“Traditionally, fossil fuel companies have been considered very safe and very profitable industries with high returns, if you were to invest in their shares. Now, this may be changing,” said Jean-Francois Mercure, professor of energy, climate, and innovation at Radboud University in the Netherlands and lead author of the study.
“It requires institutions to properly reassess the risk in their portfolios,” he said. “This transparency needs to start to happen, because they need to know what their money is ultimately invested in. This really reminds us a lot of what happened in 2008 with the financial crisis, where there was a lot of repackaging of assets, and people didn’t really know what they owned until they realized those assets weren’t paying off.”
Mercure and an international team of economists and policy analysts modeled the future of fossil fuels under a variety of scenarios, examining what will happen if countries hew closely to targets of the Paris Climate Agreement, and what will happen if they don’t. What’s remarkable is that fossil fuels are likely to go bust whether or not countries take climate change seriously. The rapid pace of technological progress will transform the energy sector. Researchers say the only way to guard against the impending collapse in the price of conventional fuels is to accelerate the transition to clean energy, ensuring investors and fossil fuel firms aren’t caught flat-footed when oil, gas, and coal bottom out.
If this seems hard to believe, consider that renewables will drive down the price of fossil fuels long before they become our primary source of energy. By taking over a small, but significant share of the market, they will force producers to slash costs to stay competitive. People will buy electric vehicles, meaning they will no longer need gasoline to fuel their cars. They will buy electric heat pumps, meaning they will no longer need natural gas to heat their homes. They will buy solar panels and home batteries, meaning they will no longer need to buy power from a coal- or gas-fired power plants.
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A sudden and dramatic drop in the price of fossil fuels would lead to mass unemployment. Jorge Viñuales, a professor of law and environmental policy at the University of Cambridge and co-author of the study, warns this could fuel “public disenchantment and populist politics.” He pointed to U.S. coal companies, which have struggled to compete with wind, solar, and natural gas. Many coal workers have thrown their support behind President Trump, who has tried to keep the industry afloat, most recently by moving to stay the shutdown of coal-fired power plants.
Researchers caution against subsidizing fossil fuels — a strategy akin to forcing Netflix users to rent movies from Blockbuster. The only viable strategy, they say, is to reduce the systemic importance of fossil fuels by accelerating the transition to clean energy. Mercure recommends retraining coal, oil, and gas workers for jobs in clean energy.
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In a 2015 speech Mark Carney, governor of the Bank of England, warned that meeting the goals of the Paris Agreement would require leaving as much as 80 percent of the world’s proven reserves of oil, gas and coal underground, which would alter the economics of fossil fuels. Now, it seems that in the absence of ambitious climate policies, the growth of renewables will have a similar effect. There is, however, a bright side. As Carney noted, the shift to clean energy “is a major opportunity for insurers as long-term investors.” He added, “The more we invest with foresight; the less we will regret in hindsight.”
Read more at Fossil Fuels’ Dirty Secret: Climate Action or Not, Things Look Bad
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