According to the Wall Street Journal, “Institutions such as the Bank of England, the Financial Stability Board and the European Systemic Risk Board are examining how banks, insurers and pension funds would cope if policies designed to reduce carbon-dioxide emissions led to a sharp drop in the share price of oil, gas and coal companies.”
“The regulators’ concerns rest on scientific assessments that much of the world’s known fossil-fuel reserves would have to stay underground if governments want to limit global warming to 2 degrees Celsius above preindustrial levels. If they aim to contain average temperature increases to 1.5 degrees, as set out in an international climate deal sealed in Paris in December, the so-called carbon budget would shrink even more.
That has triggered fears that a poorly managed switch to less-polluting energy sources, such as solar or wind power, could cause selloffs of fossil-fuel companies and broader economic problems caused by energy shortages.”
I wonder who’s advising these regulatory bodies? Certainly not IPCC Lead Author Richard Tol, who in 2009 did a meta-review of various analyses of the economic impacts of climate change, finding broad agreement “that the welfare effect of a doubling of the atmospheric concentration of greenhouse gas emissions on the current economy is relatively small–a few percentage points of GDP.”
Companies run two risks regarding climate change. One is climate change–if it comes in at the high end of estimates it could be a truly disruptive force, changing where companies operate, how they operate, how they move goods, what markets they do business in, etc. And of course those who plan beyond five years should take a look at climate change.
However, most recent estimates of the impacts of climate change show very small effects over the next 30-50 years, longer than all but the most visionary companies keep as a planning horizon. If they were to advise their shareholders of possible impacts due to climate change, they would say ‘it’s not a factor for your lifetime’. Warren Buffet said pretty much that in his most recent letter to shareholders and as someone running a conglomerate that includes insurance, transportation, food production and retail, we might consider his opinion a proxy for the developed world’s companies.
The second risk is much larger. Companies may be damaged, even destroyed, by inappropriate climate policy. This is explicitly what the Wall Street Journal refers to in the linked article–“how banks, insurers and pension funds would cope if policies designed to reduce carbon-dioxide emissions led to a sharp drop in the share price of oil, gas and coal companies.”
Global energy use is set to double over the next 30-50 years. The world’s use of fossil fuels, pretty much the same, although it is (thankfully) starting to look as though natural gas will substitute for coal. The current low price of petroleum will climb again in the fairly near term and in normal times fossil fuel shareholders would be rubbing their hands with glee at the prospect of continuing good times for the foreseeable future.
But now that they are being labeled as akin to the tobacco industry and considered as Public Enemy Number One, factors like reputational risk, liability, regulatory and legislative impairment of assets all become issues to contend with.
In short, companies face little risk from climate change for the lifetime of current shareholders. It should not be the cause for worry. It is the cure for climate change that can kill them.
The insanity of this should be obvious. Governments own 70% of the oil that companies are pumping. Consumers the world over are buying these fossil fuels. To blame our current situation on those extracting the fuel, refining it and shipping it is just addictive whining, blaming those selling hillbilly heroin or inattentive pharmacists for the problem.
For normal observers of the economic landscape, this is akin to killing the golden goose. But for committed climate activists, this is a feature not a bug.