Wednesday, June 25, 2014

An Easy Call: The Norwegian SWF Should Divest from Fossil Fuels

Forget about social responsibility.  It's a matter of simple risk diversification principles.  Norway's sovereign wealth fund should not invest at all in assets tied to fossil fuels.  If anything, it should lean toward assets that move in the opposite direction from fossil fuel prices.

This fund, of course, is entirely financed by Norway's North Sea oil royalties.  Its future revenues from this source, then, are dependent on oil prices.  These fluctuate with short run events like the pace of global economic growth (demand) and civil unrest in petrostates (supply).  The biggest long term factor, however, is whether there will be significant movement toward climate change mitigation.  At present next to nothing is being done.  The problem is immense, however, and there is an obvious risk, from the point of view of an oil producer like Norway, that new evidence of climate sensitivity will frighten governments into action before deposits are exhausted.  If there is a major intensification of policy, it will result in massive earnings reductions for oil and coal, and possibly also natural gas—of which Norway is also a significant exporter.  (Prices will shoot up, but this effect will be captured either by governments or by resource-using businesses if permits are given away.)  To put it differently, the point of mitigation measures is to leave fossil fuels in the ground, which would mean that resource owners like Norway would simply have to write off these assets.

Given that risk, the prudent thing to do is to avoid any investments whose returns are positively correlated with it.  That means divesting from Shell and any other fossil fuel companies.  A rational hedging strategy, on the other hand, would call for investments in companies whose prospects are tied to aggressive carbon policy, such as those in the renewables sector, public transportation, and whose products compete with fossil fuel-intensive goods.

Sometimes social responsibility points in one direction and sound finance in another; here they converge.  It’s remarkable there should be any debate at all.


Myrtle Blackwood said...

Re: "...the point of mitigation measures is to leave fossil fuels in the ground..."

There is great danger in a single focus on fossil fuels. About 40% of the world's CO2 emissions come from the burning of biomass (or so I've read).

When the Greek government recently raised the cost of heating oil vast numbers of people turned to wood to heat their homes. The triple whammy of heavy air pollution, high CO2 emissions and loss of forests (and their beneficial functions) hit home.

Much more focus needs to go on alternative heating and cooking solutions.

Peter Dorman said...

Myrtle, without getting into the details of this or that biomass activity, the main point to bear in mind is that terrestrial and aquatic systems have carbon cycles. The carbon may be temporarily in one sink (such as a forest) but the process of carbon exchange moves it through the entire system. Humans can tweak these fluxes (through burning rather than allowing decomposition, for example), but we can't shut them down. What governs the amount of carbon in the atmosphere in the medium to long run (in human terms) is the amount of previously sequestered carbon we haul/pump out of the earth and inject into biospheric cycles.

As someone who spends a lot of time with scientists who study this stuff, I am struck by the disconnect between the mental frameworks of those familiar with biogeochemical cycling and those who aren't -- which include nearly all economists. Economists think this is a "pollution" problem that you can fix by controlling the movement of the "pollutant" from point A (a forest, a farm, a factory) to point B (the atmosphere). Nope. There is lots of flux back and forth and humans can't do much about it -- except prevent the carbon that was buried hundreds of millions of years ago from being dug up and reintroduced into the process.

Every time I see the phrase "carbon pollution" I want to cringe.

Myrtle Blackwood said...

Re: "humans can't do much about it -- except prevent the carbon that was buried hundreds of millions of years ago from being dug up and reintroduced into the process."

That statement seems fair enough. Heating and cooking problems remain, in that respect. I was thinking in terms of conversion to solar heat banks for heating and solar cooking facilities.

I don't think that this will be a straightforward revolution, however. In the end it will probably be that a wide range of technologies are employed to address both climate change and peak energy and resources. Solar refrigerators that don't need batteries (they exist already). Sunny decks that are designed for the erection and use of solar cookers and dryers, underground cool stores, insulated window shutters and insulated doors...