The strengthening economic case for fossil fuel divestment

That’s the title of my latest piece in The Conversation. The bottom line

Leaving aside the ethics of divestment and pursuing a purely rational economic analysis, the cold hard numbers of putting money into fossil fuels don’t look good.

Unless universities are willing to bet on the destruction of the planet they have committed themselves to understanding and preserving, divestment from fossil fuels is the only choice they can make. Forward-thinking investors of all kinds would be wise to follow suit.

23 thoughts on “The strengthening economic case for fossil fuel divestment

  1. Thanks, John. It’s great to see this side of the case for divestment being made. I certainly accept that the ethical case is very strong. But I believe that is far less convincing to the people that need convincing than the self-interested (financial) side of it.

  2. “More immediately, the high discount rates typical of financial markets mean that ordinary investment decisions typically take little account of the future beyond the next 50 years anyway. At a discount rate of 6%, it’s not deemed to be worth spending a dollar now to avoid the loss of $15 in 50 years’ time.”

    IMHO the discounting issue is central to the problem with capitalism and needs a lot more exploration and public discussion because it seems to be the Achilles heal of why we should not let economics call the tune over direct legislation to ban carbon emissions above a given level.

    ??? 6% – the discount rate in reality needs to be got down to 1.5% for investing in climate change mitigation to make sense.

    Worse, return on capital needs to be even higher to pay not only investors but for say paying the CEO and development of a company’s infrastructure and human capital. I’ve heard a figure of 15% returns mentioned.

    Another aspect of the problem is superannuation – supposedly this is looking for 6 to 10% return but this is before paying all the financial industry parasites and accounting for depreciation of assets invested in. Further superannuants want their return now if they are investing for retirement income – maybe the next 10-20 years at most – not the 30 to 40 years to start making returns on say a solar thermal power station – or a nuclear one if that is you poison.

    As a result economic approaches to climate change mitigation in isolation seem worse than useless though analysis of discounting can be helpful in showing why we are in such a mess. It make economic sense to trash the planet.

    (ps at the Risk of being boring I mention again ACKERMAN, F. 2009. Can We Afford the Future? The Economics of a Warming World, Zed Books Ltd, Cynthia Street, London. to understand this issue further – see also the powerpoint presentation with the same title and author).

  3. Newtonian

    ??? 6% – the discount rate in reality needs to be got down to 1.5% for investing in climate change mitigation to make sense.

    Perhaps I am misunderstanding you but a discount rate of 6% implies $17.37 in 50 years time and one of 1.5% implies $11.76 in 50 years time. Surely you would prefer to save the latter than the former?

    The word discount implies depreciation of benefit so perhaps you mean that the benefit only receded by 1.5% per year in value on the lower discount rate?

    In that case in 50 years time a dollar spent now would be worth 47.6 cents.

  4. Agreed that for any at least partly ethical investor like a university, and probably for an amoral rational investor, divestment is the right policy. Norway’s $800 bn state rainy day fund is still mulling over the question.

    When I blogged on Stanford’s divestment from coal – the only really large endowment so far – I suggested that the divestment would raise the required return on capital for fossil fuel companies and so hamper their operations. I got pushback from commenters of the efficient markets persuasion, saying it would make no difference to company behaviour. What is JQ’s take on this? The commonsense view is that when a significant bloc of investors sell, or a single large investor like Harvard, they lower the price, and therefore raise the yield. The company’s managers have to prune investments that don’t satisfy the new, higher benchmark. It looks as if the Seven Sisters are doing exactly this, cutting exploration in high-cost, high-risk provinces like the Arctic and accepting a further decline in sales.

  5. I don’t think one investor is enough. But if a substantial class of investors pulls out, the cost of capital must rise to compensate other investors for the extra risk associated with overweighting fossil fuels in their portfolios.

    Moreover, for other portfolio managers, the reputational risk associated with a bet on fossil fuels that turns out badly will be high.

  6. There are maybe a few hopeful signs. I will wait for the world coal consumption numbers to show significant and accelerating declines year after year for maybe 10 years in a row. Then I will call coal as on the way out.

    We can’t forget oil and gas. We have to stop using them too or at least reduce from current use to about 10% of current use. Unless there is radical and rapid transformation now it will be too little too late. We need 90% of fossils phased out by 2030 IMO. It’s going to be a busy 15 years if we are to save the environment and our global civilisation.

  7. “Coal provides around 30.1% of global primary energy needs, generates over 40% of the world’s electricity and is used in the production of 70% of the world’s steel.” – Coal Facts.

    “Total world coal production reached a record level of 7822.8Mt in 2013, increasing by 0.4% in comparison to the previous year.” – Coal Facts.

    We have not even begun to turn it around. As I said, there are some hopeful signs but we need to see year after year of rapid decline in coal use… starting now!

  8. @rog
    KLP is the smaller Norwegian public-sector fund, with a mere $66bn under management. I was writing about the big one, the $800 bn Government Pension Fund (formerly Petroleum Fund), which is still hesitating. It’s one investor which would be presumably enough to shift prices, pace JQ.

  9. In Australia coal will be given a boost by the expected rise in the gas price from mid 2015 with east coast LNG exports and an expected El Nino-lite reducing hydro output. Subcritical black coal has about double the emissions per Mwh of combined cycle gas fired electricity and brown coal about triple. Coal plant also needs to be kept hot thereby wasting emissions which is less the case for some gas fired plant.

    The test will come in the period 2025-2035 when the big coal stations need replacing. Perhaps carbon pricing will be back in fashion. It has been assumed that in NSW that the ~2 GW Bayswater 2 plant would be gas fired not coal but there won’t be enough cheap gas. The recently elevated Victorian Greens seem keen on replacing 1.6 GW Hazelwood, due to retire 2031 and the OECD’s dirtiest power station but plans are not coherent at this stage. Domestic coal isn’t going anywhere for a while.

  10. Hermit

    Hazelwood was ‘due to retire’ in 2005 — assuming a 40-year life. Allowing for some new capacity at Hazelwood in the 1980s, you could argue for 2023 … though I wouldn’t.

    There’s about 10GW too much supply in the system and Hazelwood and Anglesea between them are about 1.6GW. It seems simple enough to decommission them. It’s not as if those operating the plant post-Kyoto should not have anticipated this day.

    Victoria could just impose an airquality standard and that would take care of them on the spot.

  11. @Fran Barlow
    I suspect Anglesea will get the chop with the closure of Point Henry smelter. However with no carbon tax and expensive gas then brown coal is the cheapest form of 24/7 power. When carbon tax was $23 Loy Yang said the tax could double and they would still be Australia’s cheapest generator. Therefore I suspect if Hazelwood got the chop then Loy Yang and Yallourn would operate at higher capacity, thus saving only some of Hazelwood’s 16 Mtpa emissions. It is expected that both SA and Tas will increase imports of Vic brown coal power in the foreseeable future. To curtail it we need a leakproofed emissions target (ie a well designed ETS) then let the players choose who survives.

  12. Hermit, hang on. Your Empowerme site shows Vic brown coal generation as already more or less maxed out all the time (including Yallourn and Loy Yang). It’s obviously a major problem if we can’t or don’t start legislating to phase that out asap. But, in any case, where do you think all this extra coal capacity is going to come from?

    I had a go at putting this together on the weekend:

    It’s 5 min intervals, no smoothing. It’s instructive if you view it as an accompaniment to the Empowerme site (which unfortunately doesn’t archive data), and cycle through a few weeks day by day. I definitely have a much better understanding now than when I replied to Val a few days ago.

    The graphs shouldn’t be compared directly to one another as the scales are different. I thought it more useful to set them to the actual interconnector capacities. The yellow lines are the zero point.

    See what you make of it.

  13. Nick the graphs are quite informative but I think the flow arrow approach sometimes used by BREE for energy imports and exports is even more so. Thicker arrows would represent bigger flows. However a problem might be attributing pooled input to a particular generation source. For example at certain times SA might send Vic some windpower with some solar in the mix. Blue arrows with yellow dots? I agree empowerme may mislead for example when showing Tasmania with 0.5m population as 90% renewable while NSW with over 7m but say 10% renewables looks like a pariah.

    This new information site could also include a graph for total NEM interconnect flows on a zero horizontal axis. That would show busy and quiet days for interstate trading. It would also be good if empowerme retained selected archive results such as best solar and worst coal day in 2014.

  14. Apart from the risk factor associated with long term fossil fuel energy system investments there is for universities the need to invest in their own outcomes.

    Universities produce qualified professionals in many fields not the least being in the sciences, the sciences that predict a poor environmental outcome from the over use of stored carbon fuels rather than utilising the constant solar energy flow that produced the stored energy in the first, and never to be repeated to the same degree, place.

    The overwhelming conclusion of the many thousands of scientists, the product of decades of educational achievement warns that the very institutions from which they graduated along with the communities that created them are at risk if there is not immediate change in energy systems that sustain us all.

    The point is that what sort of institution is it that fails to honour the accumulated research outcomes of its own graduates, in favour of the politically contrived arguments of a handful self serving renegades?

  15. @Fran Barlow

    That seems a very compelling argument on all grounds: economic, environmental and in terms of real energy requirements. Why is it impossible for our political-economic system to deliver logical and beneficial outcomes? Could it be that rent-seeking has entirely hijacked our political economy? Until we change the politics we will get no substantial progress on these issues; albeit the politics might only change when real outcomes get so horrendously bad they are totally undeniable (like China’s pollution for instance).

  16. @Ikonoclast

    You could be a climate change denier and close the two I mentioned on local health and safety grounds alone. Anglesea emits massive amounts of SO2 and was only licensed to sell energy this year to avoid Alcoa having a stranded asset. Both plants harm air quality seriously and you will recall what happened when Hazelwood’s feeder mine caught fire in the bushfire. It burned for months forcing evacuations.

    So yes, very much a case of spivs running the show.

  17. “However a problem might be attributing pooled input to a particular generation source. For example at certain times SA might send Vic some windpower with some solar in the mix.

    Hermit, unlike other countries including the UK, the AEMO isn’t required to publically release purchase agreement data. Which really makes it impossible to get an accurate picture of “what’s in the mix” over the interconnectors.

    I think you can make some educated guesses though based on the interconnector readings, and what each state’s generating at any given time.

  18. An interesting issue is whether Victoria’s brown coal stations being the cheapest generators are working flat out. If so Hazelwood is unlikely to be retired as per Greens policy. Empowerme suggests brown coal output is about 5-6 GW day and night where total brown coal capacity is 6 GW I believe. This is clearly one of the obstacles to getting emissions down ie the success of brown coal fired baseload.

    I calculate 5500 MW for 8760 hours a year at 1.23 tonnes of CO2 per Mwh is 59 Mt a year of emissions just from brown coal. We’ve only cut our national emissions by some 10 Mt (=552-542) between years 2000 and 2013. We know who the villains are but seem to be incapable of stopping them.

  19. Hmmm,

    International Power Australia
    Submission on the Carbon Pollution
    Reduction Scheme Green Paper
    10 September 2008

    Click to access IPRA.pdf

    “I’ll tell you one thing for sure… I wouldn’t trust no words written down on no piece of paper, especially from no Dickinson out in the town of Machine… you’re just as likely to find your own grave.” – Train Fireman, “Dead Man” directed by Jim Jarmusch.

  20. @James Wimberley

    Norwegian govt release details of criteria here.

    Climate change is an economic risk and assets are individually judged on their ability to safeguard against economic loss. This is somewhat reliant on price signals so does have its own consequences – some companies could squeak through.

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