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Introduction to Fossil Fuel Divestment

Originally published at The Beam

An introduction to Fossil fuel divestment  — what is the current status and does it work? by Maik Günther, from the Heinrich-Böll-Foundation.

“Fossil fuel divestment has grown into a truly global movement, with institutions divesting on every continent and permeating every sector of society.”

Fossil Fuel Divestment
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More than 600 institutions across 76 countries, representing $5 trillion in assets, have committed to divest from fossil fuels. This includes, among others, the world’s largest sovereign wealth fund  Norway’s GPFG , and financial giants Allianz and AXA, the Rockefeller Brothers Fund, as well as the cities of San Francisco and Berlin, and Stanford University.

For a social movement that since 2012 has been challenging the business model of the fossil fuel industry by calling to divest  — removing capital from stocks, bonds or funds invested in fossil fuel companies  — this is momentous.

The Dawn of Fossil Fuel Divestment

The argument that investing in fossil fuels  —  oil, coal, and gas  —  is morally problematic started to take shape on US campuses in 2011. Motivated by previous divestment campaigns, for example those against South African Apartheid in the 1980s or the tobacco industry in the 1990s, students urged university boards to withdraw their school’s endowments from fossil fuel companies. Their argument? Investing in companies that contribute to the destruction of the earth contradicts the key mission of higher education in preparing younger generations to shape and protect that earth.

Inspired by these ideas, in 2012 Bill McKibben, founder of environmental NGO 350.org and one of the leading figures-to-be of the global fossil fuel divestment moment, published a landmark article in Rolling Stone magazine. Therein, McKibben addressed three numbers:

  • 2 degrees Celsius: The maximum amount of temperature rise the planet can bear before dangerous climate change occurs
  • 565 gigatons of carbon dioxide: The amount of emissions that can be released before that point is reached (the so-called global carbon budget)
  • 2,795 gigatons of carbon dioxide: The amount of emissions that would be released from burning all reserves currently listed in fossil fuel companies.

These figures, according to McKibben, meant that the unexploited reserves of oil, coal, and gas identified by the global fossil fuel industry equated to five times more carbon than can be emitted before the planet’s temperature would rise by more than two degrees. In other words, if fossil fuel companies eventually extracted and sold every reserve listed in their balance sheets, catastrophic climate change is bound to occur.

To address this mismatch between burnable and to-be-burned carbon, 350.org launched its first divestment campaign in 2012. Building on the students’ ideas, the activists called upon any organization that serves the public good  — mostly governments, educational and religious institutions  —  to cut their ties to the fossil fuel industry. They also urged society to view the fossil fuel industry in a new light and to distance itself from this “rogue industry, reckless like no other force on earth. It is ‘Public Enemy Number One’ to the survival of our planetary civilization.”

Since then, a number of universities, faith-based organizations, foundations, and cities have, to varying degrees, committed to divest from fossil fuels. The movement particularly picked up momentum through divestment announcements by a number of symbolic institutions and endorsements by opinion leaders. In 2014, the World Council of Churches, representing half a billion Christians, ruled out all fossil fuel investments. The Guardian Media Group divested its funds, following its subsidiary newspaper’s “Keep it in the Ground” campaign.

In 2015, the UNFCCC  — the UN Secretariat overseeing climate change  — backed divestment as “it sends a signal to companies, […] that the age of ‘burn what you like, when you like’ cannot continue.” That same year, the G7 called for a complete decarbonization of the world’s economy. And Leonardo DiCaprio, during an address at Davos’ World Economic Forum in 2016, urged to stop allowing “the corporate greed of the coal, oil and gas industries to determine the future of humanity,” and to “leave fossil fuels in the ground where they belong.”

Fossil Fuel Divestment in the Financial sector

While sparked by a moral imperative  —  “If it’s wrong to wreck the planet, then it’s also wrong to profit from that wreckage”  — moral concerns, over time, became supplemented with concerns about economic risks from stranded assets, and legal attention about fiduciary duty.

Whilst climate-associated risks were certainly present before the campaign, as the movement progressed, the financial sector started to recognize the economic risks of remaining invested in fossil fuels. In particular, the notion of stranded assets, introduced by financial think-tank Carbon Tracker in 2012, signaled a turning point: if the world’s governments fulfill their pledges to tackle climate change by cutting carbon emissions (exacerbated by Paris’ push toward a 1.5 degree future), close to 80% of global fossil fuel reserves would have to be kept in the ground, creating the so called carbon bubble and making investments in them worthless, or stranded.

Today, financial institutions increasingly recognize this risk. In 2014, Bank of England Governor Mark Carney publicly stated that “the vast majority of reserves are unburnable,” while calling for investors to consider the long-term impacts of their decisions. In 2015, the International Monetary Fund and the World Bank called to cut “harmful” fossil fuel subsidies. And a recently launched report by the G20-Financial Stability Board  —  incorporating the world’s most powerful central bankers and finance ministers  — urged companies to disclose climate-related risks of their operations.

In addition to regulative bodies, climate concerns also entered the for-profit financial mainstream  —  including large insurers, pension funds, and banks  —  with companies such as AXA and Allianz divesting, and Goldman Sachs, HSBC, and Blackrock, for instance, issuing climate change warnings and calling on investors to incorporate climate risk screenings for new investment decisions.

Besides asset risks, divestment also ignited a debate among legal scholars warning that trustees and investors who fail to consider climate risks may jeopardize their legal duty as fiduciaries. UNFCCC Executive Secretary Christiana Figueres, for instance, while linking the dangerous rise in greenhouse gases in large part to “past investments in […] fossil fuels,” warns that “institutional investors who ignore climate risk face being increasingly seen as blatantly in breach of their fiduciary duty.”

Taken together, fossil fuel divestment today has grown into a truly global movement, with institutions divesting on every continent and permeating every sector of society  — from purpose-driven organizations, to cities and faith groups, even mainstreaming into the financial sector. The movement has become the fastest growing divestment campaign in history and, in fact, “one of the great movements of the 21st century,” as heralded by Hans Joachim Schellnhuber, one of the world’s most influential climate scientists.

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Energy Darwinism: The Case for a Level Playing Field

by John Brian Shannon | February 2, 2015

By now, we’re all aware of the threat to the well-being of life on this planet posed by our massive use of fossil fuels and the various ways we might attempt to reduce the rate of CO2 increase in our atmosphere.

The First Option: Economic Incentives to Lower Fossil Fuel Use

Disinvestment in Fossil Fuels (A) or Outright Elimination of Fossil Fuel Subsidies (B)

A) Divestment in fossil fuels is under discussion as one way to lower carbon emissions

The case for divestment generally flows along these lines; By making investment in fossil fuels seem unethical, investors will gradually move away from fossil fuels into other investments, leaving behind a smaller, but hardcore cohort of fossil fuel investors.

Resulting (in theory) in a gradual decline in the total global investment in fossil fuels, thereby lowering consumption and CO2 additions to the atmosphere. So the thinking goes.

It worked well in the case of tobacco, a few decades back. Over time, fewer people wanted their names or fund associated with the tobacco industry — so that the tobacco industry is now a shadow of its former self.

Interestingly, Solaris (a hybridized tobacco plant) is being grown and processed into biofuel to power South African Airways (SAA) jets. They expect all flights to be fully powered by tobacco biofuel within a few years, cutting their CO2 emissions in half. Read more about that here.

b) Another way to curtail carbon emissions is to completely remove fossil fuel subsidies from the equation

In 2014, the total global fossil fuel subsidy amounted to $548 billion dollars according to the IISD (International Institute for Sustainable Development) although it was projected to hit $600 billion before the oil price crash began in September. The global fossil fuel subsidy amount totalled $550 billion dollars in 2013. For 2012, it totalled $525 billion dollars. (These aren’t secret numbers, they’re easily viewed at the IEA and major news sites such as Reuters and Bloomberg)

Yes, removing those subsidies would do much to lower our carbon emissions as many oil and gas wells, pipelines, refineries and port facilities would suddenly become hugely uneconomic.

We don’t recognize them for the white elephants they are, because they are obscured by mountains of cash.

And there are powerful lobby groups dedicated to keeping those massive subsidies in place. Ergo, those subsidies likely aren’t going away, anytime soon.

The Second Option: Reducing our CO2 footprint via a carbon tax scheme

But for all of the talk… not much has happened.

The fossil fuel industry will spin this for decades, trying to get the world to come to contretemps on the *exact dollar amount* of fossil fuel damage to the environment. Long before any agreement is reached we will be as lobsters in a pot due to global warming.

And know that there are powerful lobby groups dedicated to keeping a carbon tax from ever seeing the light of day.

The Third Option: Levelling the Subsidy Playing Field

  • Continue fossil fuel subsidies at the same level – without any carbon tax.
  • Quickly ramp-up renewable energy subsidies to match existing fossil fuel subsidies.

Both divestment in fossil fuels and reducing fossil fuel subsidies attempt to lower our total CO2 emissions by (1) reducing fossil fuel industry revenues while (2) a carbon tax attempts to lower our total CO2 use/emissions by increasing spending for the fossil fuel industry

I prefer (3) a revenue-neutral and spending-neutral solution (from the oil company’s perspective) to lower our CO2 use/emissions.

So far, there are no (known) powerful fossil fuel lobby groups dedicated to preventing renewable energy from receiving the same annual subsidy levels as the fossil fuel industry.

Imagine how hypocritical the fossil fuel industry would look if it attempted to block renewable energy subsidies set to the same level as fossil fuel subsidies.

In 2014, renewable energy received 1/4 of the total global subsidy amount enjoyed by fossil fuel

Energy Darwinism - Global Energy Subsidies (2014, in billions USD)
Energy Darwinism – The Case for a Level Playing Field Subsidy Regime. Global Energy Subsidies 2014. (billions USD). Image courtesy of IISD.

Were governments to decide that renewable energy could receive the same global, annual subsidy as the fossil fuel industry, a number of things would begin to happen;

  • Say goodbye to high unemployment.
  • Say goodbye to the dirtiest fossil projects.
  • Immediate lowering of CO2 emissions.
  • Less imported foreign oil.
  • Cleaner air in cities.
  • Sharp decline in healthcare costs.
  • Democratization of energy through all socio-economic groups.

Summary

Even discounting the global externality cost of fossil fuel (which some commentators have placed at up to $2 trillion per year) the global, annual $548 billion fossil fuel subsidy promotes an unfair marketplace advantage.

But instead of punishing the fossil fuel industry for supplying us with reliable energy for decades (by taking away ‘their’ subsidies) or by placing on them the burden of a huge carbon tax (one that reflects the true cost of the fossil fuel externality) I suggest that we simply match the renewable energy subsidy to the fossil subsidy… and let both compete on a level playing field in the international marketplace.

Assuming a level playing field; May the best competitor win!

By matching renewable energy subsidies to fossil fuel subsidies, ‘Energy Darwinism’ will reward the better energy solution

My opinion is that renewable energy will win hands down and that we will exceed our clean air goals over time — and stop global warming in its tracks.

Not only that, but we will create hundreds of thousands of clean energy jobs and accrue other benefits during the transition to renewable energy. We will also lower healthcare spending, agricultural damage, and lower damage to steel and concrete infrastructure from acid rain.

In the best-case future: ‘Oil & Gas companies’ will simply become known as ‘Energy companies’

Such Energy Darwinism will reward investors that simply but profoundly migrate from fossil fuel energy stocks, to renewable energy stocks within the same energy company or group of energy companies.

At the advent of scheduled airline transportation nearly a century ago, the smart railway companies bought existing airlines (or created their own airlines) and kept their traditional investors and gained new ones.

Likewise, smart oil and gas companies, should now buy existing renewable energy companies (or create their own renewable energy companies) and keep their traditional investors and gain new ones.

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