Wednesday, July 9, 2014

Climate Misconception #14: Greedy oil companies are preventing action on climate change

One of the big developments of the last couple of years is that the movement to stem climate change has discovered political economy.  Before that the strategy was science class writ large: explain clearly enough to enough of the population why filling the atmosphere with carbon is a bad idea, and the political system will snap to attention.  But that didn’t work, and climate strategists have now shifted to a new target, the corporations that have been funding denialism and fighting carbon legislation every way they can find.  The initial insight is rather obvious: if the goal is to keep carbon in the ground, companies that own this carbon are going to be against it.

There’s nothing wrong with this shift, but it represents just the beginning of a political economy analysis, not its endpoint.

Before looking at the interests at stake, it’s in order to say something about this word “greed”.  Are oil and kindred fossil fuel companies especially greedy compared to other businesses?  They have become immensely skilled at locating hard-to-find deposits of carbon fuels and bringing them to the surface.  Current plans to produce deep ocean oil, for instance, are technological marvels.  Except for climate change, this wizardry would be something to cheer about: they are giving the public what the public demands, and it's unfortunate that this demand happens to be suicidal.  In other words, the problem is as much in the demand as in the supply, if not more so.  In any case, every business strives to make a profit, and no business is happy to see the value of the assets it has invested in plunge to zero.  Fossil fuel companies are not exceptions in this respect.  Demonizing them, as if they are owned and staffed by a distinct race of ethically damaged mutants, is false and counterproductive.  (That said, coal companies in the US have a long record of environmental destruction and disregard for worker rights—but even so they are not necessarily outliers in those respects.)

But they are still driven by economic interest to oppose serious climate policy.  The political economy problem is not an illusion.

Now let’s take a closer look at these interests.  Fossil fuel deposits owned by private companies that are mandated to remain undeveloped because of their climate-changing impacts become stranded assets, investments that simply have to be written off.  Most such deposits are owned by governments, not private firms, however.  On top of this there are secondary investments that would also be devalued, such as leasing rights (unless they are reimbursed) and stocks of mining and drilling equipment.  No one doubts that this would be an enormous financial loss for the entire sector.  This surely explains the behavior of these companies.

Stringent limits of fossil fuel extraction is therefore wealth destruction—but whose wealth?  Some fossil fuel companies have narrow ownership, meaning proprietorships, partnerships, and corporations whose shares are not publicly traded, but the bulk of the assets are in publicly traded corporations.  Equity claims on the fossil fuel sector are dispersed across portfolios around the world.  In the end, policies that diminish or even zero out these claims threaten the a portion of the wealth position of most of the world’s individual and institutional investors.

On the other hand, when you consider fossil fuel wealth in a portfolio context, you also have to take into account the fact that the great majority of the world’s wealth is not in fossil fuels.  Only a few percent of total is directly at stake.

In fossil fuels.  But then we have to consider the larger problem of the entire capital stock whose value is at risk from a dramatic surge in fossil fuel prices—the concern raised in Misconception #11.

One small example may help illuminate the issue.  The European Union has an Emissions Trading System which is intended to reduce fossil fuel use.  It hasn’t proved very effective because the carbon caps have been too generous, and too many sectors were excluded.  In an effort to tighten, the EU extended the ETS to airlines flying in and out of European airports.  In response, Congress passed and Obama signed into law the European Union Emissions Trading Scheme Prohibition Act of 2012, which makes it illegal for any US carrier to participate in the European system.

Of course, Obama presents himself as a tireless crusader on behalf of combating climate change, and the EU program, weak as it was, counts as an important initiative in this field.  What gives?  It probably won’t surprise you to learn that the bill was the object of an intense lobbying campaign by the airline industry.  If their operations had been allowed to come under the ETS, and if Europe were to dial down its carbon caps to a level at which they might bite a little, fuel costs would rise and airline profits would tumble.  Indeed, if the goal is to actually reduce the consumption of jet fuel, the cost of air travel has to go up enough that a substantial number of would-be travelers choose not to fly.  That in turn would mean that some portion of the airline companies’ investments would need to be written down or even off.

Surely the airlines are not the only businesses whose investments would suffer if fossil fuel prices were greatly increased.  The rest of the transportation sector—trucking, for instance—would be alarmed.  No doubt many manufacturers depend on relatively cheap energy as an input or to market their outputs; the auto industry comes to mind.  How about real estate interests in America’s vast suburbia?  Or agroindustry?  The list could be long, as we will likely find out if stringent carbon policy is ever put on the table.

It will be a tremendous challenge to overcome all of this business opposition, but it’s not impossible.  The risks of catastrophic climate change can serve as an effective motivator, and, as we will see, policies can be crafted to actually generate financial benefits for much of the population.  The worst mistake any movement can make, however, is to underestimate its opposition.  Trying to isolate the fossil fuel companies seems like a clever move by climate campaigners, but it will fail because a considerable portion of business, and the wealthy who invest in them, will see their interests on the line.

In the end, this is why so little has happened on the policy front despite overwhelming evidence for the need for action, and why it will take a massive, determined movement to turn the tide.

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