Decarbonization and the Fossil Fuels – What Happens Next?

Dieter Helm—

The simple answer is that if Paris is the best we can do to decarbonize the global energy system, the companies can relax and carry on as usual. Paris keeps the climate change bureaucracy in business, and the UN in the game, but it emphatically does not do much to bring down emissions. Even on the most optimistic reading, the pledges from the countries do not add up to 2 degrees, and it would be rash to assume they are going to do much to meet their voluntary offers. Shareholders have not been rattled and few appear to believe that their investments will be stranded by climate negotiations anytime soon.

Contrary to the spin of many NGOs and governments, understandably anxious to report progress, the Paris Agreement is not what the negotiators had in mind when they set the ball rolling. It was supposed to set legally binding emissions targets. All that is legally binding turns out to be a repeat of the Paris jamboree every five years. Almost comically, the Paris negotiators, having failed to meet the 2 degrees target, set a new one for 1.5 degrees.

Remember too that the pledges are pretty weak. China says it will cap emissions by 2030. It would be difficult not to achieve this. India is not really tied down, and rapidly growing parts of Africa do not look like delivering significant reductions.

There may have been a lot of hyped up media coverage of the Obama deal with China that preceded the Paris Agreement, but a quick glance at the lack of substance tells a more sober story. Remember too that Obama presided over the greatest expansion of US fossil fuels since the Second World War. Most of the shale boom has happened on Obama’s watch. Trump is just carrying on where Obama left off.

Paris is likely to go the way of Kyoto, leaving the concentration of greenhouse gases on an upwards trajectory.  The gap between consensus science and the Paris Agreement is immense. When the Kyoto going got tough, Canada and Japan opted out, leaving a largely European game. Kyoto has not made much difference to climate. It may even have made matters worse. Whether or not Rex Tillerson heads off Trump’s climate scepticism, the US is unlikely to do much positively to meet either the letter or the spirit of the Paris Agreement. Whether Trump formally withdraws is of limited extra significance. The US under Trump has already moved on.

Oil companies are nevertheless keen to show that they are doing their bit for the climate. Some of them really believe that they have the corporate competence to build renewables. Quite why large oil companies should be good at local small scale intermittent electricity generation is a mystery. Less mysterious is the BP failure to go “Beyond Petroleum”. It is hard to see ambitious employees in big oil companies making their name, and getting to the board, because they are good at building wind farms.

So far, so bad. But before the shareholders and the managers rush off with the excitements of new offshore oil, the Arctic and other frontiers, they need to cast their eyes towards the bigger picture. Paris might be ignored, but the march of technologies can’t. These are coming thick and fast, and spell the gradual end to the fossil fuels. The economies of the world are digitalizing and hence going electric, and as robots take a bigger role, re-shoring is undermining the great globalization and all the emissions that went with it.  The next generation renewables, especially solar, are an existential threat to the oil companies, and eventually to the other fossil fuels as well.

Lower and gradually falling oil prices may help the fossil fuels hold onto market shares but they also encourage governments to raise taxes. Whilst many politicians are wary of carbon taxes, they need the money.  Even republicans in the US have begun to see climate change as a way of addressing the holes in public finances.

Smart shareholders and managers of the fossil fuel companies will see the writing on the wall – eventually. There is little point in trying to reinvent themselves as something different. They don’t have the skills and there are very few examples in corporate history of this sort of transformation. Microsoft, Apple, Google and Facebook, not IBM, AT&T or indeed any of the European TelCos have made our digital future.

What they should do is stick to their knitting and harvest-and-exit. That is the route to higher dividends, not yet more E&P in the cold Arctic waters. Onshore shale has its role, but not the sort of mega projects that excited the industry in the run up to the 2014 peak and crash.

Past experience suggests they will resist the harvest-and-exit strategy. Managers don’t like shrinking their companies and squeezing back capital investment. That is not what big oil does. But as the oil price gradually falls away, as oil loses its twentieth century star role, they will be forced on the back foot. Several are already borrowing to pay for their dividends. Better for their shareholders if they recognize the decarbonization that will come from the new technologies, even if they are right to take little notice of Paris.


This post originally appeared on the Yale University Press London blog.

Dieter Helm is fellow in economics, New College, Oxford. He is also professor of energy policy and professorial research fellow, Smith School of Enterprise and the Environment, University of Oxford.

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