by Michael Roberts
Last month at the gathering of the great but not good, the rich and infamous, at the World Economic Forum in Davos,
US Treasury secretary, Steven Mnuchin, formerly a hedge fund manager,
was asked whether he agreed that calls by teenage climate activist Greta
Thunberg for public and private-sector divestment from fossil fuel
companies would threaten US growth. He said it would and Mnuchin jibed:
“Is she the chief economist? Who is she, I’m confused… After she
goes and studies economics in college she can come back and explain that
to us.” Thunberg retorted: “My gap year ends in
August, but it doesn’t take a college degree in economics to realise
that our remaining 1,5° carbon budget and ongoing fossil fuel subsidies
and investments don’t add up.”
Thunberg may not be an economist (which may be to her advantage), but
the economics of global warming and climate change is concentrating the
minds of many economists, if not Mnuchin. JP Morgan economists
recently considered the issue of the “financial stability and
economic risks from fossil fuel stranded assets: oil, coal and gas
reserves that cannot be exploited due to the transition to a low-carbon
economy.” They reckon that up to US$20tn could be wiped from stock
market values if it is realised by investors that reducing fossil fuel
use would mean a sizeable portion of proved reserves held by energy
companies may never be used. These ‘transition risks’ to the profits of
the energy companies would be equivalent to 17% of the US$119tn global
fixed income and equity markets.
So JP Morgan economists tried to work out what could be the minimum
reduction in fossil fuel use to avoid losses for the energy companies
and financial markets. The lower the target limit on greenhouse gas
emissions, the greater the risk of ‘stranded assets’ (unused) on the
books of the companies. The size of stranded assets would depend of the
temperature target, which in turn would depend on government policy
decisions and on technology innovations to reduce energy use and carbon
emissions over the next generation.
The International Energy Agency (IEA) has a ‘Sustainable Development
Scenario’ which it claims to limit the global warming increase to 1.8⁰C
relative to pre-industrial times, with a 66% likelihood. In this
scenario, energy-related CO2 emissions are assumed to peak immediately
(yes, right now!) and then fall to reach zero in 2070. If that actually
happened, then, according to JPM, 87% of the current proved coal
reserves, 42% of current proved oil reserves and 26% of current proved
natural gas reserves would need to be left in the ground if the
temperature gain were to be limited to 1.8⁰C.
The IEA also has a ‘Stated Policies Scenario’, which is intended to
reflect the effects of policies that governments have already
implemented with an assessment of the likely consequences of policies
that governments have announced but not yet implemented. Finally, there
is the ‘Current Policies Scenario’ which is where governments ignore or
do not implement all stated current climate policies. What the IEA finds
is that the Stated Policies Scenario shows some relative improvement in
reducing carbon emissions compared to the Current Policies Scenario,
but it is a long way short of the Paris 2⁰C objective. Indeed, the
Stated Policies Scenario would be consistent with an increase in the
global temperature of around 3⁰C! That would have devastating effects
on the climate.
The difference between the temperature increases in the Sustainable
Development Scenario (around 1.8⁰C), the Stated Policies Scenario
(around 3⁰C) and the Current Policies Scenario (around 3.5⁰C) may not
seem very large. But they are for the world economy, human society and
ecosystems. Climate change is about much more than an increase in the
temperature. It is also about the frequency and intensity of extreme
weather events (such as heatwaves, droughts, flooding, storms, and
tropical cyclones), shifts in atmospheric and oceanic circulations,
declines in ice cover and sea level increases.
But here is the crunch for the energy companies and financial
markets. Even in the IEA Stated Policies Scenario, the stranded assets
for coal are still large, at 67% of the proved reserves. But there are
no stranded assets for either oil or natural gas. Indeed, the cumulative
extraction of oil from 2019 to 2070 exceeds the level of proved
reserves in 2018 by 215.7 billion barrels (12%of proved reserves in
2018), while the cumulative extraction of natural gas from 2019 to 2070
exceeds the level of proved reserves in 2018 by 68,525 billions of cubic
meters (35%of proved reserves in 2018). JPM comments: “These
calculations help to explain why companies are still exploring for new
oil and gas deposits, despite some dire warnings about stranded
assets.” In other words, existing government agreements to reduce
fossil fuel use and carbon emissions will not damage the profits of the
oil and gas multinationals at all, but also will fail to stop the
inexorable rise in global warming to increasingly destructive levels.
JPM economists pin their hopes on squaring the circle through the
development of carbon capture and storage (CCS) technology, which aims
either to prevent CO2 emissions from energy production and industrial
processes that use fossil fuels from entering the atmosphere or to
remove CO2 from the atmosphere completely (see graph above). The CO2
captured would then need to be stored underground. The more effective
the CCS technology, the less pressure on stranded assets; and the less
the loss of profits for energy companies.
At the moment, there are three technologies in theory that could do
this. First, carbon capture and storage (CCS), where the emissions from
power plants and industrial processes are captured before they enter the
atmosphere. Second, biomass energy carbon capture and storage (BECCS)
where energy is produced by plant material (which has absorbed CO2 while
growing) and the emissions are captured before they enter the
atmosphere. This generates negative emissions. And third, direct air
capture and carbon storage (DACCS) where CO2 is extracted from the
atmosphere directly. This also creates negative emissions.
In reality, these technologies are not going to do the job.
Currently, there are 19 operational CCS facilities, with 32 under
construction or development. These facilities have the capacity to
capture around 40Mt of CO2 per year. This is just 0.1% of the current
energy-related CO2 emissions of around 33Gtper year.
Then there is the Nightmare Scenario. Some recent scientific
projections suggest that a ‘business-as-usual climate policy scenario’,
as promoted by the likes of Mnuchin, is expected to deliver a
temperature increase of around 3.5⁰C; dangerous enough. But the impact
of climate change is likely to come just as much from an increase in the
variance as from an increase in the mean. Up to now scientists concur
that the Earth could warm 3°C if CO2 doubles. But the latest models
suggest even faster warming — recent model projections on global warming
from various sources are suggesting a rise in global temperature in
excess of 5°C.
Indeed, a Pareto probability distribution function of the current
projections have ‘fat tails’ that suggest there is a 1% likelihood of a
12⁰C increase in temperature. Weitzman:“the
most striking feature of the economics of climate change is that its
extreme downside is non-negligible. Deep structural uncertainty about
the unknown unknowns of what might go very wrong is coupled with
essentially unlimited downside liability on possible planetary
damages.”
With that kind of temperature increase, human life would probably not survive. But even worse, says JPM economists, “in such a catastrophic outcome, all financial and real assets would likely be worthless.”!
And yet governments continue to allow energy companies to search for
and develop more fossil fuel resources. And this is not just in
so-called emerging economies which need growth. Canada’s Liberal
government claims to be a leader in fighting global warming. But the
government has still agreed to allow the development of the biggest tar
sands mine yet: 113 square miles of petroleum mining. A federal panel approved the mine despite conceding that it would likely be harmful to the environment and to the land culture of indigenous people.
These giant tar sands mines (easily visible on Google Earth) are
already among the biggest scars humans have ever carved on the planet’s
surface. But Canadian authorities ruled that the mine was nonetheless in
the “public interest”. Justin Trudeau, recently re-elected as Canada’s
prime minister, put it in a speech to cheering Texas oilmen a couple of years ago: “No country would find 173 billion barrels of oil in the ground and leave them there.”
So Canada, which is 0.5% of the planet’s population, plans to use up
nearly a third of the planet’s remaining carbon budget. There’s oil in
the ground and it must come out.
It’s the future of the planet and its species versus the profits of the multinationals.
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