'd suggest taking a careful look at the issue from a global perspective if you want to help generate a viable agreement for the mitigation that is so urgently required.

regards,

Lewis
Posted by Lewis Cleverdon on 14 Jan 2015


This article has some misleading segments.

For example, the statement "The global economy is
on a long-term trend to greater efficiency in the use
of energy. Carbon emissions for every dollar of GDP
are 37 percent below those in 1990" implies that
there are no limits to increasing efficiency (either
economic or physical), or at least no near-term limits
to contend with. (Readers without a background in
the natural sciences may mistakenly conclude that
efficiency can go on increasing indefinitely.)

Also "carbon intensity" as referred to here
(emissions/GDP) is not a very useful measure. The
Worldwatch article linked above in that section of text
states:

"Although a growing economy generally correlates
with growing absolute energy use, energy intensity
may well decline. In the 1990s, industrial economies
started to turn to a new growth paradigm that relied
heavily on service sectors. This “knowledge-based
economy” is much less energy-intensive than the
economic model that most nations adopted during
industrialization. As a result, global energy intensity
decreased 13.72 percent during the 1990s"

If growing economy = growing absolute energy use
(as it does in reality), of what real significance is
decreasing "intensity"? Anyway it would have to
decrease at a rate greater than overall growth and
energy use in order to move towards sustainability -
has it? Neither author tells us. The answer is that it
has not.

Further, this ignores the role of debt. Since the 70's,
in (formerly) industrial countries like the US,
manufacturing has gone oversees and debt has
ballooned. Increasing debt, and the swelling of the
FIRE (finance, insurance, real estate) sector, has
been responsible for an increasing proportion of GDP
growth in the US. These forms of "growth" do not
generate emissions at the scale of manufacturing -
but neither do they produce much anything of use to
the economy/society. In fact, they have become very
big (TBTF) and troublesome lately and now are
mostly doing harm to the economy and society.

So, yes, if you get rid of your real economy that
actually makes things and does things that are useful
to society, and replace it with debt and risky speculation,
then you can make your economy
appear to grow while emissions grow at a slower rate
than they did when you had a real economy. Then
"intensity" will appear to go down. And you can
(nonsensically) call it a "knowledge economy" - but
what has been achieved?

And finally, the statement "The global economy is on
a long-term trend to greater efficiency in the use of
energy" is incorrect. The global economy is on a long-
term trend of diminishing returns with respect to
energy. For a given unit of gross energy production,
society receives less net energy, as more has to be
redirected into the energy sector so that it can
produce lower-quality resources (e.g. "fracked" shale
oil or tar sands versus historical convention crude).
Diminishing returns is another way of saying
"inefficiency," as progressively more energy has to be
invested in order to obtain the same net energy.


Posted by Josh Kearns on 14 Jan 2015


I feel we are trying, but we still have a sense of not understanding how valuable nature is for us. It is like saying you will never die. Guess what — you will.

We are living in a capitalistic world that does not put value on ecology. In financial terms what is a tree worth, what is clean air worth, and so on. We escape the city where we make our fortune to enjoy the countryside, the lakes, the beach. We somehow think it will always be there in its pristine form.

Is a country successful when the GDP is up? It is such a poor scale of how we are doing as a people.

What we need is a variety of scales that measures people's long term income/wealth/health/ecology and act accordingly to break the mold and create a new, sustainable balance.
Posted by dolf jansen on 15 Jan 2015


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fred pearceABOUT THE AUTHOR
Fred Pearce is a freelance author and journalist based in the UK. He serves as environmental consultant for New Scientist magazine and is the author of numerous books, including The Land Grabbers. Previously for Yale Environment 360, he has written about why setting a global carbon budget is difficult and efforts to protect the Indonesian coast with mangrove forests.
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