'Unburnable Carbon' or No, Fossil Fuel Companies Face a Climate Catch-22
What happens when your most valuable assets become liabilities? International oil, gas and coal companies may be about to find out.
This week, the International Energy Agency (IEA) released a special update to its annual World Energy Outlook, which reveals that governments face severe challenges if they hope to limit the rise in global temperatures to below the internationally recognized 2 °C target. In fact, IEA estimates that global temperatures are currently on track to rise between 3.6 °C and 5.3 °C, a change that would have a dramatic effect on every sector of the global economy, from agriculture to air travel.
While every industry bears the costs of a changing climate, some industries play a greater role than others in creating the cause. As the IEA noted, the energy sector accounts for approximately two-thirds of global greenhouse gas emissions. Therefore, the agency focused its Redrawing the Energy-Climate Map report on what can be done to de-carbonize global energy systems.
That’s no easy task, but for the energy industry itself, it’s an imperative. As IEA put it in the lead up to the report’s release, “[The study] demonstrates that the energy sector, in its own interest, needs to address now the risks implicit in climate change – whether they be the physical impacts of climate change or the consequences of more drastic action later by governments as the need to curb emissions becomes imperative.”
In other words, the fossil fuel industry faces a climate change Catch-22.
Either it burns its existing reserves of oil, gas and coal and faces physical risks from climate change, like stronger storms that shut down coastal refineries and melting tundra that destabilizes northern pipelines. Or, when rising temperatures compel international governments to limit carbon emissions, the industry will be forced to keep its carbon reserves in the ground, facing financial risks that will cost its stockholders billions in shareholder value.
Previous studies have warned of the risks of “stranded assets” or “unburnable carbon” and its potential impact on the fossil fuel industry. IEA’s analysis adds a new chapter to the debate, and it underscores the fact that whether or not the fossil fuel industry chooses to burn its carbon reserves, it faces a hard road ahead.
The fossil fuel industry intends to be the dominant energy provider of the next several decades, and by most analysts’ calculations, it will. But it will have to come to grips with this alarming reality: It no longer makes sense to seek out more oil, gas or coal, since a significant percentage of those products may never be sold. And even if that carbon does go to market, the energy industry itself will pay a toll, as extreme weather wreaks havoc on its physical assets and, frankly, its customers. Major consumers of fossil fuels, like electric power utilities, face many of the same risks.
Fortunately, IEA offers some solutions. The report outlines four specific measures for the energy sector that can be quickly and effectively implemented, at no net economic cost, to help keep the 2 °C target alive while international negotiations continue. The authors recommend that:
- The world’s governments double down on energy-efficiency measures;
- Cut back on the use of inefficient coal-fired power plants;
- Minimize methane emissions from oil and gas production;
- And accelerate the removal of fossil fuel subsidies.
These are initiatives that Ceres’ Investor Network on Climate Risk has long championed. Within the past 12 months alone, investors filed shareholder resolutions on energy efficiency with 13 companies after engaging with dozens more, encouraged five major coal-fired electric power utilities to ramp up renewables and efficiency, and signed a global investor statement on limiting fugitive methane emissions, along with several more resolutions targeting harmful practices from hydraulic fracturing operators and the natural gas supply chain.
But these measures alone are not enough. Even as investors call for greater energy efficiency and responsible oil and gas development, they must grapple with the same dilemma: The dire threat of climate change makes fossil fuel companies’ carbon reserves both assets—and liabilities. Plans are underway for a major investor-led initiative that will ask fossil fuel companies how they reconcile these risks with their current business model.
Fossil fuel executives aren’t ignoring the issue, but their responses thus far won’t satisfy investors. Last year, ExxonMobil CEO Rex Tillerson was asked about his firm’s take on the threat of climate change. He answered, “We have spent our entire existence adapting. We’ll adapt.”
Whether or not the fossil fuel industry chooses to implement IEA’s four energy policies, it must respond more aggressively to climate change. If it fails, it will have only itself to blame.