Top military experts and government institutions like the U.S. Department of Defense and National Intelligence Council warn that climate destabilization threatens our national security, yet global emissions just keep going up.
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When Oregon state officials last month denied a key permit to a huge proposed facility for exporting coal to Asia, they deepened a geographic divide t…
Read more: Renewable Energy, Coal Power, Green Energy, Fossil Fuels, Coal-…
Date: 9/16/2014Source: Clean Energy Solutions Center9:30-11:00 a.m. ET
The Clean Energy Solutions Center, in partnership with United Nations Foundation’s Energy Access Practitioner Network, is hosting a free webinar-based training to showcase work un…
Date: 9/22/2014Location: MESource: Maine Ocean & Wind Industry Initiative10:00-10:45 a.m. ET
Efforts in Europe are well underway to reduce the cost of offshore wind, including the development of new turbines, innovations in support structures, in…
report written by Nathaniel Bullard at Bloomberg New Energy
Finance highlights the difficulties large institutional investors
would have divesting from fossil fuels. What it does not
specifically discuss is that these difficulties could lead to
large financial losses for investors who see the difficulty of
divesting as a reason to delay.
Just as we can’t easily fill up our cars with solar power instead
of gasoline, the report points out that there is no asset class
that can directly substitute for oil and gas in large
A person with a short commute can simply ditch gasoline for
renewable fuel by riding a bike, and small investors can easily
fuels without sacrificing growth or yield by using small
capitalization stocks and yield
The relatively high yield of oil and gas stocks is the most
difficult to replicate, even at its level of 2.41%, which the
report describes as “not enormous.” According to the report, the
only sector with a higher average yield is REITs (at 4.55%). REITs
have a total market capitalization of less than a third of oil and
gas stocks, so it would be impossible for more than a fraction of
large investors to replace their oil and gas holdings with REITs.
The Instructive Case of Coal
In contrast to oil and gas, the
report makes the point that because the market capitalization of
coal companies is much smaller, divesting from coal alone is much
easier than divesting from oil and gas. The report states that
“Coal equities are less than 5% the total value of oil and gas
equities, and have already trended down nearly 50% in the past
five years… as a result, divesting from coal would be much
easier then divesting from oil and gas.”
The report’s author Nathaniel Bullard, told me in an interview
that divesting from coal would have been more difficult just three
years ago. He says, “US coal has had clear indicators of future
change in place for a while. … Some coal equities have lost 90% of
their value since 2011… This much diminished size means that…
the same number of shares will represent a much smaller portion of
an investor’s overall portfolio relative to 2011.”
Hold High, Sell Low?
To put it more bluntly, investors who
have already lost their shirts in coal stocks will have a much
easier time selling their much-diminished holdings today than they
would have when coal stocks were at their peak. Ironically, it’s
easier to sell low and buy high than vice-versa, especially for
investors who manage large pools of money.
It does not take a multi-million
dollar salary to know that waiting until your stocks have fallen
by half before you sell is a suboptimal investment strategy.
Despite past “clear indicators of future change” and lower
estimates of future coal demand due to air pollution regulations
in the coal industry, institutions like Stanford are only now
beginning to divest from the sector. Most have not yet budged.
Are Oil and Gas Next?
The report begins with a quote from
an executive who describes the divestment movement as “one of the
fastest-moving debates I think I’ve seen in my 30 years in the
markets”. If this fast-moving debate leads to fast-moving
divestment, the sheer size of institutional oil and gas holdings
would lead to a scale of the selling that could easily drive down
prices of oil and gas stocks as fast as coal stocks have fallen
over the past few years.
The divestment movement was only in
its infancy when coal stocks peaked in 2011, so divestment has
been only a minor contributor to their decline. Bullard attributes
most of the decline to fundamental factors, such as low gas prices
and (to a limited extent) wind power in the US, and concerns about
air pollution in China.
That said, the long term fundamentals
of oil and gas are not favorable. Industry costs are rising as
producers shift towards unconventional sources such as tar sands
and tight oil and gas which are extracted with relatively
expensive techniques such as hydraulic fracturing (“fracking”).
Meanwhile, high fuel prices are beginning to reduce average
driving distances in mature markets such as the US and Europe
while the declining costs of efficiency technologies such as
hybrid and electric vehicles further lower demand. In the fastest
growing vehicle fuel market, China, air pollution concerns have
led the government to aggressively promote “new energy” vehicles,
particularly hybrids and EVs.
Natural gas faces increasingly
inexpensive competition in electricity markets from wind and solar
generation. That, combined with technologies such as storage,
smart grid, demand response, and better transmission which make it
easier and cheaper for these variable sources to supply a larger
portion of electricity demand with less reliance on dispatchable
generation such as natural gas, hydropower, and biomass-fired
The fundamentals of all fossil fuels
will be further undermined if the world ever makes a concerted
effort to rein in carbon emissions. At the moment, the prospects
for large scale regulatory moves seem dim, but at some point the
increasing costs in terms of falling crop yields, widespread and
severe heat waves and droughts, ocean acidification and the like
will lead to political action. At this point it will almost
certainly be too late to avoid significant economic and human
costs from climate change, but that does not mean that it will not
help us avoid even greater damage. And the longer we delay taking
substantive actions to curb greenhouse gas emissions, the more
draconian those actions will have to be. Drastic moves to curb
carbon emissions will have even more drastic effects on the
fundamentals of fossil fuel industries.
In part because it is so hard for
large investors to exit fossil fuels, it is unlikely that a
majority of such investors will move to divest before they have
lost a large portion of their current holdings to price declines
driven by the fundamental factors outlined above and selling from
more motivated investors.
Some of the factors listed above,
such as concerted political action to curb carbon emissions, may
take a long time to be felt. Other factors, such as the declining
cost of renewable energy and efficiency technologies and the
increasing costs of fossil fuels are moving energy markets today.
When these factors will begin to hurt
oil and gas stocks is unclear, but the coal industry shows that,
although divesting is hard, it does not pay to wait too long.
This is where the analogy to
replacing fossil fuels in your commute by buying an electric car
breaks down. With electric cars, the more people own them, the
easier and cheaper they will be to use: growth in charging
infrastructure will rise with the adoption of plug-in vehicles,
while higher volumes should help bring down their initial cost.
In contrast, it pays to be first
rather than last when divesting from fossil fuels. While it is
possible to be too early, at some point the worsening fundamentals
of fossil fuel industries and/or a large scale divestment movement
will undermine the value of all fossil fuel stocks. Those who
divest sooner will have much more money to invest elsewhere than
those who delay because divesting is just too hard.
Fortunately, small investors have it
easy. Divesting, for once, is a place where the small investor has
the advantage on Wall Street.
This article was first
published on Renewable Energy World, and is republished
If we assume that human civilization will continue for at least another 1000 years, then we will eventually arrive at a 100 percent renewable energy system. Whatever you believe about the existing reserves and undiscovered sources of fossil …
It was good news for renewable energy when President Barack Obama in June proposed carbon dioxide restrictions on existing power plants. It is even better news now that he may use the plan to leverage an international climate accord.