Why Nations Will Meet Paris Climate Agreement Goals

Paris Agreement and Climate Change Risk:

The Paris Agreement was the first time all countries came together to work toward a reduction in global greenhouse gas emissions in an effort to mitigate climate change. In a 2015 study published in Nature if the world was able to maintain its commitments toward meeting the Paris Agreement goals then it could be expected that:

  • A third of oil reserves
  • Half of gas reserves
  • 80% of known coal reserves

will stay in the ground. Although this would be good for the overall health of the planet by reducing impact of climate change, it would be disastrous for resource extraction based companies. However, with recent reports, companies that work on the extraction of oil, gas and coal may not have much to worry about if current trends continue. Even with the Paris Agreement accords we see many countries not meeting their goals and actually increasing their emissions. Globally, we see more coal plants coming online to support developing countries appetite for growth. Also, we continue to see increases in emissions from the transportation sector.

Is this growth in emissions a hiccup and expected to be short lived? Some would argue that it is.

Why could this be just a hiccup?

Due to growing global climate change risk countries and companies continue to take steps to transition from the burning of fossil fuel. With decreasing costs of fossil free alternatives, the effort to debarbonize is becoming much easier.

The most recent levelized cost of energy studies, show all PV solar and wind to be cost competitive with natural gas and coal fired power plants. This was not necessarily the case at the signing of the Paris Agreement. Costs will continue to decrease for these generation assets and it will be more difficult to fund more expensive fossil-fuel alternatives. Further, as more renewable energy facilities are built out, the diversity of locations for these systems will reduce the intermittency issues that have been a concern for power grid operators. Not only the number of systems and the diversity of location are a benefit, but so is the significant ongoing decrease in the price of battery storage. On a regular basis, new reports are published on the ongoing decreasing cost of battery storage.

The technology is coming quickly and is ready for deployment. Much of the barrier is now political. Globally, risk adverse elected officials responding to very powerful fossil fuel interests, has resulted in an unlevel playing field with markets and regulations not properly accounting for and allowing new clean energy technologies.

What happened after the Paris Agreement?

 It was expected that when the Paris Agreement was signed  everyone was ready to go and begin to implement all these climate change mitigating measures. The fact of the matter is that there were many well meaning pledges, but the economic and political reality was not yet there for many parts of the world. Although we needed these goals to be met sooner rather than later, it takes time.

Technologies needed to be further developed and costs had to continue to decline. The financial markets and capital providers had to become more comfortable with valuing and funding these new technologies. Government regulators and policy makers had to better understand the barriers to deploying these systems and start making the appropriate changes that would not hinder the deployment of clean energy systems. Finally, the clean energy sector needed more allies and a bigger voice to compete with the more powerful fossil fuel lobby. 

Winds of Change

Financing and Investment in Clean Energy

Things are looking up. Specific to investing in clean energy, in 2017, clean energy investment outpaced fossil fuel investment by a significant amount, $333 billion vs $144 billion, respectively.  A specific funding instrument growing in popularity are green bonds. They are becoming one of the largest investment vehicles for energy efficiency and renewable energy investments. In 2018, it is expected that there will be $250 billion in green bond new offerings. This is 60% higher than 2017, which was $155 billion.  2017 saw a 60% increase in investment from 2016 (See graph below).

Source: Bloomberg

Political Winds are Changing

On the political side, at least outside of the US, we see a more robust shift to taking serious steps toward decarbonization and reducing climate change risks. The European Parliament is getting more serious in supporting plans to facilitate EU capital markets to meet long-term sustainability goals, which includes decarbonization, disaster resiliency and resource efficiency.

On May 29th the European Parliament adopted the sustainable finance resolution. Which includes:

  • Rules to orient financial markets towards environmental objectives
  • Policy framework to encourage investments into sustainable assets
  • Divestments from fossil fuels and unsustainable energies

The first two items are key areas that all countries must further develop to ensure Paris Agreement goals are met and exceeded. Without the proper market and regulatory framework in place, the investment community and companies will be less willing to transition to cleaner technologies. Item three, divestments are already happening. They will only become more rapid as the rules and frameworks around clean energy are developed.

Divestment Continues

What we are seeing in the market in regards to divestment should provide some hope for clean energy and concern for fossil fuel interests.

For example, hedge funds are seeing a 50% increase in demand for responsible investment offerings from current and prospective investors. This is according to a survey of about 80 managers from the Alternative Investment Management Association.

Another significant move was made by the state of New York and and New York City to actively divest from existing and future fossil based investments. To date, endowments and portfolios managing over $6 trillion are actively divesting from fossil fuel assets. Pension funds have come to the realization that they must protect their portfolios from climate change. Fossil fuels are not the future and their investments are at risk.

Stranded Assets Due to Climate Change

As divestment occurs, one of the primary concerns is the threat of fossil fuel stranded assets. These are largely reserves that will not be used as global markets move to clean energy resources.

What is a stranded asset? According to University of Oxford Smith School and Enterprise and the Environment, a stranded asset are “assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities and they can be caused by a variety of risks.”

At risk are assets listed on the financial statements of energy producers and a reduction in anticipated cash flows for future production which may be reflected in company stocks.

Risky Business

Oil and gas companies may see transitioning their business model to clean energy as risky. Some have made some initial transitions, Total, Statoil, Shell and BP for example. At this time, their clean energy investment is still minor compared to their overall fossil fuel investment strategies. For example, of Shell’s $30 billion investment budget only $2 billion goes to renewables.

Although this climate change transition may be risky, not paying serious attention and taking serious steps toward transitioning to clean energy assets may be even more risky. There is a lot of uncertainty as to the speed to which this transition will happen. A miscalculation in the speed of this trend could have dire consequences for fossil fuel companies. A recent report by the Oxford Institute for Energy Studies, “The Rise of Renewables and Energy Transitions,” lays out the significant risks of stranded assets that could be faced by those who do not choose wisely ( a little Indiana Jones reference). Moving to be an integrated energy company rather than an oil and gas pure play is probably the most appropriate choice in the current energy landscape. A recent study by Wood Mackenzie, finds that over the next 20 years renewables will be the fastest-growing primary energy source worldwide. They anticipate average annual growth rates of 6% for wind and 11% for solar. In contrast demand for oil, is anticipated to grow about 0.5% per year.

Growth in Renewable Energy vs. Fossil Fuels

Concerns over climate change risk are real and are being taken seriously by financial decision makers and policy makers. This would suggest that fossil fuel companies can no longer take a wait and see approach. The technology and markets are changing rapidly and for their own viability and of the communities they serve, they probably should get on board.

 

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With Climate Change, Where Will Be the Next Energy Capital?

No matter how civic leaders try to spin it, the Houston economy is still very much tied to oil and gas. Below are three reports that recently came out on the state of the economy of Greater Houston area. You will see that each report highlight the fossil fuel industry as being the economic engine for Greater Houston area. There is little mention of any other economic factors, other than services, which are largely here to support the fossil fuel industry. When we look at the global activity to decarbonize the economy to mitigate climate change, this continued reliance on a single economic driver may be a problem.

Economic Outlook for Greater Houston

Texas A&M Outlook for the Texas Economy –

  • Houston posted the largest monthly increase with 8,000 jobs, half of which occurred in professional
    and business services (often linked with the region’s energy sector).
  • The Greater Houston region added 30,000 jobs in the first quarter alone amid strength in the energy and manufacturing industries. (the manufacturing is largely oil and gas related.)
  • Increased drilling activity and weaClimate Change and Texas Economykness in the U.S. dollar supported 5,800 manufacturing jobs over
    the past two months. At the metro level, manufacturing employment surpassed 4 percent growth seasonally adjusted annual rate (SAAR) in both Austin and Houston, translating to 900 and 1,800 industry jobs this year, respectively.
  • The wave of professional and business service jobs grew higher, adding more than 50,000 jobs across the state in just six months. Many of these jobs supplement the energy industry and are located in the financial sectors of Dallas and Houston.

Greater Houston Partnership – Economy at a Glance

  • The region’s leading exports in ’17 were petroleum products ($18.2 billion), basic chemicals ($12.9 billion), oil and gas extraction ($11.5 billion), agricultural, construction and mining machinery ($3.5 billion) and plastics and resins ($3.4 billion).

Greater Houston Partnership Employment Forecast 2018

Approximately one-third of Houston’s GDP is tied directly to oil and gas. This figure doesn’t include energy’s impact on wholesale trade, transportation, and professional services. Nor does it account for how much of their paychecks energy workers spend at the grocers, in local restaurants or at the drug store. Factor in those expenditures and energy’s impact on local GDP is significantly higher.

Risk of Decarbonization

Although it may be less apparent in the US, there is a global push to decarbonize our energy and transportation systems. My concern is that the Greater Houston region is underestimating the pace of this global energy transition. This is problematic for the Gulf Coast in the mid to long-term. For the short-term things are looking pretty good with oil prices lingering around $70 a barrel. However, when we look at global factors relating to the decarbonization of our world economy, it is hard to be as optimistic. Much of the world is taking climate change seriously and is taking steps to mitigate greenhouse gas emissions.

Some indications of the risk include:

Climate Change Policies
Carbon Brief Map of Climate Change Policies

Oil and Gas Majors Are Taking Note of Climate Change

The large major oil and gas companies are taking note of the global climate indicators and appear to be conceding to some degree that business-as-usual may need to change. Shell and BP are both publishing reports in 2018 that will provide greater insight into operational risks due to climate policy. The realize the near term political climate is pushing for policies that are intent on keeping the planet below two degrees Celcius temperature increase. Chevron has provided some insight as to what the near to mid-term would look like with lower oil demand due to climate-related policies. Chevron does not see peak demand in the near term but concedes that there is a future where there will be less oil demand. This will increase competition among oil and gas companies and result in lower cash flows. Exxon Mobil and BP both see peak demand coming in the next couple of decades. The peak is driven by a shift to renewables and to electric vehicles, as well as improved efficiency of internal combustion engines.

Greatest Risk is Shift to Electric Vehicles

As seen in the LNNL graph below 72% of petroleum goes to transportation. The longevity of the oil and gas market is driven by the continued consumption of oil by the transportation sector. However, forecasts point to a growing number of EVs and improved efficiency of autos which will lessen oil demand.

Climate Change Changes Energy Mix

Lawrence Livermore National Lab US Energy Consumption 2017

BP predicts 300 million electric vehicles by 2040. This will account for 15% of all vehicles. The most recent Bloomberg New Energy Financing research estimates that by 2040 there will be 530 million EVs on the road. This potentially could displace 8 million barrels of oil per day, 336 million gallons. By 2040, over 50% of car sales will be EVs. Recently, Aurora Energy Research reported in Oilprice.com that similar to the BNEF report, it sees 540 million EVs on the road. EVs will make up a little over one-quarter of total vehicles on the road. More concerning is that the firm estimates that with EVs and improved efficiencies of internal combustion engines (IEC) total revenue loss by oil and gas companies may be around $21 trillion.

China Leads the Way

Who is leading the pack? China. Being a leader in EV technology and high-tech manufacturing is one of the key focus areas of China.  As part of its Made in China 2025 strategy, the government is pouring billions of dollars into EVs to make it happen. When the worlds second largest economy is looking to electrify the transportation sector, primarily driven by strategic concerns related to importing much of its oil and gas supply and the choking smog largely attributed to the internal combustion engine, it may be time to think beyond the short-term gains being reaped from the most recent resurgence of the regions oil and gas sector.

Natural Gas May Not Pick Up the Slack

As more EVs are on the road more power generation will be needed.

It is possible that combined cycle natural gas plants will be built to provide the additional power required to power the fleet. However, with unsubsidized renewables having a similar levelized cost of energy as natural gas plants,

building more natural gas plants to offset the decrease in fossil fuels used to fuel the transportation sector is not certain.  A recent Greentech Media analysis finds lithium-ion storage looks to compete head to head with gas peakers by 2022 and beat out peakers by 2027. See below.

Climate change and energy storage

Greentech Media Image – Storage and Nat Gas Peakers 

Where are Public Leaders?

In the Greater Houston area there needs to be more leadership to diversify beyond the oil and gas sector. There has been much excitement around how the Greater Houston survived much of the last oil bust cycle due to its growing export market. However, when you look at what was being exported, a good bit of it was and continues to be petroleum products.

The Greater Houston area must take concrete steps to seriously diversify the region’s economy. The Amazon HQ snub should be a wake-up call. Dallas is more attractive than Houston to Amazon.

Exporting more oil and gas products vs. importing is not really diversification. Further, it does nothing to limit the reliance of the economy on the fossil fuel industry. Houston is not seen as anything more than an oil and gas town. Otherwise, we would not have been the only large city not making it to the top 20 of the Amazon search.

There was a step forward with the announcement of the new Innovation District in Midtown. This is a $100 million project led by Rice University, in partnership with the city and business leaders, to kick-start the high tech start-up community. Hopefully, there is more being planned than this one initiative.

How a Rapid Transition to Electric Vehicles Puts Gulf Coast at Risk

I have been discussing the double climate risk faced by the Texas Gulf Coast over the last year. Physical climate risk due to extreme weather and economic risk because of a decarbonizing economy.  This week, the economic risk became more apparent. In BP’s latest energy report, we see a decarbonizing global economy, with the adoption of electric vehicles (EVs) being one of the areas that may pose the greatest risk.

The EV Transition

Currently, 70% of total crude in the US goes to gasoline and diesel sales. With most of the major auto

Chevy Volts charging under a solar array

companies pledging to have all EV vehicles or at least multiple EV cars available in the next few years, it is expected that demand for crude oil could be peaking more quickly than expected. Some examples of automaker pledges include General Motors having 25 EV models available by 2023; Toyota will offer EV model options for all vehicles in its fleet by 2025; Daimler and BMW anticipate 15% of vehicle sales by 2025 will be EV; Ford is investing $4.5 billion in EV’s; Volkswagen plans on having 30 models by 2025 and anticipate 25% of sales will be EV’s; Volvo announced all vehicles sold after 2019 will be EV’s or hybrids. Everyone knows what Tesla is up to. So, we see now not just high end, luxury segment going EV, we see cars being introduced to the wider public at more acceptable price points.

The automakers are not doing this because they necessarily care about the impact of their vehicle’s emissions on climate change. Much of these announcements are being driven by governments who care about climate change and are trying to meet their Paris Climate Accord agreements. A good way to reach these goals is to decarbonize their domestic fleets. To name a few, India, England, the Netherlands, France, Germany and Scotland have all made announcements to end sales of diesel and gas-fueled vehicles in the next 20 years. China has also made a pledge to decarbonize its fleet, but has yet to set a firm date. Although the United States Federal Government is not taking the climate threat seriously, the rest of the world is and that will have a significant impact on the US economy, particularly the part of the economy that produces the oil and gas.

Oil Projections Largely Slowing for Transportation Fuel Use

Projections vary considerably as to the rate at which EVs will be adopted. ExxonMobil and the DOE’s Energy Information Administration anticipate fairly low and slow EV sales. However, both anticipate that overall growth of consumption will increase at a slower rate, not peak. This is due to significant growth of vehicle purchases in developing countries, such as China and India, combined with increasing fuel efficiency of vehicles.

BP, Statoil, Morgan Stanley, Wood Mackenzie and Bloomberg New Energy Finance all anticipate more robust demand growth for EVs. For example, Wood Mackenzie anticipates a net decrease in oil consumption by up to two million barrels per day by 2035 due to EV sales. BP anticipates significantly slower growth of transport fuels out to 2040.

BP finds that during the last 25 years fuel demand increased by 80%. According to their new report, which assumes an “evolving transition” the next 20+ plus years will see significantly lower growth of 25%. Evolving transition is the assumption that technology, social preferences, and policies continue to evolve at the same rate as the present. In this scenario, the outcome is that due to EVs and efficiency gains, the amount of fuel consumed in 2017 will be about the same in 2040.

BP goes a step further and runs some models that consider a globe that bans internal combustion engines. We have already started seeing this in some countries. In this alternative scenario, we see that by 2040 all car sales will be EV and about 66% of total vehicle miles traveled will be with an EV. This is about double what would be anticipated in the evolving transition scenario.

The fact of the matter is that the oil industry may be at risk with this transition, and more importantly the livelihood and communities of the Upper Gulf Coast. Maybe some of this risk will be mitigated by the increased use of natural gas to fuel the additional power plants needed to charge all of the new EVs.

Barriers and Opportunities

There are major hurdles to significant demand growth in the deployment of EVs. The upfront cost of EVs remains higher than gasoline and diesel powered vehicles. Further, the charging infrastructure is not wide-spread enough to adequately power up a large EV fleet. There is also the problem, that like myself, a good portion of the population holds on to their vehicles for about 10 years.

That being said, the largest cost to EVs, battery prices are coming down very quickly and continue to decrease. The cost in 2010 was $1,000 per kWh. Today the prices is $209 per kWh with an anticipated cost of $100 kWh by 2025. Which according to Bloomberg New Energy Finance could be the tipping point for EVs. Also, there is a very large push to build out a more robust EV charging infrastructure. A lot of this new infrastructure may occur with the Volkswagen Diesel Emissions settlement. There is a discussion of approximately 2,800 stations being installed with the settlement funds.

The likelihood of these dire scenarios coming true is largely driven by the cost of EVs and the availability of charging infrastructure to conveniently recharge these vehicles in and out of town. The growing demand to decarbonize our lives and subsequent policy and market changes will also have a material impact.

Gulf Coast leaders should not take a wait and see approach. It is great that the region is coming out of its latest oil induced hangover. The problem is that you can tell a lot of our leadership is feeling pretty fat and happy again. We are again becoming complacent and less willing to take the steps to diversify the economy. We have a long history of falling back into business as usual as the oil and gas sector booms. After multiple crashes, why else would you still have a regional economy that is still largely fueled by the oil and gas industry?   The region can’t afford to become complacent. It should seize the movement to decarbonize and use our engineering and science expertise to our advantage.  There is no reason the region should not be leading the clean energy economy. Unfortunately, to our detriment, there does not seem to be a lot of desire to lead us in this direction. This is a problem. If the Amazon snub should tell us anything, it is that there may not be a lot of faith from outside business that the Gulf Coast can learn new tricks. Maybe they are right.

 

 

UPDATE : Climate Change has Put the Tiger in a Corner

UPDATE:

As I mentioned in my earlier post below, ExxonMobil is being much more aggressive than would be expected in its legal activity to clear its name related to climate fraud allegations. The company is fighting back with a much-increased level of intensity. In what some are saying is unprecedented, ExxonMobil is going directly after the attorney’s that are suing them.

This week it appears ExxonMobil’s attempt to play defense against multiple climate fraud lawsuits hit a significant roadblock. The case Exxon Mobil Corp et al v Schneiderman et al was filed with the US District Court and heard by Judge Valerie Camproni. This case argues that the suits filed by the New York AG Schneiderman and Massachusetts AG Healey, which claims ExxonMobil has committed fraud by not disclosing known climate risk, are politically motivated and in bad faith. Judge Camproni disagreed and dismissed the lawsuit with prejudice. This means that ExxonMobil cannot file a similar suit in the future. ExxonMobil is currently considering its next legal options

We will see what ExxonMobil’s next move is, but the findings of this case do allow the AG’s to move forward with their investigation, as well as provides optimism to others who filed similar suits.

ORIGINAL POST:

Back in May of 2017, I wrote a post on the double climate risk for the Gulf Coast region. To quickly summarize, the first risk is the physical risk that is being realized due to a rapidly changing climate. The second risk is that the region’s economy is fossil-fuel driven at a time when much of the world is trying to decarbonize. There is still significant debate as to how quickly this will happen and to what degree, but trends in technology, i.e. electric vehicles; an increasing push for more renewable energy, i.e. China and India;  would make one think a shift is happening more quickly than initially anticipated. This shift to decarbonizing is receiving growing support from the financial and insurance sector. On the financing side, we see a quickly growing green bond sector that is pouring considerable dollars into renewable energy, energy efficiency, and other green infrastructure projects. We also see growing demand from institutional investors for “green” investment opportunities. The insurance industry is also pushing for more decarbonization, as well as climate adaptation, due to the significant and growing risks of insured assets.

Kids Want Climate Justice

The lawyers are also getting involved. A variety of lawsuits have been filed in the last few years across the United States claiming harm to communities due to the burning and consumption of fossil fuels by industry. The oil and gas sector is getting a significant amount of attention from the legal sector, with ExxonMobil being one of the key targets. ExxonMobil is a focus of many due to the research the company conducted in the 1970’s that indicated the burning of fossil fuels contributed significantly to global warming and could result in significant climate change; they found an “emerging consensus that fossil fuel emissions could pose risks for society.” While they were finding these results and continuing to study how climate change would impact business operations, they were leading lobbying efforts to fight the adoption of greenhouse gas regulations. The claim that is being made is that Exxon Mobil knew about the climate risk but did not properly disclose this risk to shareholders. The legal action that appears to be getting the greatest traction is the State of New York Attorney General’s investigation into whether Exxon Mobil the statement the company made to its shareholders was consistent with its research findings on climate change. The California AG is also investigating whether ExxonMobil was implementing business strategies in line with their research findings but not disclosing this risk to shareholders. In all, there are 17 AGs investigating ExxonMobil on this issue.

 

Much of this AG activity has received expected legal pushback from ExxonMobil. The company also tried to limit any reputational damage with media campaigns on the company being a good steward and continued denial of any wrongdoing. Until this week, when it appears the company is fighting back with a much-increased level of intensity.  In what some are saying is unprecedented, ExxonMobil is going directly after the attorney’s that are suing them. ExxonMobil is looking at filing suit and getting depositions from lawyers involved in the climate suits. The company is claiming that the state AG’s and citizen groups are conspiring against ExxonMobil in a public relations and legal campaign. This campaign is believed by ExxonMobil to have started in La Jolla, CA several years ago.

So why is the 10th largest company on the planet, fighting back with such intensity? With the current occupant in the White House and the Republican domination of the legislative branch, there is no short-term regulatory risk to the company, at least in the United States. It is not likely that it is the legal suits they are most concerned about, either.

They are good prognosticators. Based on their research, they knew that climate change could be a business risk and was making business decisions based on this risk. (At least this is what the lawsuits claim.)  ExxonMobil is likely less concerned that the AG suits will prevail in courts; they have the resources to tie these up for years. What they are more likely concerned about is losing in the court of public opinion. Public opinion is driving demand for decarbonization and the market and investors are reacting accordingly. And why not, the costs of decarbonizing are at or soon to be at the same price point as business as usual. So it’s much easier for the public to get on board. Most people don’t care what their car is fueled with. They just want to have easy, inexpensive access to transportation.

The double risk is real for ExxonMobil. They have known for years that the climate change will impact their business operations and have made decisions accordingly. Now it is becoming obvious that there is more than the physical risk. There is the real risk of losing the support of the markets and public opinion. The Gulf Coast region should take heed of this growing double climate risk. ExxonMobil may be the canary in the coal mine.

 

Uncertainty in Climate Regulations Detrimental to the Environment and the Economy

A variety of climate risks are starting to have a noticeable impact on how we do business. These risks can be physical climate risk, both chronic and acute, which directly Inhofe_holding_snowballimpact operations; financial risks, such as divestment; regulatory/policy risks, such as carbon pricing or risk disclosure requirements; and reputational risks. In the next series of blog posts we are going to take a deeper look at each of these risks. The first will be with regulatory risk.

According to the Global Adaptation and Resilience Investment (GARI) Working Group 2016 survey, 78% of respondents see physical climate risk as being a very important concern and 53% ranked climate regulation risk as a very important issue that must be considered. Within the same survey, 68% of respondents are currently working on strategies to deal with anticipated changes in climate-related regulations.

Organizations must we willing to address the transitional risks associated with new policies and regulations that are likely to be adopted to mitigate climate change. New climate related regulations at the local, state and federal level have been and will continue to be considered. Some of the potential regulatory risks are related to pricing or taxing carbon emissions; change in land use zoning and subsequent loss of property value; new building and construction standards; new business continuity or insurance requirements; more requirements attached to state and federal funding for infrastructure development; and more stringent disclosure requirements. To add complexity to these regulatory changes, there is a distinct possibility that a lot of this action will be happening at the state and local level which will result in a patchwork of regulations and policy across the United States. For example, many state and local governments have vowed to move forward in battling climate change. California is one of the more vocal and active states in regard to climate policy; see the “Preserve California” legislative package.

A key area of interest for me is to what extent these companies are actually acting on these potential regulatory risks. The private sector gets very uncomfortable when there is uncertainty in the regulatory environment. In fact, although regulations are typically not highly desired, many corporations prefer regulatory certainty over a regulatory environment that is in flux. Organizations can at least plan when there is greater certainty. This is why we see some large corporations that have not traditionally been overly excited about climate regulation pushing for a carbon tax. A carbon tax is not too complex and it can be planned for and actively managed by corporations.

Unfortunately, the current Administration is creating a significant amount of uncertainty in the regulatory space. There is a definite desire by the current administration to roll back as many climate related regulations as possible. It appears the Clean Power Plan has largely been put on the back burner and there are a variety of efforts to roll back methane emissions and other Obama-era regulations. However, today July 29th, the US Court of Appeals for the DC Circuit just ruled that the EPA cannot suspend these rules.  This follows an earlier loss by the Administration when the Senate voted to reject the suspension of these rules.

This frenetic policy making process of the current administration to roll back regulations just because the word climate is associated with it is not good policy making. This is particularly a problem when the Administration does not understand the policies they are rolling back and how policy making works, particularly in regards to the dynamic we have in place with the checks and balances from the Courts and the representatives we have on the Hill. Further, for an Administration that is focused on economic growth, this yo-yoing back and forth between rules and regulations is not good for business. It leads to very uncertain business environment that reduces investment R&D, and economic growth.  To track policy uncertainty, Moody’s has published their Policy Uncertainty Index and currently it is at its highest point to date this year.

I am a fan of many of these climate regulations. I would like to see many of them stay in place. That being said, none of them are perfect and there is room for improvement. However, a wholesale rollback without any thought as to the impact on the environment, and particularly here, the impact it has on the ability to conduct business is highly problematic. There are common areas of concern and interest that both sides of the aisle can work on together. We have great examples of bipartisan work from Shaheen and Portman and Murkowski and Cantwell. So if we really want to make “America Great Again” it is important that the current Administration take a deep breath on their regulatory agenda, learn how the federal policy making process works and conduct policy making in a way that actually helps business and our communities.

 

Jumping the Gun on Climate Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig

Jumping the Gun on Carbon Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig