November 15, 2019
Since 1800, worldwide consumption of fossil fuels has increased 1,300-fold. Access to this cheap energy has lifted people out of poverty and catalyzed economic growth, wealth creation and healthier living environments. So, the fossil fuel industry must be remarkably profitable, right?
After all, if renewables like solar and wind were competitive in a free market, would we not have switched over by now? Wouldn’t the top of the Forbes Global 2000 be stacked with clean energy companies instead of oil and gas giants?
It sounds reasonable that market forces make fossil fuels our energy source of choice. The reality is quite different, however. Oil and gas companies are better at procuring government subsidies than generating profits. That has led investors to overestimate the fossil fuel industry while leaving clean energy innovations underfunded. It seems like we give companies important to the energy transition “just enough capital to fail.”
Until we unrig the playing field, clean energy will struggle, and your tax dollars will perpetuate climate change. There is little time left for action, as the Intergovernmental Panel on Climate Change (IPCC) warns that without major reductions in CO2 output by 2030, the Earth will suffer severe and irreparable damage.
Human civilization needs to become carbon neutral. But has anybody seen a realistic plan for that? What stands in the way of unhooking ourselves from cheap fossil fuels?
A Subsidy Transition for the Energy Transition
Today, your tax dollars pay fossil fuel shareholders and help western oil and gas companies compete with state-owned enterprises from the Middle East. That’s a daunting task when you consider that the cost to extract Saudi oil is a multiple lower than for any of its rivals. Even so, state-owned Saudi Aramco wants out of the industry for fear of stranded assets. They hope that western pension funds will buy them out in the upcoming IPO. That begs the question: how profitable is the fossil fuel industry?
My team at Chrysalix analyzed the net profits of the 1,801 largest publicly traded oil, gas and coal companies worldwide for the year 2013. Their combined net profits were $500 billion (USD), yet they received direct subsidies that year worth $700 billion (indirect subsidies were not counted). To put this in context, the International Energy Agency (IEA) estimates that renewables received about $120 billion worth of subsidies in 2013. That’s higher on a per-kWh equivalent basis, but much lower in aggregate.
Yes, the West built its fossil fuel industry on tax breaks, taxpayer funding and subsidies for both producers and consumers. That made sense when cheap energy was the key to economic growth in the 20th century. Now, even though fossil fuel use is the greatest threat to human life on Earth, your tax dollars continue to be shovelled into the hands of fossil fuel shareholders—and through your pension fund, they may buy out the Saudis in the Aramco IPO.
As a free market advocate, I don’t mind subsidies that help introduce crucial new innovations into the market. But once those innovations become mainstream, government should step aside and ensure a level playing field.
We pretend that the free market will govern the transition from fossil fuels to cleaner energy sources, but, in reality, subsidization keeps fossil fuels in their position of privilege. The playing field is rigged against clean energy, delaying the necessary energy transition. What can we do about it?
Divestment Dilemma: Out of Fossil Fuels, But Then What?
As long as governments artificially buoy the stocks of fossil fuel companies, clean energy will struggle to compete. And if governments don’t transition subsidies from fossil fuels to renewables, investors are unlikely to divert capital into fusion energy, hydrogen, wind and other carbon-fighting innovations.
Bloomberg forecasts that clean energy investments will hit $2.6 trillion this decade. Most of that will go into solar, which is becoming so cheap that it can compete with subsidized hydrocarbons. Yet solar alone is not enough to transition big cities, transportation and heavy industry off fossil fuels. For that, we need additional sources of clean energy.
Institutional investors have committed to divest $11 trillion from fossil fuels, but the likelihood that money will be invested in renewable energy is slim. It seems that big investors would rather park their capital, as the bond market shows. An unprecedented $15 trillion of the $60 trillion bonds in circulation now trade at negative yields.
Isn’t the surge in “impact investing” changing things? No, because not all impact investments are created equal.
Too Much Impact Investing Has No Impact
Picture an Impact Scale that ranges from -3 to +3. The higher on the scale an investment is, the higher the risk but the greater the potential impact on the energy transition and social causes. Companies in fusion energy, for example, belong at +3. Companies like Beyond Meat and Tesla and CO2 capture companies like Svante and Carbon Engineering also deserve that ranking.
The opposite of impact, at -3, is greenwashing. For example, the Royal Bank of Canada (RBC) offers an impact portfolio featuring Suncor, one of the biggest players in the Canadian oil sands, and Baker Hughes, one of the world’s largest oil field services companies. Who is RBC kidding? There are quite a few examples like this, such as Mackenzie’s Global Sustainability and Impact Balanced Fund. The major holdings include Alphabet, Facebook, Comcast, Amazon, Royal Caribbean Cruises, Total and Southwest Airlines.
Google is carbon neutral because it purchases offsets, which mitigate harm but aren’t transformational at all. Amazon’s delivery trucks spew tons of carbon, although the company is working on electric delivery vehicles. Royal Caribbean and Southwest Airline’s carbon initiatives aren’t even worth mentioning. And Total, the French fossil fuels company—really?
At the very best, this “impact” fund is doing no harm. Tech companies don’t deserve to be at +1 until they get most of their energy from green sources. Promises don’t equal impact.
We need clarity in Impact Investing with a scale like this:
0: Neutral: The investment is neither impactful nor harmful.
The +3 companies should receive substantial subsidies and tax relief, while the -3 companies should be punished with extra taxes. That would give the energy transition the necessary boost and encourage investors to put their capital where it can make a real difference.
Freer Market Forces Will Enable a Timely Energy Transition.
It’s time to acknowledge that fossil fuels are held up more by government intervention and taxpayer money than by free market forces. Most investors seem to be against subsidizing clean energy, but it’s a double standard. If we want to win the fight against global warming, we need a transition of the subsidies that fossil fuels have long enjoyed.
At the same time, we must incentivize investors to reallocate their holdings to truly impactful clean energy innovations. We can no longer pretend that funds holding oil companies are “impact” investments. The Impact Scale presented here is a starting point that can help investors identify +3 opportunities that not only combat climate change but offer substantial returns.
Divesting from fossil fuels only to fund Silicon Valley tech is not impact investing. It’s time to fund true innovations and cut the greenwashing.
Until the energy industry’s subsidized playing field is unrigged, the energy transition will remain stalled. The successful transition to a free market energy industry depends on governments ending fossil fuel subsidies and providing the right incentives to clean energy and impact investors. The faster we establish this free market system, the greater the odds that we will achieve carbon neutrality and avert a climate catastrophe.