Discover more from ESG on a Sunday
Week 15: Stuck in a fossil past, present and future
In this issue: ▸ Where are we now? ▸ Who owns the fossil reserves? ▸ Who invests in and manages the fossil assets? ▸ Why is to so hard? ▸ And much more!
I hope everyone is well and ready for a new edition of ‘ESG on a Sunday’!
This week – and the coming weeks – is all about the transition to a sustainable future, seen through the lens of the different energy sources.
Today, we focus on fossil fuels.
Where are we now?
In order to develop systemic improvements that work for the many, not just the few, the key question is always if we know enough, and if we truly understand how things are interconnected.
I think an important part of the process is to understand where we are. It’s not about right or wrong. It’s about our dependence on energy sources that apparently undermine our ability to sustain our civilisation over time. It’s a structural problem.
The world has agreed that we need to change that, move away from fossil fuels, and that we need to do it fast. But what will that transition look like? And how likely is it that we will make it?
On the one hand we have scientists who tell us that it is alarming, it is late, and we don’t have any time left. On the other hand we have a world – which we have built – that remains stuck in the machine.
Let’s start by looking at who owns the fossil reserves and what is currently happening in this space.
Who owns the fossil reserves?
Approximately 360 to 286 million years ago, long before the dinosaurs, many plants and organisms filled the swamps and oceans of the Carboniferous Period. When the organisms and plants died, they sank and eventually formed different types of fossil fuels.
Nowadays, fossil fuels are still the world’s dominant energy source, accounting for around 82% of the global energy supply. The U.S. is the biggest overall producer, producing just under 20% of all global fossil fuels, followed by Russia and Iran. Next on the list is Canada, which produces just under 5% of all fossil fuel.
So where do all these hydrocarbons come from? The U.S. and Saudi Arabia, sure, but there are some intriguing insights to be gleaned from a company called 911 Metallurgist, which has pulled together data from more than a dozen sources to create animated maps showing which countries currently produce the most oil, coal, and natural gas.
Below is one of their maps. You can see the rest here.
Also, this site will give you a kindergarten-like feeling in terms of statistics and data, enabling you to think twice next time you hear someone mention their net-zero pledges or when you read about the surge in investments in renewable energy sources around the world.
Yes, we are quadrupling these renewable investments right now, but the scale is not there, and we have no choice but to fuel our world with fossil fuels for the foreseeable future. Even nuclear energy, that was off the chart only couple of years ago, is back in favor. The latest discussions on the EU taxonomy indicates that nuclear might be classified as green source of energy, and if that happens, then investments in nuclear – that are nowadays regarded as not so profitable – may become more profitable again.
Who invests in and manages the fossil assets?
To answer that question, we essentially need to look at this InfluenceMap report. It gives you an idea of the immense efforts we need to put into action – yesterday – to make the transition away from fossil fuels happen.
So what is the short version? The research considers 300 publicly listed companies who control the largest amounts of fossil fuel (thermal coal, oil and gas) reserves and production. It links these assets to the world’s largest 4,000 asset owners, 4,000 asset managers and almost 60,000 listed funds.
The report is part of the FinanceMap project which examines asset managers through a climate lens. Visit their website here.
Why is to so hard?
A key issue is the unburnable Wealth of Nations, i.e. the fossil reserves that nations need to keep in the ground to make all of this happen.
States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental and developmental policies. But also the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction.
Two decades of climate negotiations have not resolved this tension, which has kept the Parties from addressing fossil fuel supply under the UNFCCC.
In this report – Fossil fuel production in a 2°C world: The equity implications of a diminishing carbon budget – you find out what this really means for countries that are heavily dependent on fossil reserves. And it is a tough reading.
What about fossil fuel subsidies?
For the most part, the public debate on fossil fuel energy subsidies has been governed by two arguments.
From the position of the profit-maximizing firm, the economic rationale has gravitated towards the issue of cost-competitiveness: The reduction of emissions requires a cutback of energy consumption which, when operating through the pricing mechanism, drives up the cost of inputs. Increases in fossil fuel prices may therefore harm competitiveness.
On the other hand, the environmental argument stresses the importance of cost transparency and externalities.
However, there has also emerged a body of research which introduces a second layer to the argument of cost-competitiveness by emphasising that an increase in energy prices may not necessarily be detrimental to economic performance.
This study provides evidence on this insight by examining the effect of a change in fossil fuel subsidies on the manufacturing industry of an oil-rich Middle Eastern economy. Using a firm-level micro data set on manufacturing enterprises, it shows that increases in fossil fuel energy factor prices lead to improvements in productivity as well as efficiency and notable business upgrading.
What about Big Oil executives?
White knights or horsemen of the apocalypse? What are the prospects for Big Oil to align emissions with a 1.5°C pathway?
According to a new study, lucrative pay and share options have created an incentive for oil company executives to resist climate action. The study thus casts doubt on recent net-zero commitments by BP and Shell.
Compensation packages for CEOs, often in excess of $10m (£7.2m), are linked to continued extraction of fossil fuels, exploration of new fields and the promotion of strong market demand through advertising, lobbying and government subsidies, the report says.
Needless to say, these “compensation packages” with executives runs counter to efforts around the world to keep global heating to 1.5-2C (2.7-3.6F) above pre-industrial levels.
Essentially, these boardroom rewards underpin a skewed corporate logic that is slowing the world’s path to decarbonisation.
What about politics?
Well, the stakes are, as you can imagine, very high. The EU taxonomy that is supposed to classify green assets and enable an easier definition of sustainable and non-sustainable assets looks right now more and more like a fossil lobby industry product.
The financial community, which was supposed to benefit from all this, is mainly, as usual, quiet about it. The fact that the financial community really needs the taxonomy to enable the transition of capital flows is sort of forgotten.
The fossil industry lobbies ministers and politicians, while the financial industry stands on the side-lines knowing that compromises will entail significant financial opportunities that will not necessary work for the planet, but certainly for the bottom line. And it sort of looks good and has a good packaging.
The latest proposal drafted by the European Commission suggests that fossil gas does no harm to the environment, and therefore could be included as Sustainable for Finance under the EU Taxonomy.
These are baseless claims and are opposed to climate science. Introducing fossil gas in the EU taxonomy is firmly against the recommendations of the Commission’s Technical Expert Group and caves in to the demands of the gas lobby.
In this open letter in March 2021 to President von der Leyen, Vice-President Timmermans and Dombrovskis as well as Commissioner McGuinness, no less than 226 scientists, financial institutions and civil society groups try to address this.
And the protests seem to have made a difference. According to an internal draft that commissioner McGuinness plans to send out on April 21, the delegated act (secondary legislation) implementing the Taxonomy will be published that day, but without the controversial sections concerning fossil gas.
Market participants' first reaction to the leak was that the Commission was delaying a decision on whether gas could enter the Taxonomy, as Germany and east European countries have called for, but which is vehemently opposed by environmentalists.
In the fourth quarter of this year, gas would be considered for inclusion in the Taxonomy alongside nuclear power.
So renewables are clean, right?
Let’s stay positive and focus on renewables instead. After all, that is where the future lies. But it’s not that simple, unfortunately, as this article on the solar production in Xinjiang makes very clear.
In the wilderness of the Gobi Desert sit two factories that churn out vast quantities of polysilicon, the raw material in billions of solar panels all over the world.
It’s a four-hour drive from Urumqi, the capital of the Xinjiang region at the centre of China’s crackdown on Uyghurs and other Muslim minorities. The only structures that rise up among miles of rolling snow-covered fields are the chimneys of coal-fired power plants, belching white smoke.
Almost no one outside China knows what goes on inside these factories, or two others elsewhere in Xinjiang that together produce nearly half the world’s polysilicon supply. State secrecy cloaks the raw material for a green boom that researchers estimate will include a nearly tenfold increase in solar capacity over the next three decades.
Solar is set to grow by about a quarter this year after record installations in 2020 backed by almost $150 billion in investment.
That means millions of homeowners buying solar panels everywhere face moral uncertainty:
Embrace the green future, and you have no way of knowing if you're purchasing products made by forced labour and dirty coal.
The article is a chilling read. And it does make you think that we need to think much more about how we make the transition so it does not become a transition that creates new systemic issues we need to deal with.
That’s all for now. Next week will be about nuclear and hydropower!