What to Do With the Dirty Stuff
(Bloomberg Opinion) -- Pressure on the world’s big fossil-fuel producers to clean up their act appears to be having an effect. Mining companies have rushed out of coal, oil giant BP Plc plans to sell billions in assets by 2025 and Royal Dutch Shell Plc is following suit after a court ruling in May ordered it to slash net carbon emissions 45% by 2030. Compulsion to act, and be seen to act, is only growing.
Those supporting the divestment movement have the right goals in mind. Unfortunately, it’s increasingly clear that green-minded asset sales often aren’t all they’re cracked up to be. They can even do more harm than good.
There’s no doubt that companies are feeling the heat. BloombergNEF calculates that big oil companies sold almost $200 billion of fossil-fuel assets between 2015 and 2020. Just last month, Shell sold its Permian business to ConocoPhillips for $9.5 billion. But while such sales grab headlines, they don’t close down coal mines or oil wells, or even accelerate their decline. Instead, they increasingly shift the assets to a shrinking pool of willing buyers — niche players, private-equity firms or state-owned entities — that are under less pressure to be transparent. Nor do the proceeds of these disposals necessarily flow into green alternatives. In the case of the companies totted by BNEF, their renewable-energy investments amounted to less than a quarter of the total raked in from sales.
Divestment, in other words, often looks more like climate arbitrage, as companies clear their portfolios of risky or high-cost assets, shift their problems to others, and earn accolades from ESG-focused investors in the process. The earth’s rapidly shrinking carbon budget leaves little room for such musical chairs. According to the latest report by the Intergovernmental Panel on Climate Change, the world can emit a maximum of about 500 gigatons of carbon dioxide starting on Jan. 1, 2020 for a 50% chance of limiting global warming to 1.5 degrees Celsius — which leaves a little more than a decade on current trends. That means actual reductions are imperative.
One option might be to encourage producers to keep their polluting assets but to run them down responsibly. That’s what BHP Group is being asked to do by shareholder activist group Market Forces, which opposes a plan to merge the company’s oil-and-gas business with Woodside Petroleum Ltd, arguing the sale is inconsistent with the miner’s climate promises.
Yet businesses can’t easily be told not to sell if there’s a willing buyer, much like they can’t simply be prohibited from developing assets in the ground while they remain economic.
That argues for a more comprehensive approach. As a start, a fiscal and regulatory framework is needed to put a price on carbon emissions and impose a system of border adjustments to prevent companies from pushing the problem to the emerging world. Paired with incentives to spend on clean-energy research, a carbon tax would harness the power of competition, spur innovation, and encourage longer-term investment decisions. Under such a system, the cat-and-mouse game over divestments would soon be moot.
In the meantime, however, investors and regulators need to start asking tougher questions when it comes to divestment plans and prospective buyers, taking into account a sale’s net impact on emissions and the buyer’s ability to deal with the costs that come at the end of an asset’s life. They can insist on executive remuneration packages that reinforce the idea that goals are holistic — not just headline-grabbing efforts. They can even demand that emissions goals be rebased when a significant sale is made, as some are already doing. Companies should no longer be able to claim a PR victory simply by offloading a polluting asset as swiftly as possible with little regard for consequences.
Reducing the money deep-pocketed companies put into fossil fuels is the right aim. But without better safeguards, simply encouraging fire sales risks undermining its backers’ own goals. A clearer-eyed approach is long overdue.
Editorials are written by the Bloomberg Opinion editorial board.
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