High Fossil Fuel Valuations Are a Political Weapon

In France this week, temperatures reached 108 degrees Fahrenheit, some 36 degrees above the seasonal average. London hit 104, breaking a record set in 2019. Meanwhile, extreme wildfires are raging across France, Spain, Portugal, Greece, Turkey and a dozen US states.

Global warming is no longer a problem of the future. It’s here, and its consequences are rapidly getting worse.

In response, nations have promised to reduce their greenhouse gas emissions, primarily carbon dioxide from fossil fuels. Following the 2015 Paris Agreement, the US promised to reduce emissions by 50% from 2005 levels by 2030, and to achieve net zero emissions by 2050. Many other nations have made similar or more ambitious promises.

As a consequence, financial markets should have begun marking down the value of “stranded” fossil fuel assets — reserves of oil and coal that simply can’t be burned if we’re to have a liveable future. Nearly a decade ago, then Governor of the Bank of England Mark Carney highlighted this problem with great public fanfare.

Yet the markets haven’t been listening. A recent study published in Nature Climate Change found that the present value of ostensibly stranded oil and gas assets still exceeds $1 trillion. They’re held mainly by private investors in OECD countries, and the value of assets held by prominent financial institutions is roughly twice that of the risk exposure which led to the banking collapse and financial crisis of 2007-2008.

What’s going on? It might be, of course, that markets just aren’t very efficient, and investors are so far ignoring the horrific shock they’ll experience some time in the future. Or, it could be that investors just don’t believe governments will act on their climate pledges, and really, who can blame them? Despite countless fine words, global greenhouse gas emissions are still relentlessly rising.

But there’s also a third possibility, illustrated by the recent dramatic collapse of climate legislation in the US Senate, where Democratic senator Joe Manchin, himself heavily invested in coal operations, tipped the balance against stronger climate policy, and was of course joined by the 50 Republican senators. It could be that fossil fuel companies and their investors — especially some powerful groups with extensive lobbying reach — hope to influence the future by keeping their fossil fuel valuations inflated. Perhaps they believe that continued confidence in fossil fuel assets might be enough to sway markets, encourage further investment, and ultimately convince the public to expect continued fossil fuel use. That is of course easier if effective climate mitigation policy is obstructed.

It’s disturbing, but this idea makes a lot more sense than one might initially think. High valuations create expectations that can easily become self-fulfilling, letting governments get away with doing nothing – generally the least-painful course of action for political leaders — if politicians can be convinced that declining fossil fuel demand will lead to lost elections or social unrest.

This dismal outcome is conceivable if fossil-fuel interests manage to build a coalition large enough that abrupt change away from fossil fuels is perceived as too painful to be feasible, reasons Gregor Semieniuk, an assistant research professor of economics at UMass Amherst and the lead author on the Nature study. The more people see fossil fuels as a great investment, the more will support fossil fuel stocks, and the more fossil fuel companies will invest in real assets. Then it will be harder for governments to push back, because more money and capital will be at stake. Worse yet, fewer people will have invested in energy alternatives such as renewables, which will then draw support from a weaker lobby. The end result? We all continue using fossil fuels at rates incompatible with climate change mitigation regardless of the increasingly dreadful consequences.

In sum, showing confidence in fossil fuels now can make shifting away from them seem worse, for governments, than sticking with them. As Semieniuk puts it, “What is expected today and happens based on today’s expectations can influence what’s feasible in the future.”

This is a thoroughly cynical view of investors’ motivations. Part of me prefers to believe that investors might still wake up, if they see real evidence of action on climate — say, five consecutive years of falling emissions. But historically, the fossil fuel industry has certainly tested the limits of cynicism. Why should the future be any different?

One hope is that the influence of opinions works both ways. A few years of consistent emissions reductions might create a critical mass of expectations and widespread belief that fossil fuels have a bleak future, leading to an accelerating flight toward greener energy. The key is to make the coalition of winners from climate change so powerful that stranded assets seem like an acceptable societal cost, affecting mostly a few laggards who realign their expectations later than others. Luckily, in Semieniuk’s opinion, the favorable economics of a growing number of low-carbon alternatives makes this an increasingly likely outcome.

And yet, either outcome is still possible. Everything still hangs in the balance. In the case of climate, opinions are not just opinions – they carry a potentially decisive influence over our collective future.