Thursday, April 7, 2016


Three significant events in the last fortnight point towards a sea change in the way that investment markets will increasingly look at fossil fuels. The first is just a headline. Even oil barons are giving up on fossil fuels. The second is a new report by the US National Academies of Sciences, Engineering, and Medicine. This draws much stronger connections between climate change and the frequency of extreme weather events, something that notoriously cautious scientists have hitherto been reluctant to claim with confidence. The third is a straightforward analysis from the Oxford Martin School of facts and figures on carbon emissions, pointing out the risk to any new investment in fossil fuel power generation without carbon capture. It is a stark warning … on the probability that ‘2°C capital stock’ will be reached in 2017.

Rockefeller charity takes ethical stance on fossil fuels

The Rockefeller Family Fund, the charitable vehicle of one part of the family, announced last month that it would be divesting its shares in coal producers and oil and gas explorers, including ExxonMobil, today’s of the Rockefeller money machine, Standard Oil. This is a repudiation of the fossil fuels that were the foundation of the family fortunes. By itself the action of a single charitable organisation may appear of limited consequence, but as an indicator of future investor sentiment, it will be symbolic.  For reasons unconnected with ethical principle, other serious investment funds, including pension funds are also taking a long hard look at the impact of climate concerns, and the risk to long term investments which may be forced to close before the end of their “economic” life.  The reasons relate to the second and third of our recent events. [see FT’s US investment correspondent, Stephen Foley, 3 April 2016]

Responsibility for extreme climate related events

The second news item, the US National Academies Report, is important for its potential political impact. It explores the controversial question of event attribution due to the impact of climate change. Nick Butler [FT, 28 March]  asks whether events such as the 2003 Paris heatwave (killing 3,000), floods on the Somerset levels in in the winter of 2013/14, or the wildfires of western Russia in 2010 (killing 56,000) can be confidently attributed to climate change. The report suggests that at least for some extreme events, notably heat, there is a causal connection. It is not the first such attribution. Myles Allen of the University of Oxford was the first to propose the use of Probabilistic Event Attribution to quantify the contribution of human influences on climate to specific individual weather events.

For some physicists and engineers this may merely confirm an instinctive intuition that complex systems with more energy (ie heat) will tend to be more chaotic, and the report remains quite cautious and nuanced. But the tendency to ignore climate change, as a far distant phenomenon that need not concern us now, will be weakened if locally catastrophic impacts start to be seen as immediate. As Butler says, if the linkages become more obvious, the public demand for action will grow.

He adds: “In politics, if a risk cannot easily be removed or managed the temptation is to look for someone to blame. In legal terms this will be translated into the concept of liabilities. If you are a shareholder in an energy business you might like to ask your company’s view of the issue.” As a practical matter, legal liabilities for climate change may seem rather hard to establish, but I would not underestimate the abilities of US law firms in this area. It is certainly another question for investors.

New fossil fuel plants for power generation will turn into stranded assets

The third event is a report from the Oxford Martin School, by Professor Cameron Hepburn and others, that reiterates the observation that we are uncomfortably close to the point where the world’s energy system commits the planet to exceeding the carbon budget for emissions consistent with a “safe” climate change target of 2°C increase. The report goes on to argue that, even on quite favourable assumptions for other sectors, any new fossil generating plant built after 2017 will, unless it allows for carbon capture and given the longevity of power plant, commit us to exceeding the global budget.

So if we actually propose to take the Paris agreements seriously, and if we do not then we face the prospect of a dangerously uncertain global future, we need to recognise that any such plant will need to be retired well before the end of what investors would normally consider to be its economic life. In other words it would be a stranded asset.

There are many qualifications that might be added to what are inevitably broad brush projections. The assumptions may be too optimistic, both on greenhouse gas reduction in other sectors, or on the degree of “safety” provided by the notional carbon budget. Other, older, fossil plant (without CCS) might be retired earlier. And allowing for a carbon capture retrofit introduces a loophole.

But the general direction of travel is clear.  “Far from having years to work out how to curb the risks of climate change, we face a moment of truth.” [Martin Wolf, FT, 5 April 2016].  The regulatory and policy risk for new fossil plant will be huge, and such plant depends on revenue guarantees over periods of up to 30 or 40 years. This will be a really serious concern for investors and make the investments much harder to finance at any realistic cost of capital.
Nor can the owners of the stranded assets expect much sympathy. To quote a colleague, “surely the sight of stranded assets will be seen as a sign of successful climate policy”. 

(re-published on the Oxford Martin School website)

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