After Paris: Ignoring 2 Degree Planning Is No Longer An Option
- The Paris Agreement increases carbon risk for fossil fuel companies.
- After Paris, companies that stress test capital expenditures for a 2 degree or 1.5 degree future will have the competitive edge.
- The impacts of the oil price downturn illustrate how unprepared most fossil fuel companies are to manage the risks of the energy transition.
Why 2 Degrees?
Now that the climate talks have concluded, no responsible business, especially carbon-intensive oil companies, can ignore the importance of planning for a 2 degree future. Why is 2 degrees so important?
After nearly two decades of working to limit climate change, parties to the United Nations Framework Convention on Climate Change agreed in 2010 to limit global temperature rise to no more than 2 degrees Celsius above pre-industrial levels.
For years, investors have called on companies to stress test their business models against that globally agreed upon benchmark only to have fossil fuel companies and others claim that achieving such a target with carbon-reducing measures was "highly unlikely."
But over the last year, the world has shifted. In 2015, Shell (NYSE:RDS.A) (NYSE:RDS.B), BP (NYSE:BP), and Statoil (NYSE:STO) endorsed shareholder resolutions requiring them to assess the "resilience" of their portfolios in a 2 degree world. ConocoPhillips (NYSE:COP) began testing its investments against three different 2 degree scenarios, a move that prompted them to abandon costly deepwater drilling. In September, BHP Billiton (NYSE:BHP) released the first example of a fossil fuel company's considered analysis of the range of impacts that multiple 2 degree scenarios might have on its portfolio. Shortly before the Paris talks began, ten major global oil and gas companies announced their support for the 2 degree target.
And then, a remarkable agreement was achieved in Paris. Perhaps it was the increasing number of natural disasters and costly damages countries have linked to climate change. Perhaps it was the excitement over how quickly the cost of renewable energy and energy storage has plunged. More likely, it was a combination of these factors and more, coupled with skillful negotiation and diplomacy that led to the historic climate accord.