The Queensland Resources Council provides a sustainable resource investment special briefing from ITS Global, which says the Paris Agreement “presents almost no risk to fossil fuel producers; divestment campaign steps up exaggeration:
- Paris Agreement leaves out commitments, energy
- China revises coal consumption upwards
- HELE boosted under OECD arrangements
- Adani seeks rule changes to bolster policy certainty
- US donors oppose divestment
The United Nations Framework Convention on Climate Change (UNFCCC) meeting in Paris concluded on December 12 with an agreement referred to as the ‘Paris Agreement’. That Agreement is the culmination of more than seven years of negotiations that have aimed to find a policy instrument to replace the Kyoto Protocol, which has lapsed.
Under the terms of the Agreement, countries will seek to peak greenhouse gas (GHG) emissions “as soon as possible” (no determined date) and to achieve a balance between emission sources and sinks of GHGs (oceans, forests, potentially CCS) in the second half of this century.
Some parts of the agreement are legally binding, such as submitting an emission reduction target and reviewing that goal regularly. However, the global agreement is not legally binding, and the implementation of policies will be monitored by a to-be-created committee of experts without any sanction if countries fail to do their part.
At any time after three years from when the agreement has entered into force for a country, that country may withdraw from the agreement by giving written notification.
The result has been hailed by campaign groups as a ‘clear signal’ that fossil fuels should ‘remain in the ground’; it has also been criticised by both extreme green groups and more sceptical commentators as weak.
The latter is closer to the truth. So, what’s the reality, asks ITS Global? It provides this analysis.
First, greenhouse reduction commitments are voluntary; there is no penalty for non-compliance.
As predicted in previous briefings, each country’s commitment is self-determined, and any reductions in emissions can be achieved within a timeframe or by a method of their own choosing. At the moment, these are based on each country’s submission to the UNFCCC in the lead-up to Paris.
China, for example, aims to reduce emissions intensity – the amount of CO2 emitted per unit of production – and has forecast peak emissions by 2030, but has made no binding commitments on how to achieve either of these.
Glen Peters, a researcher with Norway’s Centre for International Climate and Environmental Research and the Global Carbon Project, which tracks emissions and mitigation pledges, told Road to Paris that beyond the hype, the Chinese goal of peaking emissions by 2030 remains “very vague.” Peters and others reckon that China’s pledge is not very different from business as usual.
Second, the temperature target in the document of 1.5o or 2o is political. In the lead-up to the meeting, a number of analyses were published that pointed out there is no technical foundation for the ‘two degrees’ target, noting no such target has appeared in IPCC publications.
Third, the agreement allows for bilateral and multilateral cooperation on reductions. This will permit countries to claim mitigation efforts in other countries – such as reductions in deforestation – as their own. This has been an aim of the Norwegian government, for example, which offered the governments of Indonesia and Brazil upward of $2 billion to generate carbon credits as a way of mitigating its own emissions. News reports have already pointed out Australia is in favour of this approach.
Fourth, the language is deliberately neutral. The negotiations have pushed the agreement in such a way that the language used is less than proscriptive. The only action that countries are compelled to take is the reporting itself.
Are there downside risks for fossil fuel companies? Possibly, but they are small and indirect, and coming from two related sources: domestic policy decisions and campaign groups.
The risks from domestic policy decisions are nothing new. Domestic policy will come under domestic political pressure when commitments are reviewed every five years. But realistically, that pressure will only emerge in industrialised democracies, and only when other political concerns (e.g. economy, employment military action, immigration pressures) are not prominent.
Campaign groups will pressure national governments and the private sector to reduce emissions to achieve the goal of preventing temperature rises of 1.5 degrees.
Divestment campaigners in particular will continue to attempt to pressure investors and financial institutions using these reference points from the agreement. The reason for the emphasis on financial institutions is simple: lower prices for fossil fuels combined with steady demand growth in developing countries, falling competitiveness of renewables and limited ability of governments to subsidise energy means that coal, oil and gas remain the most viable energy source for most of the world.
Divestment groups are acutely aware of this; 350.org, the most prominent divestment group has already promised a ‘big announcement’ following the Paris meeting. 350.org founder, Bill McKibben, stated: “We’ll be blocking pipelines, fighting new coal mines, urging divestment from fossil fuels — trying, in short, to keep weakening the mighty industry that still stands in the way of real progress.”
But there are three further things to note in relation to energy in the agreement.
First, one of the best indicators of the sensitivity around the sector is that the word ‘energy’ doesn’t appear in the Paris agreement in any meaningful way. This was largely driven by developing countries, such as India.
Second, despite divestment advocates stating that the risk of ‘stranded assets’ is increased by the Paris Agreement, or that the agreement has sunk certain stocks, these statements ignore the fundamentals of the global energy market and how they interact with policy. As stated previously, most coal generators in Asian markets are state-owned, unlisted and part of broader domestic energy strategies. Risks to companies or infrastructure operators supplying those markets are subject to those policy risks; not those of the Paris Agreement.
Third, despite talk of any policy risks in the energy sector around fossil fuels, their context needs to be considered. Companies exporting thermal coal to Asian markets – which have made no significant policy commitments to altering their fuel mix – can expect the situation remain unchanged.
Carmichael gets another green light
Adani’s Carmichael mine appears more likely to proceed after the Queensland Land Court rejected an activist appeal against the project.
The appeal action was brought by campaign group Coast and Country, represented by the Environmental Defender’s Office.
Land Court president Carmel MacDonald said the mine should proceed with tighter environmental conditions relating to water and bird species. However, the key argument that the mine should be rejected because of its impact on the climate was rejected wholesale.
President MacDonald was also highly critical of evidence presented by activist Tim Buckley of the Institute for Energy Economics and Financial Analysis (IEEFA). She rejected Buckley’s argument that uncertainty in the coal market over the next 30-plus years meant the project is unviable. Similarly, Buckley’s evidence that the decision of a number of banks not to finance the operation signalled a lack of financial viability was also rejected.
Adani described the appeal decision as “another repudiation of politically motivated, activist-driven legal challenges which only serve to deny the benefits of jobs and investment to Queensland and to Australia.”
The Adani Group recently asked the Federal Government to draft a law prohibiting green groups from seeking repeated judicial reviews of environmental approvals for its Carmichael coal mine, rail and port project.
HELE boosted under OECD arrangements
New OECD arrangements for export financing for coal technology are likely to provide high-energy low-emission (HELE) technologies a boost.
There had been a campaign push to prevent export credit agencies (ECAs) subsidising fossil fuel investments and operations.
However, under the OECD arrangement, which takes effect in 2017, financing would be allowed for the most advanced “ultra-supercritical” plants. The arrangement also allows for the development of “supercritical” coal plants of up to 500 megawatts in developing countries as well as some exemptions in emerging economies where up to 90 percent of the country has electricity access, including India, Indonesia, the Philippines and South Africa.
Trade Minister Andrew Robb said the new rules struck the ‘right balance’ between cutting emissions and ensuring access to adequate power supplies to support development.
OECD countries play a major role in bringing coal-fired plants online worldwide. In the past seven years they have financed more than $35 billion worth of coal plants. According to leaked OECD documents, its export credits supported projects accounting for 23% of the approximate 15.3 GW of new global annual coal power capacity installed outside of China between 2005 and 2012.
HELE provides opportunities for India
The World Coal Association (WCA) has released a report stating the most cost-effective way India can balance its energy needs with carbon reduction is through the deployment of high energy low emission (HELE) coal technology.
According to analysis in ‘The Case for Coal: India’s Energy Trilemma’, replacing India’s subcritical thermal units with supercritical and ultra-supercritical coal technology would save CO2 at a cost of around $10/tonne by 2035. By comparison, abating a tonne of CO2 through the deployment of large-scale solar PV in India can cost up to $40/tonne, even accounting for the cost declines expected through 2035.
Building on the abatement research, the report also found that $1 billion spent on ultra-supercritical coal in India could abate more CO2 than the same expenditure in European renewables.
The report also found that globally, raising the average efficiency of coal plants from 33% to 40% with off-the-shelf technology currently available would save 2 gigatonnes of CO2 emissions – equivalent to India’s annual CO2 emissions or running the Kyoto Protocol three times over .
While clean coal share of the Indian energy mix is expected to increase, cost is holding it back. According to the WCA report, “There is as much as 40% price difference between the capital costs of an ultra-supercritical and a subcritical coal plant.”
China revises coal consumption upwards
China has adjusted its coal consumption over the past decade upward by 17%, marking a significant correction over previously reported quantities.
The revised figures added about 600 Mt to Chinese coal consumption in 2012 alone. 600 Mt of coal is equivalent to more than 70% of the total coal used annually by the US or more than Germany’s total yearly output.
Major policy changes were announced by China’s State Council earlier this month to make its coal consumption cleaner.
The Council announced a plan to reduce the discharge of pollutants in the power sector by 60% by 2020. At the same time, the Council announced it would reduce the annual carbon dioxide emissions from coal-fuelled power generation by 180 Mt by 2020.
Under the new plan, older coal plants will be upgraded in order to make them as efficient as newer ones. China will provide more financial support, including preferential loans, to help firms renovate. By 2020, plants that fail to comply with the energy-saving standard will be shuttered.
Further, beginning January 1, the government will begin paying bonuses to coal plants that meet new efficiency standards. Coal-fired generators installed before 2016 will receive 0.01 yuan for per kilowatt-hour of electricity they generate that meets the new standards, while those installed in after 2016 will get half that amount.
This year, Beijing approved the construction of 155 new thermal power plants. The number of new, cleaner coal plants is likely to increase in order to plug the gap left by the shuttering of older, dirtier power stations.
US college donors oppose divestment
A new survey of 275 large financial donors to colleges and universities in the US indicates these donors oppose fossil-fuel divestment and would think twice about giving money to a college if it decides to divest its assets in fossil fuel companies.
The survey of 275 people was commissioned by the Independent Petroleum Association of America and conducted by FTI Consulting in Washington, D.C.
Among the key finding are:
- 62% support the colleges’ decision to reject divestment
- 76% agreed that endowment managers should be using donors’ money to maximise the value of the endowment
- 66% indicated they would be less likely to invest their money in a college or university that had decided to divest itself of oil and gas securities
- 80% believe that their alma mater divesting of oil and gas companies would decrease the value of the endowment
- 73% say divestment would have no tangible impact on the environment or energy-related companies
- 49% believe it’s hypocritical for colleges to divest of oil and gas companies while they continue to be major consumers of oil and natural gas.
Donors surveyed were defined as individuals who donated $5,000 or more to US colleges in the past five years. More than half of respondents donated $10,000 or more over the past five years, while three in 10 donated $20,000 or more.
Most university leaders have so far stood up to the divestment rhetoric and asserted that a college endowment is not the place to play politics. MIT President Rafael Reif stated last year that divestment “would entangle MIT in a movement whose core tactic is large-scale public shaming.”
A $3.4 trillion exaggeration
At COP21, 350.org announced its fossil fuel divestment campaign had counted up 500 institutions worldwide that had agreed to “divest $3.4 trillion in assets from fossil fuels”– up $800 million in the ten weeks since their $2.6 trillion announcement in New York.
The $3.4 trillion represents the total assets under management (AUM) of those individuals and institutions making divestment pledges. No one knows how much of the $3.4 trillion is being divested. When institutions decide to divest, there is no set formula they follow.
One could base an estimate on the portion of the value of the S&P 500 that comes from fossil fuel companies: 3 to 7%.
Writing in Forbes this month, Christopher Helman performed a few rudimentary calculations to conclude that the divesting institutions may have jettisoned about $125 billion, or less than 3% of the roughly $4.4 trillion worth of securities fossil fuel producers have issued. Helman noted that “shares in many companies can move 3% in a day.”
Both estimates are likely overstatements: each assumes the full amount of fossil fuel holdings in each of the divesting portfolios will be purged of fossil fuel.
First, there isn’t confirmation that the institutions had any fossil fuel holdings in their portfolios before they decided to divest.
Second, a number of the institutions have promised to make no further direct investments or have decided to divest only direct investments. Oxford University and Syracuse University both pledged no further direct investments – neither owned any in the first place. Stanford University and Georgetown University have pledged to divest only their direct holdings in coal companies.
Lisa Lapin, Associate Vice President at Stanford University, acknowledged Stanford’s divestments “did not comprise a significant proportion of our $21.5 billion portfolio that would have resulted in a change in value.”
Four universities have sold no investments since their divestment decisions, according to a recent report from the National Association of Scholars, yet their endowments are included in 350.org’s tally.
Third, pledges generally limit the companies targeted to those that earn a particular percentage of their revenue from coal. California, for example, defines a coal company as “a publicly traded company that generates 50% or more of its revenue from the mining of thermal coal.”
Many of the companies in CalSTRS’ and CalPERS’ portfolios that mine for coal are diversified energy companies that may not exceed that threshold, exempting them from the law’s divestment requirements.
Other divestment efforts have included similar carve-outs that left holdings in companies that produce coal energy untouched. Norway’s sovereign wealth fund set the revenue threshold at 30%.
Fourth, some divestment pledges, for examples California’s SB185 and Newcastle city council, include provisions that do not require fund managers to take action if divestment is seen to be in breach of fiduciary duty.
Fifth, some organisations have pledged to divest and then simply done nothing about it. San Francisco and Seattle, for examples, have both pledged to divest but have yet to take action.
After looking closely at the divestment pledges, Helman’s $125 billion divestment figure appears likely to be much smaller. Unless the amount of capital held by divesting institutions and individuals is increased significantly, selling shares will be offset by others who recognize under-priced stocks. Investors seek prudent yields and there are many willing to take good investments that others shun. Indeed, any smart investor would view low commodity prices as an opportunity to buy, not sell.
Nor will fossil fuel companies have trouble borrowing as a result of the divest campaign: profitable investments will draw lenders. People bought oil and coal because of their utility, not salesmanship.
ITS Global specialises in public policy in the Asia Pacific region.