Fossil distraction

Investors shouldn’t let today’s headlines distract from the future threat of global warming explains Caroline Cook, head of climate change.

India is currently experiencing an unprecedented heatwave. In April, New Delhi had seven consecutive days above 40C (104F). Across central India the average daily maximum temperature exceeded any seen since records began in 1900. According to the Intergovermental Panel on Climate Change (IPCC) Lead author, Dr Chandhi Singh, “the heatwave is testing the limits of human survivability”.


After the 2021 Canadian “heat bomb”, and repeating fires in Australia and California, these are not, unfortunately, new headlines, but in a country with weak infrastructure the impacts can be even more devastating – and long-lasting. They are a reminder that while generic climate risk models might be good at spotting potential stranding for existing assets, they do a poor job at articulating the greater threat to future growth and prosperity.


India has little alternative but to turn to coal-fired generation to meet its immediate needs for more cooling. This literally adds more fuel to the fire raging through fossil markets as buyers shun Russia’s volumes of oil and gas in the wake of its invasion of Ukraine. As prices for coal, oil and gas have risen around the world, so have the demands of the fossil lobby for more investment and for (yet more) favourable tax and subsidy regimes. Their narrative presents the threat of near-term civil hardship and unrest, while remaining silent on the even more enduring consequences of accelerating global heating.


Rising energy prices


Super-spikes have long been a feature of the concentrated, inflexible oil and gas market. This is the sixth I can count across my lifetime – starting with OPEC’s (Organization of the Petroleum Exporting Countries) profound restructuring of the energy balance of power in 1973. This decade was always going to be spike-prone as we struggled to match step-change shifts in capital allocation from rising-cost fossil to falling-cost renewables, against an inevitably more linear drift in demand. This time, however, the long-term outcome can be different.

Not only does the current political crisis prove, again, that the sources of incremental fossil supply are neither reliable nor cost competitive, but the last decade has delivered a fundamental shift in the reality of alternatives. Our renewable sources of energy and, through data and digitisation, our patterns of demand, can work together to enable new choices in terms of security of supply and the environment. Choices that did not exist in 1973 or, more recently, through the “commodity super-cycle” that accompanied China’s modernisation.

The developing world has the most to lose in the short term, from high prices, and the long term, from climate collapse

While the underlying trend to non-fossil looks inevitable, what policy-makers and investors do today, at this point of stress, is nonetheless critical to pace – and thus the maximised economic outcomes for the most that will be enabled by climate success.


Three things.


Research shows that when capital is directed to incremental fossil production to lower price, it impairs green innovation. A recent paper, using empirical evidence from the US shale boom, demonstrated that while cheap gas can substitute out coal and reduce short-term emissions, it induces firms, and academia, to divert resources away from pioneering alternatives.


So significant might this effect be given the nascency of “green”, that not only might long term emissions be higher, but the switch from fossil may actually be “infinitely delayed”. The authors suggest that avoiding this tragic trade-off requires policy intervention in the form of research subsidies and carbon prices. Redirecting gains, over time, from fossil to green. There is a message there for governments now considering the direction of windfall profits for energy firms and cries for cuts to gasoline taxes. And it seems that some are taking heed.


Which links to the second thing. Energy efficiency – aka the “nega-watt”. Increasing investment in fossil fuel assets now, can only really produce extra volumes a year out or more. Releasing current market pressure requires less demand. And in an energy system riddled with losses to heat and noise, cutting the 67% we waste doesn’t mean dropping our standard of living, it means doing the same with less: a concept which in many other industries would just be known as improved efficiency and something to be sought, almost above all else.


Despite massive gains in computing, data, digitisation and automation the how, and when, we consume energy has remained pretty unreformed for decades. The reasons lie in a mix of fossil under-pricing (it’s obviously not carrying its real environmental cost), utility regulation biased to the installation of physical capacity rather than demand flexibility, and the often-higher upfront capital cost of better equipment that delivers lower lifetime running costs. With so many demand-side solutions now ready to go, this is the moment for governments to promote the hell out of efficiency tech. The volumes could come quicker than new fossil, and with truly enduring benefits.

And my third thing. Back to where this note started. The developing world has the most to lose in the short term, from high prices, and the long term, from climate collapse. But it also has enormous unrealised growth potential that just might be unlocked (finally) through the combination of self-sufficiency and de-centralisation enabled by low carbon energy. Glasgow’s COP26 put the global consensus behind accelerating capital flows for pro-climate investment into emerging markets. Germany has now put the creation of an “open climate club” at the heart of its ongoing G7 presidency. The organisation’s showpiece meeting in June will try (again!) to produce the frameworks financial markets need to support north-south funds flow.


The role of investors


As investors, the siren call of the inevitability of fossil pre-eminence is strong. But we know the associated near-to-mid term regulatory risks are massive, and the long term likelihood of disrupted, depressed global growth in an over-heating world is clear. Our job through this period is to seek out the enduring innovations, and to support management teams re-positioning for low carbon leadership – which can come from any sector, including the currently fossil-heavy, and from any country, including those just developing.


We know that markets do not exist in a vacuum. There is an element of the self-fulfilling as the feedback loops weave through our complex systems. If we point more money at fossil now, it will be sustained. If we point it to green, invention will become innovation, will become the new normal.

Caroline Cook

Head of climate change

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