Divestment from fossil fuels is accelerating around the world. But as forward-thinking investors move their money and fossil companies sell off their most polluting and criticized resources, companies looking to generate short-term gains are snapping them up. While this may shuffle assets off one company’s books, the world’s carbon emissions keep climbing, risking our safety, security and economic well-being.
As pressure to clean up corporate environmental performance mounts and companies increasingly look to shed dirty assets, how do we ensure we’re not just rearranging deck chairs on the Titanic? We need an equitable wind-down of fossil fuels and the funding that supports it.
There are now 1,500 organizations with assets totalling more than US$39.8 trillion that have already sold or are in the process of selling off fossil fuel holdings. Besides dozens of universities (including Harvard and the University of Toronto), the divestment list now includes France’s Banque Postale, the State of New York, and Europe’s largest pension, ABP. It’s hard for an oil giant to ignore: in 2021, Shell labelled fossil fuel divestment campaigns a “material risk.” Meanwhile, Bloomberg Intelligence reported that “oil companies are finding it increasingly difficult to raise financing amid rising environmental, social and governance (ESG) concerns, while banks are under pressure from their own investors to reduce or eliminate fossil-fuel financing.”
According to two recent reports from Goldman Sachs, the cost of developing fossil fuels has surpassed the cost of renewable energy projects. “That’s an extraordinary divergence, which is leading to an unprecedented shift in capital allocation. This year will mark the first time in history that renewable power will be the largest area of energy investment,” Goldman Sachs analyst Michele Della Vigna told Bloomberg.
These developments are critical. But even in the face of these tectonic shifts, national governments still plan to produce twice the fossil fuels than what is in keeping with limiting average warming to 1.5°C above pre-industrial levels, according to the United Nations Environment Programme (UNEP).
Not only are we failing to wind down fossil fuel production and use; we are adding to the problem. The markets alone cannot ensure this happens in a fast and equitable way. We need an actual government-regulated phase-out, and removing financing of the problem is key.
In the necessary transition to renewable energy, half the world’s fossil fuel assets could soon be financially worthless. In fact, new research published in Nature Energy shows that this could happen as early as 2036. Energy conglomerates have various reasons to peer into their crystal balls and determine which of their assets are at risk and worth shedding. There’s also incentive for the banks and other institutions financing these fossil fuel companies to sell off assets as well. Yet fossil-fuel-dependent communities, as well as workers and their retirement funds, ultimately will bear the costs – not bank executives.
Private equity and vulture firms are buying up coal-fired power plants, operating them at a lower cost for up to 15 years, and then shuttering them earlier than their original lifespan, to much fanfare. They claim this is doable because the lower operating costs lead to a quicker payoff, and in turn an earlier closure of facilities.
The world’s largest asset manager, BlackRock, is getting in on the action, along with banks such as Citigroup, HSBC and the Asian Development Bank (ADB). They’re framing the dirty asset takeovers as beneficial to the planet, but ultimately, they’re running distressed coal plants into the ground or extending their operational lives to grab the last cash possible before assets are stranded. Either way, these schemes should be viewed with a huge grain of salt. None of these financial institutions have good track records of actually meeting climate commitments, including reducing the emissions footprints of the projects they finance or getting out of financing fossil fuel infrastructure altogether.
What’s needed are just and equitable buyouts that permanently retire those assets without propping up fossil fuel companies or pushing the cost of environmental liabilities onto taxpayers. Retiring coal power plants early will, in 2025, cost an estimated US$164 billion, according to research from American non-profit RMI – a small price to pay when climate disaster damages topped US$210 billion worldwide in 2020 alone. The costs to retire facilities are dropping as more coal power plants become uncompetitive.
The shuffling of fossil fuel assets and the fact that oil and gas companies are subsidized to the tune of US$11 million per minute make it clear that the necessary wind-down of fossil fuel production and funding won’t take place without an agreement and framework in place. It certainly won’t happen in a way that will protect workers and communities most dependent on oil, gas and coal and that lack the resources to move away from them.
That’s why a growing network of parliamentarians; local governments including Los Angeles, Vancouver, Sydney and Barcelona; Indigenous leaders; youth; more than 1,000 civil society organizations; and more than 100 Nobel Prize laureates have endorsed the principles of a Fossil Fuel Non-Proliferation Treaty. This first-of-its-kind global initiative aims to increase transparency and accountability to phase out fossil fuels in the ground and accelerate a just transition. It would advance action along three pillars.
First, end the expansion of fossil fuels. In May 2021, the formerly fossil-fuel-friendly International Energy Agency issued a report stating there was no longer any “need for investment in new fossil fuel supply in our net zero pathway. Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required.”
Second, wind down production of existing fossil fuel stockpiles at the needed 5% annually, as per UNEP. Third, create agreements for wealthy fossil-fuel-producing countries to lead the transition and support countries more dependent and less financially resourced to move to clean energy and diversify their economies.
The markets, on their own, will not deliver the right signals and incentives as long as they are skewed by fossil fuel subsidies and policies that reward short-term profits despite the long-term risk to us all. International co-operation among governments is essential to wind down the source of the problem.
While some may grumble, the costs of a fossil fuel phase-out are affordable – and they are no doubt cheaper than the costs of climate inaction on our economies and our collective health.