NB Financial Innovation
Why Fossil Fuel Companies Must Evolve or Die: An Interview with Carbon Tracker Founder Mark Campanale
Editor’s note: Throughout 2017, NextBillion is organizing content around a monthly theme, dedicating special attention to a specific sector alongside our broader coverage. This post is part of our focus on the environment for the month of March.
Carbon Tracker is a nonprofit financial think tank that aims to align global capital markets with the climate goals set out in the Paris agreement, limiting global warming by transitioning the world away from fossil fuels. The initiative’s work is based on a stark reality: To keep global warming under 2 degrees Celsius and (hopefully) avoid the harshest consequences of climate change, says Carbon Tracker founder Mark Campanale, “we cannot emit more than around 900 gigatons of Co2,” based on the known physical effects of carbon dioxide in the atmosphere. Yet corporations and governments continue to seek new reserves of gas, oil and coal – and if we burn it all, he says, “the world’s going to release 2,500 gigatons of CO2. So that tells you half to three-quarters of known fossil fuels will have to stay in the ground” – something Campanale refers to as the “unburnable carbon” capital markets thesis.
Why aren’t markets adjusting to this reality? “There’s no one telling the markets, ‘Exxon’s got to stop developing new projects, or Chevron should start to begin an orderly wind-down,'” he says. “So that tells us the markets are pricing the risk wrong – they’re not really understanding the science.” And the consequences of this lack of insight go beyond the damage it will do to our environment: According to Campanale, “If the markets don’t get this one right, they could be deploying billions, no trillions of dollars, into projects that just aren’t needed in a 2 degrees world. … If a company, for example, spends $10 billion on building a new pipeline from Canada to the U.S. because they think it’s got a 50-year life, what happens if it only turns out to have a 10-year life? The economics, the return on capital, are going to be all wrong. So those are the risks we’re trying to highlight, to get the math around unburnable carbon into the metrics used by your typical Wall Street energy analysts.”
But wouldn’t most fossil fuel companies argue that their product is essential to meeting the world’s current power needs, and that this isn’t likely to change soon? Not so fast, says Campanale: “In the last seven years, the price of photovoltaics has dropped by 85 percent. We’ve gotten to the stage now where solar is beating coal and other fossil fuels energy sources out of the park, just purely on cost and efficiency.” And this dynamic is only going to get more pronounced as technology advances. “If you look at demand for petroleum, a lot of the large oil companies are saying, ‘Electric vehicles will only have a 5 percent penetration rate in 20-30 years time. But what history tells us about transitions is it can happen much faster than people think.” Citing the examples of video rental chain Blockbuster being supplanted by online streaming services like Netflix, or Blackberries being unthroned by iPhones, he predicts that the same thing will happen with electric vehicles and clean energy as costs continue to fall. “If you’re in Africa and you’re not connected to the grid, are they really going to build coal-fired power stations in the middle of the savannah, with huge pylons for hundreds of miles transporting coal-fired power generation? No, what’s actually happening right now is that at the village level, they’re building mini-grids based on solar, or household-level solar, skipping completely coal-fired power stations and going straight to the renewable energy source.”
But even if they wanted to change, could fossil fuel companies reshape themselves at this point? Campanale thinks they have no choice. “If we look at the break-even prices of oil projects, for many big companies it’s costing them about $55 a barrel to get the oil out of the ground … and they’re selling it for around $50, $55, $58 a barrel. So they’re getting a zero return on equity. The margins have collapsed. … And because of that, Wall Street has suddenly woken up that this industry that used to be able to get it out of the ground at $10 and sell it at $100 and make huge profits – those days are probably gone now. … And if electric vehicles come in and kill off demand, as we think will happen, then prices for oil will stay low. And with low prices, companies aren’t making money. This is an industry facing a crisis … and it isn’t just a climate problem, it’s actually an existential problem caused by the cost pressures on the company and the collapse on return on equity. Investors want to invest a buck and make two bucks – they don’t want to invest a buck and make five cents. It’s just basic economics.”
With that in mind, is shareholder activism like the divestment movement even necessary to motivate a transition that’s bound to happen anyway? Campanale shares his views on this topic and others – including a troubling blind spot that plagues many in the impact investing space – in this interview, recorded at The Economist’s “Impact Investing: Mainstreaming Purpose-Driven Finance” conference. You can watch the conversation in the video below.
James Militzer is NextBillion’s senior editor.