The decoupling from fossil fuels by the four primary sectors responsible for much of the global warming emissions and their realignment with the emerging renewable energies of a Green New Deal is quickly edging society to the collapse of the fossil fuel civilization. In June 2018, Nature Climate Change published a detailed and extensive study conducted by scientists from the Cambridge Centre for Environment, Energy and Natural Resource Governance at the University of Cambridge, which concluded that the question of the carbon bubble was no longer tied to governments’ emission targets but rather to an ongoing technological revolution, which “remains robust even if major fossil-fuel producers [e.g., the US] refrain from adopting climate mitigation policies.”1 “Our conclusions,” say the authors of the report, “support the existence of a carbon bubble, which, if not deflated early, could lead to a discounted global wealth loss of between $1–4tn, a loss comparable to the 2007 financial crisis,” but “further economic damage from a potential bubble burst could be avoided by decarbonizing early.” The authors go on to say:
Irrespective of whether new climate policies are adopted or not, global demand growth for fossil fuels is already slowing down in the current technological transition. The question then is whether under the current pace of low-carbon technology diffusion, fossil-fuel assets are bound to become stranded due to the trajectories in renewable energy deployment, transport fuel efficiency and transport electrification. Indeed, the technological transition currently underway has major implications for the value of fossil fuels, due to investment and policy decisions made in the past. Faced with SFFA [stranded fossil fuel assets] of potentially massive proportions, the financial sector’s response to the low-carbon transition will largely determine whether the carbon bubble burst will prompt a 2008-like crisis.
The authors of the report suggest that the competitive advantage of solar and wind energy prices could force a weakened oil industry to drop the price of oil on world markets—despite the losses—in order to extract the maximum amount of remaining oil from under the ground and the sea and minimize remaining stranded assets. To quote from the report, “Low fossil-fuel prices may reflect the intention of producer countries to ‘sell-out’ their assets, i.e. to maintain or increase their level of production despite declining demand for fossil-fuel assets.” If this scenario were to happen, it would mean a potentially catastrophic increase in global warming emissions, taking the world far beyond the 1.5°C threshold.
Let’s back up and revisit the series of events that began with governments mandating targets for the reduction in global warming emissions and the subsequent rapid technological innovations that led to a dramatic plunge in the cost of renewable energies.
As briefly mentioned in chapter 2, by 2007 a consensus was emerging, both at the European Commission and within the European Parliament, that weaning the EU off a fossil fuel culture would necessitate legally binding targets across three interrelated domains that all member states would need to accept and adopt: a dramatic increase in energy efficiency; a historic shift to renewable energies; and a huge reduction in global warming emissions. Each of these mandated targets would feed off the other, helping the EU take its first step toward the ultimate goal of a complete transformation into a postcarbon economy by 2050.
The eureka moment came in November 2005 with the election of Angela Merkel as chancellor of Germany. What was most notable about the election is that it led to a grand coalition government between Merkel’s Christian Democratic Union (CDU) party and the Social Democratic Party (SPD) and the elevation of Frank-Walter Steinmeier to foreign minister and Sigmar Gabriel to minister of the environment, nature conservation, and nuclear safety.
Germany was already the undisputed world leader in addressing climate change and anxious to transform its economy from fossil fuels to green energies. Both political parties had been nudged to take a more aggressive stance on climate change by the fledgling Green Party that had emerged in the 1980s and had become a major player in German politics. The Green Party narrative eventually metamorphosed into a green agenda that was largely taken up by the Social Democratic Party and the Christian Democratic Union.
The coming together of the CDU and the SPD in a grand coalition, shadowed by the Greens, opened the door to the possibility of a political breakthrough that could change the narrative and future direction of Europe, making it the leader of a green transformation around the world.
By sheer serendipity, Germany was positioned to take over the presidency of the Council of the European Union between January 1 and June 30, 2007 (each member state assumes the presidency in rotation). Germany has always been a prime mover in the EU, and in 2007 three of the five major political parties in Europe were ideologically aligned in the country—the CDU, the SPD, and the Greens. This presented us with a unique opportunity to change course in Europe and move the continent toward a postcarbon green paradigm. All we needed was a similar coalition of the five major parties represented in the European Parliament to come together and pass a written declaration that would call for the EU to mandate strict legal targets for decarbonizing its member states. The six-month German presidency would be the defining moment.
Angelo Consoli, who directs our office in Brussels, and I met with Jo Leinen, a senior member of the European Parliament from Germany and a leading voice of the SPD, to strategize a plan of action that could unite all five major political parties at the European Parliament: the European People’s Party–European Democrats (EPP–ED), which is composed of Christian Democratic parties across Europe; the Party of European Socialists (PES); the Greens–European Free Alliance (Greens/EFA); the Alliance of Liberals and Democrats for Europe (ALDE); and the European United Left–Nordic Green Left (GUE–NGL). The objective was to coalesce around an EU parliament written declaration to increase energy efficiencies, generate green energies, and reduce global warming emissions and to make its targets mandatory requirements in the member states.
The passage of a formal written declaration in the European Parliament is a rare occurrence. The rules require passage within a very narrow ninety-day window, making it an extremely difficult and grueling task. Our parliamentary team recruited supporters across the five major EU political parties and began meeting with literally hundreds of parliamentarians and their legislative directors and chiefs of staff, soliciting support. The declaration, which was passed just days before the deadline, reads as follows:
The European Parliament,
—having regard to Rule 116 of its Rules of Procedure,
A. whereas global warming and costs of fossil fuels are increasing, and having regard to the debate launched by the European Parliament and the Commission on the future of energy policy and climate change,
B. whereas a post-fossil fuel and post-nuclear energy vision should be the next important project of the European Union,
C. whereas the five key factors for energy independence are: maximising energy efficiency, reducing global-warming gas emissions, optimising the commercial introduction of renewable energies, establishing hydrogen fuel-cell technology to store renewable energies and creating smart power grids to distribute energy,
1. Calls upon the EU Institutions to:
• pursue a 20% increase in energy efficiency by 2020,
• reduce greenhouse gas emissions by 30% by 2020 (compared to 1990 levels),
• produce 33% of electricity and 25% of overall energy from renewable energy sources by 2020,
• institute hydrogen fuel-cell storage technology, and other storage technologies, for portable, stationary and transport uses and establish a decentralised bottom-up hydrogen infrastructure by 2025 in all EU Member States,
• make power grids smart and independent by 2025 so that regions, cities, SMEs and citizens can produce and share energy in accordance with the same open-access principles as apply to the internet now;
2. Instructs its President to forward this declaration, together with the names of the signatories, to the Commission and the governments and parliaments of the Member States.2
The European Parliament’s declaration reinforced the European Commission’s similar mandates that were being formulated, giving Germany the needed support to secure the 20-20-20 formula for decarbonizing the European Union.
In June 2007, in the last few days of the German presidency of the Council of the European Union, Sigmar Gabriel asked me to join him and give the keynote address at the German presidency’s closing conference of the twenty-seven environmental ministers, officially inaugurating the EU’s new postcarbon journey.
It needs to be emphasized that it was the three mandatory targets set in stone by the European Union that led each member state to establish its own plans to reach each of the targets set forth. The most important of these targets was the one mandating that 20 percent of the energy used in the EU needed to be renewable energy, particularly solar and wind, by 2020.3 To fulfill the mandate, other countries began following Germany’s lead by introducing feed-in tariffs, which prompted early adopters to produce green energy for sale back to the grid at a premium price above market value.
The real value of the feed-in tariffs lies well beyond Europe reaching its renewable energy targets. This incentive not only encouraged a flood of small green energy producers to enter the market—primarily in the form of electricity cooperatives—but also propelled companies to rev up R&D to a fever pitch, fostering new technological innovations that dramatically reduced the fixed costs of generating solar and wind electricity, moving them to near parity and even below parity in some instances with the conventional fossil fuel energies a decade later. Setting legally mandated targets, combined with feed-in tariffs to promote the growth of competitive renewable energies, was the Great Disruption that has now brought the fossil fuel civilization to the edge of an imminent collapse.
But how do we know that Europe and the world are within striking distance of the endgame for the carbon era? First, the feed-in tariffs, which were in place for less than a decade, are already being phased out across the EU and in other regions around the world because of the falling price of renewable energies brought on by the rush of new innovations in solar and wind technology and deployment.4 Following on the heels of the EU, the People’s Republic of China entered the game, subsidizing its own solar and wind technology industries, allowing them to mature and drop the price of generating renewable energy even further, making solar and wind energies a prime mover in powering society.
While the subsidies for solar, wind, and other renewable energies phased in and are now phasing out in a very short period of about ten years, fossil fuel energies, even after a two-hundred-year run as the primary energy source, still enjoy an eye-popping $5.3 trillion in post-tax subsidies per year (as of 2015) around the world despite the fact that they are now quickly moving over to the stranded asset column on the global accounting sheet. (Post-tax subsidies are, for the most part, the calculation of “environmental damages from energy consumption [which] are just as real as are supply costs … and any failure to fully internalize them means that some of the damages from fossil fuel use are not borne by fuel consumers and this constitutes a form of subsidy.”)5
The question being asked with growing urgency by some and with incredulity by others is how the fossil fuel civilization could be close to an endgame because of the upstart solar and wind energies when the latter made up only 3 percent of global energy capacity in 2017.6
There is a rule of thumb in economics that is little known and mostly ignored, even by the titans of the financial community and business sectors. Yet it is remarkably prescient in predicting Schumpeter’s “creative destruction.”
Investors, on the whole, are not swayed as much by the size of an enterprise or sector as by its growth curve. They will continue to stay onboard as long as their investment shows increasing growth. If that growth loses momentum, they take notice and often lose interest. When new challengers emerge, even if they are seemingly inconsequential, if they begin to exhibit accelerating growth or even an exponential growth curve, investors begin to shift allegiance to the challenger. The key is the threshold. That is, when a challenger captures just 3 percent of the market from an incumbent, the incumbent’s sales often peak and begin to decline, signaling its eventual demise.7 Kingsmill Bond, who is the lead energy strategist for the Carbon Tracker Initiative, the previously mentioned UK research organization of specialists tracking climate risks, observes that this rule of creative destruction holds across all areas of commerce but is particularly telling when analyzing the transitions in energy paradigms over history. For example, gas lighting demand peaked when electricity accounted for only 3 percent of the lighting.8
Once again, the correlation to consider is not the size of the market vis-à-vis an incumbent and a challenger but rather the sales growth of each player. Even when the challenger enjoys only a tiny 1 percent of the market but a 20 percent growth rate, the challenger is likely to gobble up all of the incremental growth by year ten. Or, to take it from another angle, if the challenger has an exceptional growth rate of 30 percent and the market growth rate is only 1 percent, then the sales of the incumbent will likely peak at the point where the challenger’s market share is only 3 percent.9
Kingsmill Bond describes four stages in the current energy transition in Europe and around the world. Stage 1 is where solar and wind climb to provide about 2 percent of the electricity. This is the initial innovation phase. Stage 2 is where solar and wind have captured 5–10 percent of the energy market. This is the peaking phase. Stage 3 is where solar and wind comprise 10–50 percent of the market, the rapid change stage. The death knell is where solar and wind cross over to more than 50 percent of the market.10 The peaking stage is the turning point for the financial markets because that’s when the demand for fossil fuel energies peaks and the industry begins to lose market share.
An additional factor needs to be added to the equation to understand the full implications of a Great Disruption in energy. In 2017, 43 percent of the primary energy in the world was used to generate electricity.11 Over the coming decades, the electricity sector is going to use an increasing amount of global primary energy as the transport sector decouples from fossil fuels and moves to electric vehicles powered by the electricity grid.
According to the Carbon Tracker Initiative, the transitional moment is when 14 percent of global electricity will be supplied by solar and wind.12 Europe passed the 14 percent tipping point in 2017 when 15 percent of electricity generation was made up of solar and wind. The United States in 2017 was only at 8 percent, China was at 6 percent, Latin America at 5 percent, India at 5 percent, Africa at 2 percent, and the Middle East at less than 1 percent. Solar and wind supplied 6 percent of all global electricity in 2017.13
When will this transitional moment and tipping point occur on a global scale, stranding trillions of dollars in fossil fuel assets and bursting the carbon bubble? The two crucial variables in projecting global future energy supply are the growth rate of global energy demand and the growth rate of solar photovoltaic (PV) and wind supply.14 In the view of Kingsmill Bond:
If we make assumptions for these two factors, it is possible to calculate the date at which fossil fuel demand peaks … assuming total energy demand growth of 1.3% (assuming a slight fall from the 5-year average) and solar PV and wind supply growth of 17% (assuming a continued S curve of supply growth, with growth rates falling over time from the current level of 22%). The date of peak fossil fuel demand is then 2023.15
Bond concedes that the Carbon Tracker Initiative’s “view of 1.3% energy demand growth and 17% solar PV and wind supply growth is open to question” and therefore offers a number of scenarios with a global growth rate of energy demand of 1–1.5 percent and growth of solar PV and wind supply of 15–20 percent. All these scenarios “give a range of 2020 to 2027 for the date of peak fossil fuel demand.”16
The US growth rate in combined solar and wind, at least, is spot on with the Carbon Tracker trajectory. Solar and wind made up 4 percent of the electricity generated in the United States in 2013, and in each succeeding year the figure has risen by approximately 1 percentage point. In 2017, solar and wind constituted 8 percent of the electricity, a figure that is projected to reach 10 percent by the end of 2019.17 Assuming this rate of increase continues, the United States will likely reach 14 percent of solar and wind electricity generation by the end of 2023 and be at or near the tipping point.
The carnage is palpable. Solar and wind costs are, in many cases, already below the running cost of current coal- and gas-fired power plants.18 With more and more solar and wind electricity coming onto the grid every day, operating coal- and gas-fired power plants is becoming uncompetitive, forcing utilities to shut them down, meaning their capital investment will never be paid off.
Early on, the natural gas industry argued that a new generation of gas-fired power plants would need to be installed, offering up two seemingly convincing rationales: first, that natural gas is the least onerous of the fossil fuels and emits less CO2 than coal and oil and is therefore an appropriate bridge fuel on the way to a low-carbon society; second, natural- gas-fired power plants need to be in place when the sun isn’t shining and the wind isn’t blowing, providing backup storage, especially at peak electricity times. Worried that this might be the case, electric utilities began installing new gas-fired power plants, ostensibly to back up variable renewable energies.
The electric utilities should have known better. By 2011, 68 percent of all new electricity generation in Europe was coming from solar and wind power.19 In reality, there was already enough solar and wind coming onto the EU electricity grid by 2011 that the gas-fired power plants that were hastily installed would be only infrequently used or not used at all, meaning, once again, that their capital costs would never be paid down. The green route was on. It is now well recognized that the exit ramp from a fossil-fuel-based electrical system to a solar-and-wind-based electrical network appears when the latter crosses over the 14–15 percent barrier of penetration that, as mentioned, the EU reached in 2017.
The notion that variable solar and wind energy will require backup conventional fossil fuel power to prevent power lapses for decades to come has become a kind of modern-day urban myth, spread to a large extent by the gas industry. It’s just not true. Battery storage and hydrogen fuel-cell storage at rapidly declining costs can easily provide backup power to compensate for the variability of solar and wind generation. Choosing the appropriate mix of solar and wind power, recognizing the variability of each of these energies during different seasons relative to the variability in power demands at different times of the year, also helps maintain a dependable flow of electricity. Better demand-side management, upgrading the grid code, and hastening the transition from a servomechanical to a digital grid, making it smarter and more efficient at integrating electricity between base and peak load times, are equally suited to the task of maintaining the stability of electricity demand.20
When the terms “stranded assets” and “carbon bubble” are thrown around, the dire implications of what these emerging realities might mean for the world economy and civilization are often lost in the esoterica. However, knowing the extent of the bad news is important so that humanity can prepare for the jarring and unprecedented economic destabilization and accompanying social disruption that will come with the collapse of the fossil fuel civilization.
We should also bear in mind that in this instance, the bad news is the good news. The sooner the collapse of the fossil fuel era comes, the brighter the prospect that humanity might be able to quickly scale up a smart, global green infrastructure that will take us into a postcarbon ecological civilization, hopefully in time to save our species, our fellow creatures, and the Earth we inhabit.
What, then, will the collapse of the old energy order and the birth of the new energy regime look like? We can already get an inkling of what’s in store for society because we have a precedent. The European Union is embroiled in the transformation at this moment and is the canary in the mine.
The powers that be were late in recognizing the Great Disruption coming in Europe. This was the first systemic failure. There was a twofold crisis taking hold in the first decade of the twenty-first century right under the nose of global institutions, nation-states, and the global business community who, for the most part, seemed naïvely unaware of or unconcerned about the dark forces that were surfacing. From the mid-1980s until the fall of 2003, crude oil was selling at a steady price of about $25 per barrel and was of little concern to the business community, workers, and their families. From then on, the price of oil began a steady upward climb and didn’t stop until it reached a record peak of $147 per barrel in July 2008.21 It wasn’t until oil went over $90 per barrel in 2007 that global regulatory institutions, national governments, and the business community began to take notice. This came when food riots broke out in the poorest countries in the world because of the high price of staples like wheat, corn, soybeans, and rice due, in part, to the rising price of oil. The average price of rice skyrocketed by 217 percent, wheat by 136 percent, corn by 125 percent, and soybeans by 107 percent.22 Panic set in as millions of the world’s poor went without sufficient food.
What everyone else began to realize is that when the price of oil started to climb beyond $90 per barrel, prices for everything else in the economy began to go up as well. While in the highly industrial countries we make much of increased gasoline prices affecting transportation, the public is far less aware that the price of fossil fuels affects the price of almost everything else we produce and consume in society. Our pesticides and fertilizers, construction materials, pharmaceutical products, packaging, food preservatives and additives, synthetic fiber, power, heat, light, and so on are made out of or moved by the carbon deposits we extract from beneath the ground and the ocean floor. Purchasing power began slowing with the rising price of oil in the spring of 2007. The global economy was beginning to shut down. The oil bubble was far from inconsequential, dragging down businesses and weakening the purchasing power of people around the world, especially in the developing economies. Needless to say, the major oil companies reaped record profits, while millions of businesses went under because of the high price of oil in the materials they used across their supply chains.23
I have firsthand experience here. My father owned a small manufacturing company that transformed polyethylene film into plastic bags. The company, which employed about fifteen people, was in continuous operation for more than fifty years. When the price of oil shot up in 2007 and 2008, the cost of polyethylene film went through the roof, followed in quick succession by the economy careening into recession territory, meaning less demand for packaging. The family business went under during the Great Recession, ending a half century of operation.
The slowing economy was hit a second time, with a knockout punch, when the subprime mortgage bubble burst in the summer of 2008. The financial world and business community claimed they didn’t see it coming either, although I suspect that’s disingenuous and fails the smell test. More likely, they turned a deaf ear, caught up in what the economist John Maynard Keynes called the “animal spirit” of a bull market that looked like its steep upward climb was inevitable and irreversible. The bankers made a killing.
The shutdown of the global economy and the ensuing Great Recession slowed the demand for electricity everywhere, leaving the power and electricity sector with prior investments in power plants that were less utilized and partially stranded.
The other systemic failure was not understanding the full implications of the European Union’s decision in 2007 to transition the world’s largest economy out of fossil fuels and into renewable energies, accompanied by greater energy efficiencies and a reduction in global warming emissions. The European Union’s new legally binding mandatory targets for renewable energy generation, along with the generous subsidies in the form of feed-in tariffs, brought millions of new players into the energy game, selling back to the grid green electricity captured by solar panels on their roofs and wind turbines on their land.
My office was, to my knowledge, the first to use the term “zero marginal cost renewable energy.” The concept didn’t seem to register among power producers, who for several years were anxious to explain to me that the marginal cost of solar and wind was never really zero although it was patently obvious that the sun and the wind, unlike coal, oil, and natural gas, are nearly free to capture once the fixed cost of installing the technology is paid back.
Zero marginal cost renewable solar and wind energy soon became the bête noire of the power and electric utilities. Not only is the marginal cost near zero in generating solar electricity, but the generation of the power also usually peaks in the afternoons when the demand for electricity peaks and the electric utilities reap their largest profit margins. In Germany, solar PVs reduced the peak price for electricity by 40–60 percent. Overall, the average daily price of electricity declined by 30–40 percent between 2007 and 2016, eroding profits for the electric utilities.24
With the fixed costs of solar and wind electricity plummeting on an exponential curve, the marginal cost of generating the new green energies near zero, and the feed-in tariffs providing a premium price for green electricity above the market price, the conditions were ripe for creating the perfect storm. The profitability of gas- and coal-fired power plants plummeted, and so did their utilization. They became stranded assets.
It’s worth remembering that the fossil-fuel-based power and electric utilities in EU countries collapsed when renewable energies comprised only 14 percent of the total market, leaving a heap of stranded assets behind. The losses totaled more than €130 billion ($148 billion) in the European electricity sector in just the six-year period from 2010 to 2015. The disruption in the European power and electric utility market is going to be even more disorienting in the coming years. Already, the discrepancy between the “book value” of property, plant equipment, and goodwill and the “enterprise value” of just Europe’s leading twelve utilities is reason for concern. The market value is only 65 percent of the book value, a wide disparity, suggesting that dire losses are yet to come. With the total book value of the twelve largest utilities listed at €496 billion ($560 billion), it’s not inconceivable, according to one study, “that 300–500 billion euros of these assets are exposed to the risk of getting economically stranded.”25
Apparently much of the rest of the world has failed to heed what has taken place in the European Union. The major gas-producing nations are upping natural gas production, installing pipelines across continents, and establishing cross-ocean supply lanes in a frenzied race to capture the global market. The Energy Information Administration (EIA) of the US government projects that natural gas production in the United States “grows 7% per year from 2018 until 2020.”26 In large part, the growth is coming from increasing demand within the electricity sector to transition from coal to gas in order to reduce CO2 emissions and lower costs, because gas is now cheaper than coal. While that is undeniably true, the more important development is that solar and wind are now competitive with natural gas and, in some instances, even cheaper, which changes the equation once again, this time in favor of the cleaner renewable energies.27
According to 2018 research from Bloomberg New Energy Finance, “coal and gas are facing a mounting threat to their position in the world’s electricity generation mix as a result of the spectacular reduction in the cost not just for wind and solar technologies, but also for batteries” (to store these variable energies). Elena Giannakopoulou, head of energy economics at BNEF, notes that some coal and gas plants with sunk costs might be sparingly used, but she goes on to say, “The economic case for building new coal and gas capacity is crumbling, as batteries start to encroach on the flexibility and peaking revenues enjoyed by fossil fuel plants.”28
Price competition aside, the power and electricity industry continues to argue that variable renewable energies are a nonstarter without natural-gas-fired power plants backing them up with stored energy to maintain sustainability on the grid. Far from being apologetic, the gas industry is bullish on the future of natural gas. Richard Meyer, in charge of government affairs at the American Gas Association, says, “I think it’s a safe bet that the use of natural gas will continue to support a low-carbon future and that natural gas could increase in the [power] sector.”29
If that were the case—and certainly the expenditures in natural gas pipelines, power plants, and accompanying facilities suggest that, at least for now, the “gas rush” still has momentum—it would mean a dramatic overshoot of the red line the United Nations Intergovernmental Panel on Climate Change has laid down for keeping global warming emissions under a 1.5°C ceiling.
But that’s not likely going to happen, and this time it’s not because governments around the world have established binding targets on CO2 emissions. The fact is, for the most part, they didn’t. Rather, it’s because the marketplace has already determined the outcome of the process, with solar and wind technology becoming ever cheaper on a steep curve, now followed by the falling cost of battery storage. And we can all thank the European Union for that. By the member states of the EU committing to binding legal targets a decade earlier, with short-term feed-in tariffs to encourage early adoption, businesses were set loose to improve the operating performance of solar and wind and their efficiencies, dramatically reducing the costs. China then followed, with its own companies bringing on innovations in efficiencies and further lowering the costs of generating solar and wind electricity.
As mentioned, China soon eclipsed Europe, becoming the leading producer of cheap, efficient solar and wind technology, which it began exporting all over the world. In its thirteenth Five-Year Plan, which commenced in 2016, China also turned inward, with the massive production, sale, and installation of cheap solar and wind technology in the domestic market.30 The new focus on installing and harvesting solar and wind energy inside China coincided with the digital upgrading of China’s electricity grid, enabling Chinese businesses and communities to generate their own near-zero marginal cost renewable energy and use it off the grid or sell it back to the grid.
Is it possible that the energy companies and power and electric utility companies and, for that matter, countries around the world are oblivious to the Great Disruption that has unfolded in the European Union and the People’s Republic of China? Doubtful! I regularly meet with energy companies and power and electricity companies in Europe, Asia, and the Americas. They know. They see the numbers. They do the math. They watch what’s happening in Europe and China. Yet they continue pushing forward a forty-year infrastructure build-out of gas pipelines across continents and installing numerous gas-fired power plants, upping the tally of global warming emissions and future stranded assets.
So the “gas rush” is on and two of the biggest players are in North America. The United States is now the leading producer of natural gas on the planet, and its Canadian neighbor is the fourth-largest producer.31 While the Trump administration is at least up-front about its avowed commitment to exploit every possible opportunity to bring natural gas online for both domestic consumption and export, the Canadian government uses every public opportunity to flaunt its leadership in decarbonizing Canada and its prominent role in rallying the world to address climate change. But when it comes to issuing permits and underwriting gas projects, Canada has missed no opportunity to be at the head of the pack. The negative economic consequences of these misguided policies to keep the fossil fuel spigot wide open in North America are ominous, for the United States, Canada, and the world.
What might these emerging trajectories mean for stranded fossil fuel assets, a North American carbon bubble, and the destabilization of the US and Canadian economies? Turning to the United States, the Rocky Mountain Institute (RMI), which has advised the US government’s Department of Defense and Department of Energy, as well as other governments around the world, issued a detailed and extensive 2018 report titled The Economics of Clean Energy Portfolios: How Renewable and Distributed Energy Resources Are Outcompeting and Can Strand Investment in Natural Gas-Fired Generation.
Working backward, the report concludes that the frenzied rush to natural gas in the US electricity system “could lock in $1 trillion of cost through 2030.” To begin with, the US power grid, once the envy of the world, is aging. More than half of the thermal power plants that are more than thirty years old will be retired by 2030. The current low cost of domestic natural gas has spurred a huge investment in a new generation of natural-gas-fired power plants, expected to reach $110 billion by 2025. By 2030, the electric power industry will have to spend upward of $500 billion to replace all the aging power plants scheduled for retirement. It will cost an additional $480 billion for the fuel to operate those power plants, for a total of approximately $1 trillion in costs through 2030. This at a time when the plummeting price of solar and wind energies is already competitive with natural gas and in a few short years will be far cheaper, with a near-zero marginal cost and zero global warming emissions.32
The toll is mind-boggling and grim. This will saddle the US power and electricity industry not only with a potential trillion dollars in stranded assets but also with 5 billion tons of CO2 emissions by 2030 and nearly 16 billion tons by 2050.33
RMI ran a comparative study of two planned combined-cycle gas turbine power plants and two planned combustion turbine power plants being readied for peak-hour operation against optimized and region-specific renewable energy and distributed energy sources that can provide comparable services. The study found that in all four cases, an optimized clean energy portfolio is more cost-effective and lower in risk than the proposed gas plants. The implications are stunning. The data showed that “the same technological innovations and price declines in renewable energy that have already contributed to early coal-plant retirement are now threatening to strand investments in natural gas.”34 The RMI study is a potential thunderbolt for the US power and electricity sector in the United States and, if acknowledged soon enough, could quickly allow it to make the shift from fossil fuel to green energies in as little as a ten-year span. It’s worth sharing RMI’s conclusion at length:
Our analysis reveals that across a wide range of case studies, regionally specific clean energy portfolios already outcompete proposed gas-fired generators, and/or threaten to erode their revenue within the next 10 years. Thus, the $112 billion of gas-fired power plants currently proposed or under construction, along with $32 billion of proposed gas pipelines to serve these power plants, are already at risk of becoming stranded assets. This has significant implications for investors in gas projects (both utilities and independent power producers) as well as regulators responsible for approving investment in vertically integrated territories.35
The United States’ northern neighbor, Canada, is also investing heavily in natural gas exploration, extraction, and sale. While Canada is regarded as a country fiercely dedicated to the environment and protection of its natural resources, there is another, darker Canadian persona deeply tied to fossil fuel energies. Like the United States, the Canadian government, several of the provinces, the financial community, and businesses are awash in fossil fuels.
In recent years, much of the criticism by environmental organizations has centered on tar-sand extraction in the province of Alberta, with periodic protests, lawsuits, and legislative battles attempting to rein in one of Canada’s most lucrative economic enterprises. Canada is the fourth-largest producer of crude oil in the world, after the United States, which is ranked number one, Saudi Arabia, and Russia. Canada extracts and refines more fossil fuels than Iran, Iraq, China, the United Arab Emirates, Kuwait, Brazil, Venezuela, and Mexico, which I suspect will come as a surprise to most of the rest of the world.36 Less known is that British Columbia has entered the fossil fuel arena, with deep natural gas reserves in the northern tier of the province. Technical breakthroughs in the fracking of natural gas over the past decade, accompanied by the discovery of rich natural gas reserves, have led to a rush into fracking across the region.
British Columbia is a good case study in competing visions: one deeply committed to a fossil fuel future and the other to a green postcarbon era. Vancouver, surrounding cities, and many of the First Nations bands in the northern regions of the province are among the fiercest proponents of a conservation-oriented green Canada. The Vancouver metropolitan area is often cited as one of the greenest governing jurisdictions in the world. These competing visions make the region a lightning rod in the struggle between the old and new energies, the outcome of which will give us a good indication of the course other regions in Canada might take as they find themselves caught between these two approaches to the future.
On October 2, 2018, Canada flexed its fossil fuel muscle in a very public way. Prime Minister Justin Trudeau joined British Columbia’s premier John Horgan and representatives of LNG Canada, a consortium of oil and gas companies led by Royal Dutch Shell and including Mitsubishi Corporation, Malaysian-owned Petroliam Nasional Bhd, PetroChina, and Korea Gas Corporation, to announce the construction of a liquefied natural gas (LNG) pipeline.37 The pipeline will stretch across 670 kilometers, taking gas from Dawson Creek in northeastern British Columbia to a processing plant on the coast in Kitimat to be shipped to China and other Asian markets.38 The C$40 billion ($30 billion) investment by LNG Canada is the single largest private-sector investment in Canadian history. Trudeau announced that the federal government would be providing C$275 million ($207 million) in support of the deployment.39
The LNG pipeline faced bitter opposition and protests by environmental organizations and First Nations. Less known by the public is that energy forecasters and analysts who have scoped the project are reticent and even guardedly pessimistic about the wisdom of locking British Columbia and the rest of Canada into a natural gas future that will be amortized over many decades.
The Brattle Group published a nuanced report on the future prospects of LNG back in January 2016—two years and eight months prior to the formal announcement of the project—raising serious concerns about Canada shipping LNG to China, in light of the blitzkrieg competition there from solar and wind energies. Its reticence should have raised some red flags but apparently was either ignored or not taken seriously. The report pointed out that in Germany and California, “where renewable penetration has been high, gas demand growth has already been stunted by the penetration of renewables in the generation mix (causing a reduction in gas demand growth for power generation).”40
Now, China is following a similar path, with a short-term push in natural gas production to accompany the phase-out of coal and a simultaneous increase in solar and wind energy production, with the goal of eliminating virtually all fossil fuels from the energy mix over the next several decades. Like the experience in the EU, much will depend on when the plummeting costs of renewable energies in China will force a disruption in the Chinese energy market, leaving billions of dollars of stranded natural gas assets in its wake on the way to creating a green energy infrastructure across the country.
The disruption is already beginning to happen. As already noted, China is now the number-one producer of solar and wind energy technology and boasts the cheapest prices on world markets, making it the leading exporter.41 Moreover, the current thirteenth Five-Year Plan has set ambitious targets for the installation of solar and wind technology across every region of China, rivaling the earlier deployments in the European Union.
The Brattle Group report alludes to the trends in China that are mimicking the earlier disruptions in the European energy market, noting that if the costs of domestic production and deployment of renewable energies continue to drop precipitously, China’s demand for imported liquefied natural gas could dry up.
If the cost of renewable generation is low enough overseas (i.e. below the cost of new gas-fired generation burning LNG from North America) it could dampen the attractiveness of North American–sourced LNG as a fuel for electric generation.42
The report concludes on a cautionary note about the potential long-term implications of investment in LNG infrastructure now being laid out in British Columbia to export gas to the Asian market.
The investment risk of these proposed LNG export projects is increasing because there is a significant possibility that, over the 20 years of a typical LNG contract, power production from renewable energy sources will become less costly than the LNG sales prices needed to justify the upstream LNG investment cost (even without considering the value of avoided greenhouse gas emissions).… The competition between LNG-fueled gas-fired generation and renewable resources represents a risk to participants in the LNG industry in that higher than expected renewables penetration could reduce future natural gas demand growth (and LNG demand growth) in some of the key overseas Pacific Asian markets. Both investors in LNG infrastructure and buyers of LNG under long-term contracts will want to consider these risks before making large and long-term commitments to buying or selling LNG.43
For both the United States and Canada, the commercial case for the continued introduction of large-scale natural gas projects no longer exists because of the ever-cheaper cost of generating solar and wind electricity. Nonetheless, the fossil fuel industry continues to defend these investments, arguing that natural gas is at least not as onerous as coal in CO2 emissions. Equally egregious, the industry continues to tout the “technology” known as “carbon capture and storage” as a way to use the fuel without emitting harmful CO2 emissions into the atmosphere when, in reality, this technology is already a stranded asset. Carbon capture and storage technology should not be confused with natural carbon sequestration brought on by carbon farming, reforestation, and other organic processes that absorb CO2 from the atmosphere. A quick Google search of every single carbon capture experiment to date and the reams of scientific reports published on their technical and commercial unviability should put the so-called promise of this technology to rest. We had this debate around carbon capture and storage technology in the EU for more than a decade, and it might be helpful to share our experience as this techno-theme has recently been touted in the United States by the fossil fuel industry and some elected officials.
Carbon capture and storage technology is a three-part process, beginning with the capture of CO2 emissions produced from electricity generation and in industrial processes. The captured CO2 is subsequently transported by road tanks, ships, and pipelines to storage facilities. The carbon is then stored deep under the ground in geological rock formations.
After the expenditure of hundreds of millions of dollars in establishing pilots to test the feasibility of this technology, the EU threw up its hands, realizing that the process was unable to meet either the technical or commercial expectations.44 Energy historian Vaclav Smil summarized the commercial consensus after years of failed efforts. He made the point that “in order to sequester just a fifth of current CO2 emissions, we would have to create an entirely new worldwide absorption-gathering-compression-transportation-storage industry whose annual throughput would have to be about 70 percent larger than the annual volume now handled by the global crude oil industry, whose immense infrastructure of wells, pipelines, compressor stations and storage took generations to build.”45
Unfortunately, America appears to be repeating the EU’s failed experiments. Southern Company embarked on a carbon capture and storage project for its coal-powered electricity in 2010 at its Kemper power plant in Mississippi to prove the viability of carbon capture and storage. After years and years of effort and cost overruns that took the project from an initial $2.4 billion budget to a total bill of $7.5 billion, Southern Company canceled the project and passed on $1.1 billion of the cost to its rate payers.46
Whether it is the rush to invest massive amounts of finance capital in natural gas extraction and power generation or in carbon capture and storage technology, when the former is no longer cost-competitive and the latter is not technologically feasible or commercially viable, it brings to mind the old adage, “if you find yourself in a hole, stop digging.” Just leave the fossil fuels in the ground.
Rather than focus on futile and failed carbon capture technologies, some industry players have begun to turn their attention to decarbonizing what are called the hard-to-abate sectors. These are the most challenging industries and businesses because there are not yet commercially viable alternatives to the use of fossil fuels in their processes, product lines, and services.
Much of the CO2 abatement in these industries will come from plugging into a smart Third Industrial Revolution infrastructure that will allow them to power their production with renewable energy and to manage their transport and logistics supply chains with short-haul electric vehicles powered by green electricity and with long-haul hydrogen-fuel-cell-powered transport on road, rail, and water routes. Big Data and algorithm governance of supply chains and logistics operations will also increase these companies’ aggregate efficiencies in ever more circular business processes.
When it comes to plastic packaging and to steel, cement, and other construction-related materials, it will also be necessary to find fiber-based biological substitutes. Recently, some of the world’s leading chemical companies have begun to join together with genetics and life science companies in accelerated R&D efforts designed to find cheaper alternative biological-based products and processes. Again, as in other industries, the chemical company leaders are keen to reduce CO2 emissions to slow down climate change and are increasingly alarmed about the prospect of stranded assets going forward. Products from these R&D initiatives are beginning to reach the market. For example, airlines including United, Qantas, and KLM already use some bio-based fuels but will require much more extensive R&D to fully transition into powering air travel with a cost-effective bio-based energy.47
Bio-based materials are replacing petrochemicals in such key areas as bioplastics, bio-based food and feed ingredients, biosurfactants, and biolubricants. There is vast market potential for replacing petrochemicals with biological-based materials in a wide range of products and processes, including clothing, film, filters, beverages, animal feed, snack foods, household detergents, industrial cleaners, and automotive and industrial lubricants.48
DowDuPont Inc., the world’s second-largest chemical company, is among the leaders engaged in research involving hard-to-abate processes and product lines. In October 2018, I joined Dow’s executive team at its European Innovation Summit in Frankfurt to discuss new R&D efforts to expedite the introduction of biological-based substitutes into the market to hasten the transition into a zero-emission economy. Two of our Third Industrial Revolution roadmap test regions—Hauts-de-France and the Metropolitan Region of Rotterdam and The Hague—are currently involved in cross-industry initiatives to bring biological substitutes quickly to market. Regions and industries should be motivated with generous carrots and equally onerous sticks to advance this critical transformation in the economy.
In the last two years or so, the issue of stranded fossil fuel assets has been coming up with greater frequency in corporate boardrooms, financial institutions, government ministries, and think tanks around the world. This is not the normal conversation about the ebb and flow of markets and short-term government tweaks of economic policies, or simply about resetting agendas, but something more disconcerting that goes beyond even the occasional downturn into bear markets or deep recessions. There is a sense that something far bigger is occuring, affecting not only the global economy but our very existence and how we understand the world we live in, as well as the reliable future we took for granted.
The notion of stranded assets is more than just an economic accounting of the entropy debt for two centuries of burning carbon to create an industrial society. The stark reality of all this growing angst can be felt in a very personal way in the carbon-rich nations of the world, whose very economies depend on the extraction and sale of fossil fuels.
There is a favorite saying in the Middle East that I’ve heard countless times during my visits and meetings there over the years. It’s attributed to Sheik Rashid bin Saeed al Maktoum, who was both the vice president and the second prime minister of the United Arab Emirates and the ruler of the Emirate of Dubai. His reign extended from 1958 to his death in 1990.
The saying goes like this: “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.” Sheik Rashid was worried that the euphoria in the Emirates upon the discovery of oil in the late 1960s would come back to haunt his people, and he predicted that the country would run out of oil within a few generations—and then what? He saw oil more as an addiction and a curse and worried that if his country became a single-resource economy and society, there would be a day of reckoning when the oil spigot ran dry. He spent a lifetime diversifying the economy, turning Dubai into a regional hub for global trade between East and West. The oil hasn’t run out, but it is fast becoming a stranded asset. Most of the oil that is left will remain forever in the ground.
It’s not just the Emirates at risk. It’s also carbon-rich countries around the world whose economies are so utterly dependent on the extraction, refining, and sale of oil, gas, and coal. To say that the world’s banks, insurance companies, sovereign wealth funds, and private equity funds are worried would be an understatement. In 2018, the World Bank issued a report titled The Changing Wealth of Nations 2018: Building a Sustainable Future, which laid out a somber analysis of what’s in store for carbon-rich nations.
The World Bank pointed out that while private-sector investors and companies in the fossil fuel sector can always divest and reinvest in other more profitable and sustainable enterprises, carbon-rich sovereign nations tied to territorial boundaries are far more constrained and far less agile. Of the 141 nations that enjoy some carbon wealth, 26 of the countries have at least 5 percent of their wealth in fossil fuels, and most of them derive more than half their revenues from oil, gas, and coal. These are also among the poorest countries in the world, and ten of them are in the Middle East and North Africa, regions in crisis, with failed states and authoritarian regimes.49 The potential of hitting the wall with stranded assets and loss of carbon revenue would be devastating for these countries.
To get a sense of the magnitude of the pending crisis, the World Bank reports that “the top 10 state-owned carbon-resource companies account for $2.3 trillion of state-owned produced assets related to extraction and processing of fossil fuels.”50 With fossil fuels trending toward peak demand and the beginning of slower growth, the World Bank is beseeching the carbon-rich and carbon-dependent countries to quickly diversify their economies to ensure a sufficient tax revenue to make up for the losses.
Some of the countries are attempting to divest and reinvest in green technologies, but their efforts have been minuscule. The World Bank concludes its report on the carbon-wealthy nations on a pessimistic note, saying that while divestment and reinvestment would be the best course to follow, unfortunately, “as the data show, governments have failed to use their fossil fuel wealth sustainably over the long term.”51 Try to imagine the chaos across the Middle East and North Africa in as little as five to ten years when oil is expected to peak in demand and slow in growth.
To get a sense of where things stand in regard to stranded assets in the fossil-fuel-related sectors, it’s always best to follow the money—which means looking to the banking sector and insurance industry. Citigroup and Mark Carney, the governor of the Bank of England, were among the first to sound the alarm back in 2015; now the alarm bells are ringing everywhere, which should be a wake-up call across the global economy.
The World Bank is only one of several leading financial institutions to address the issue of fossil-fuel-related stranded assets and how they are fast changing the financial landscape and the rules of the game in the investment community. Lazard issued its own report in November 2018 comparing the cost of fossil fuel energies to the new green energies. Like reports from many of the world’s leading energy consultancies, and even some of the oil giants, Lazard’s study shows that “in some scenarios … alternative energy costs have decreased to the point that they are now at or below the marginal cost of conventional generation.”52 George Bilicic, vice chairman and global head of Lazard’s Power, Energy, and Infrastructure Group, drives home the point:
We have reached an inflection point where, in some cases, it is more cost-effective to build and operate new alternative energy projects than to maintain existing conventional generation plants.53
With reports like these, stranded fossil fuel assets have become an inextricable part of the climate change debate.
The Prudential Regulation Authority (PRA) at the Bank of England published the results of a survey of 90 percent of the UK banking sector in September 2018, representing £11 trillion ($14.2 trillion) in assets. The PRA found that 70 percent of the UK banks recognized that climate change is now posing a risk to a wide range of assets across almost every field, “and they have started to assess how the transition to a low-carbon economy driven, for example, by government policy and technical change, may impact the business model of companies that banks are exposed to.” More disturbing, however, despite the awareness of the issue, only 10 percent of the banks were currently managing these risks “comprehensively,” and 30 percent of the banks “still only considered climate change a corporate social responsibility issue.”54
Concerned that the banking sector might not be fully aware of how quickly climate change is affecting investment risks across virtually every sector of the global economy, including potential stranded assets in the fossil fuel sector and closely coupled industries, Mark Carney stepped in a second time.
Aside from his role as governor of the Bank of England, Carney also served as chairman of the Financial Stability Board (FSB) until the end of 2018, an international body that makes recommendations on the oversight of the global financial system. The FSB includes all G20 major economies and the European Commission. Carney realized that the banking system was ill prepared for the barrage of stranded assets coming its way. So he and the FSB established the Task Force on Climate-Related Financial Disclosures (TCFD), chaired by Michael Bloomberg. Its thirty-two members include representatives from large banks, insurance companies, asset managers, pension funds, and accounting and consulting firms, and it was commissioned “to develop voluntary, consistent, climate-related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks.”55
The TCFD released a set of recommendations in June 2017, beginning with an acknowledgment that the majority of banking institutions perceived climate change as a phenomenon whose effects are felt over the long term and are not relevant to financial investments made today. In other words, there was almost no understanding of the disruptions already unfolding and the forecasts coming from some of the leading energy consultancies on imminent tipping points in the 2020s, and therefore little sense of urgency about reassessing their approach to current investment decisions.
The task force recognized that increases in energy efficiency and the targeted reduction in global warming emissions, coupled with the accelerated replacement of fossil fuel energies with ever-cheaper green energies, “could have significant, near-term implications for organizations dependent on extracting, producing, and using coal, oil, and natural gas.” But the authors of the report hastened to add that “in fact, climate-related risks and the expected transition to a low-carbon economy affect most economic sectors and industries,” not only the energy sector. They cited a study by The Economist Intelligence Unit estimating that the risk to the total global stock of manageable assets could be as high as $43 trillion over the course of the next eighty years.56
The report also emphasized that the Great Disruption creates “significant opportunities for organizations focused on climate change mitigation and adaptation solutions.” The report cites an International Energy Agency estimate that the transition to a low-carbon economy will require around $3.5 trillion in new investments per year for the foreseeable future in the new energy sector to reach the goal of a low-carbon society over the course of the next three decades.57
The entwined relationship between climate change risk across the entirety of the global economy and the risk of stranded assets in the fossil fuel sector was not lost on the authors of the report. Here’s how they put the conundrum:
This means that global investors are currently facing a stark choice. Either they will experience impairments to their holdings in fossil fuel companies should action on climate change take place, or they will face losses to their entire portfolio of manageable assets should little mitigation be forthcoming. Charting a path away from these two options should be a strong motivation for long-term investors to engage with companies in their portfolios and to shift investments towards a profitable, low-carbon future.58
The TCFD realized that it was necessary to establish a set of guidelines that could be used by investors, lenders, banks, and insurance companies to model risks and opportunities to mitigate damage caused by stranded assets, as well as to initiate projects more aligned with reducing global warming emissions and prepare the appropriate criteria and data-collecting disclosure information to which companies would need to comply. Its disclosure recommendations focused on four areas that reflect how organizations function: governance, strategy, risk management, and metrics and targets. Within these thematic categories, financial institutions were asked to disclose information on the “oversight of climate-related risks and opportunities … over the short, medium, and long-term,” describe how the organization went about “identify and assessing climate-related risks,” and explain “the metrics used … to assess climate-related risks and opportunities.”59
In 2018, at the One Planet Summit in New York City, Mark Carney announced that “climate-disclosure is becoming mainstream.… Over 500 companies are now supporters of the TCFD, including the world’s largest banks, asset managers, and pension funds, responsible for assets of over $100 trillion.”60 This was a clear sign that the financial community was beginning to understand the Great Disruption that was closing in on it.