Analysis | High fossil fuel valuations are a political weapon – The Washington Post | WHs Answers


In France this week, temperatures reached 108 degrees Fahrenheit, about 36 degrees above the seasonal average. London hit 104, breaking a record set in 2019. Meanwhile, extreme wildfires are raging in France, Spain, Portugal, Greece, Turkey and a dozen US states.

Global warming is no longer a future problem. It’s there, and its consequences are only getting worse.

In response, nations have pledged to reduce their greenhouse gas emissions, primarily carbon dioxide from fossil fuels. After the 2015 Paris Agreement, the US pledged to reduce emissions by 50% by 2030 from 2005 levels and to reach net-zero emissions by 2050. Many other nations have made similar or more ambitious pledges.

As a result, financial markets should have started depreciating the value of “stranded” fossil fuel assets — reserves of oil and coal that simply cannot be burned if we are to have a livable future. Almost a decade ago, then-Governor of the Bank of England Mark Carney highlighted this issue with much public fanfare.

But the markets have not listened. A recent study published in Nature Climate Change found that the present value of allegedly stranded oil and gas assets still exceeds $1 trillion. They are mostly held by retail investors in OECD countries, and the value of the assets held by leading financial institutions is roughly double the risk that led to the bank failure and the 2007-2008 financial crisis.

What’s happening? Of course, it could be that the markets are just not very efficient and investors are ignoring the terrible shock they are about to experience at some point in the future. Or it could be that investors just don’t believe governments will deliver on their climate promises, and who can really blame them? Despite countless fine words, global greenhouse gas emissions are increasing inexorably.

But there is also a third possibility, illustrated by the recent dramatic collapse of climate legislation in the US Senate, where Democratic Senator Joe Manchin, himself heavily invested in coal mining, tipped the scales against stronger climate policy and, of course, the 50 joined Republican Senators. It could be that fossil fuel companies and their investors — particularly some powerful groups with wide lobbying reach — are hoping to influence the future by keeping their fossil fuel valuations inflated. Perhaps they believe continued confidence in fossil fuel assets could be enough to sway markets, encourage further investment, and ultimately persuade the public that they expect continued use of fossil fuels. This is of course easier if an effective climate protection policy is obstructed.

It’s disconcerting, but this idea makes a lot more sense than one might initially think. High valuations raise expectations that can easily fulfill themselves, and let governments get away with doing nothing – generally the least painful course of action for political leaders – when politicians can be persuaded that falling demand for fossil fuels is leading to lost elections or social unrest will lead .

That bleak outcome is conceivable if fossil fuel interests manage to form a coalition large enough that an abrupt switch away from fossil fuels is deemed too painful to be feasible, argues Gregor Semieniuk, an assistant professor of fossil fuels Economics from UMass Amherst and lead author on the study of nature. The more people see fossil fuels as a great investment, the more fossil fuel stocks will be supported, and the more companies will invest fossil fuels in real assets. Then it becomes harder for governments to push back because more money and capital is at stake. Worse, fewer people have invested in energy alternatives like renewable energy, which are then supported by a weaker lobby. The final result? We all continue to consume fossil fuels at rates incompatible with climate protection, regardless of the increasingly dire consequences.

In summary, showing faith in fossil fuels now may seem worse for governments than staying with them. As Semieniuk puts it, “What is expected today and what happens based on today’s expectations can influence what is feasible in the future.”

That’s a thoroughly cynical view of what drives investors. Part of me prefers to think that investors might wake up when they see real evidence of action to mitigate climate change — say, five straight years of falling emissions. But historically, the fossil fuel industry has certainly tested the limits of cynicism. Why should the future be different?

One hope is that the influence of opinion works both ways. A few years of consistent emissions reductions could create a critical mass of expectations and a widespread belief that fossil fuels have a bleak future, leading to an accelerated flight to greener energy. The key is to make the coalition of climate change winners so powerful that lost assets appear as an acceptable societal price, affecting mostly some laggards who realign their expectations later than others. Fortunately, the favorable economics of a growing number of low-carbon alternatives make this an increasingly likely outcome, Semieniuk says.

And yet both are possible. Everything is still up in the air. When it comes to climate, opinions aren’t just opinions—they have a potentially critical impact on our common future.

More from authors at Bloomberg Opinion:

• No, Joe Manchin, Higher Taxes Don’t Cause Inflation: Kimberly Clausing

• Investors deserve better climate risk disclosure: Michelle Leder

• Earth Wants Biden to Keep Gas Prices High: Eduardo Porter

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Mark Buchanan, physicist and science writer, is the author of Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics.

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