Divestment blueprint

The Carbon Tracker Initiative and Energy Transition Advisors recently published recommendations for fossil fuel companies to manage a future in which their assets will be stranded. Craig Morris investigates.

Carbon emissions

Stranded assets vs. stranded humanity.

Since the International Energy Agency (IEA) coined the term “unburnable carbon,” there has been a broad consensus that roughly three quarters of the world’s fossil fuel resources will have to stay in the ground. How can companies with these assets on their books respond?

The 42-page blueprint says that companies should mainly prepare for lower prices resulting from lower demand for fossil fuels. Firms that are able to post the greatest returns under such market conditions will fare the best, the analysts explain. In other words, the focus will not be on gross sales or revenue, but on profit margins.

Towards evaluating whether a firm is ready to respond to the energy transition, the first question the blueprint asks is: “Does management accept climate science?” Otherwise, these companies should ensure that board compensation should not be based on increasing the volume of assets, but rather with greater returns.

In that respect, the blueprint’s overview of how fossil fuel firms have responded to the climate debate is revealing. Exxon has stated it is “highly unlikely” that concern about global warming will lead to lower fossil fuel consumption, and Shell is quoted in the study saying, “[we] also do not see governments taking the steps now” to prevent the planet from warming by more than two degrees Celsius.

The question is not whether climate change is happening, but whether civilization will indeed respond by voluntarily leaving carbon in the ground. Whereas the blueprint criticizes Exxon and Shell for their stance, maybe these firms are right – we will continue to burn oil, gas, and coal at levels that will contribute to global warming.

The divestment recommendations for companies thus reads as a warning to these firms, who might see their fossil fuel assets become stranded. But how likely is that? One example given in the blueprint is Peabody Coal of the US, which wrote down around a billion dollars in assets in 2012. But is this example relevant? Peabody wrote down these assets because of a shale gas boom. The coal is still in the ground, and there is no policy in place to keep it there. When the price is right, Peabody (or some other company) will dig this coal up.

It’s worth noting that Shell was once a major player in the solar sector, and BP officially changed its name to Beyond Petroleum a decade ago (the campaign was canceled in 2013). The blueprint lists these and other examples when talking about companies diversifying “towards other industries in their comfort zone.” The wording is typical of the pseudo-relaxed business lingo in the paper. What exactly is a “comfort zone”? Renewable energy is a threat to the business models of these companies, particularly to gas and coal in the power sector, which is why Germany’s utilities RWE and E.On have mainly invested in renewables outside Germany, where these investments do not conflict with current assets. And E.On has decided that renewables are so incompatible with conventional energy that the firm will have to split into two entities for the transition. Renewable energy is not within these firms’ comfort zone.

In short, I’m not completely convinced. The blueprint calls on firms to change the way they evaluate risk, specifically taking account of the possibility of divestment. This advice is sound. Nonetheless, fossil fuel firms may be right in believing that the risk of true divestment is small. Germany recently had trouble implementing a modest levy on coal power, for instance. And outside the power sector, renewable energy is hardly a threat to oil at all (because most new renewable energy is electricity, whereas oil is used mainly as a source of heat and motor fuels).

Finally, no country has ever left affordable carbon in the ground. Under Prime Minister Margaret Thatcher, the UK stopped supporting domestic coal mining based on price, not as part of a climate policy. The real risk is therefore not that fossil fuel companies will fail to accept climate change. Rather, the world may continue to consume fossil fuels even as the consensus about and awareness of climate change grows.

Craig Morris (@PPchef) is the lead author of German Energy Transition. He directs Petite Planète and writes every workday for Renewables International.


Craig Morris (@PPchef) is co-author of Energy Democracy, the first history of Germany’s Energiewende.

1 Comment

  1. Nathanael says

    The key points economically are mostly present in Lazard’s Levelized Cost of Energy analysis, version 8.0.

    A — energy efficiency beats every form of power generation, and there’s still a lot of “low hanging fruit”

    B — Onshore wind has become so cheap that nothing except efficiency can beat it on LCOE

    C — Solar (utility scale) is one or two years away from being so cheap that nothing except efficiency and wind can beat it on LCOE. Already, “old coal” is the only fossil fuel which is competitive.

    D — Batteries from Tesla, debuting late next year, are cheap enough that they beat operating gas ‘peaker’ plants or diesel generators.

    That leaves the question of nighttime, or “fog” or “snow” demand in excess of wind power levels.
    E — What isn’t mentioned in Lazard’s analysis is hydro — in areas with hydro, especially pumped-storage hydro, this will readily cover the deep nighttime demand.

    The residuum of nighttime non-hydro power not covered by batteries is truly low. It’ll probably be covered by old nukes for a while, until they’re retired.

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