Only fools will keep walking into the same wall over and over again. Many lawmakers responsible for climate policy must by now have no feeling left in their heads. The wall I am referring to is the unbridled faith that laissez-faire capitalism will provide a solution for global warming. Time and again policymakers expect oil and gas companies to take action on their own initiative in order to limit global warming to 1.5 °C, as has been agreed worldwide. And time and again they are surprised when the fossil sector simply ignores the disastrous effects of global warming.
Currently over 80% of the power that is consumed worldwide is still generated with oil, gas, and coal. If we are to reach our climate targets, these polluting fuels must rapidly be replaced by sustainable energy sources such as solar, wind and hydro. According to the International Energy Agency the share of fossil fuels in the energy mix needs to be reduced to 20% by 2050, meaning there is no more room for new oil and gas projects. For the energy transition to be successful, it therefore appears essential that the fossil sector focuses its capital expenditure on renewables. But recent developments rather suggest the opposite.
Against all climate logic, many oil companies are in fact still starting multi-year polluting projects, which can only be profitable if demand for and the price of oil remain high. Oil companies are thus implicitly signalling that they do not believe in reaching the global climate targets. And of course, once they have started a huge oil project, they are unlikely to halt it, even if demand for oil were to drop sharply. Because the thinking will be that after they have already sunk so much money in a project, the remaining costs will be covered by the revenues. A crying, because this money could also have been used for sustainable energy projects, for which there is an annual deficit amounting to a shocking three billion euros.
But even if oil companies do aim for enhanced sustainability of their activities, this does not necessarily mean that global CO2 emissions will be reduced. Because instead of shutting down their most polluting projects, oil companies often sell these assets. And whereas oil companies themselves tend to be listed on stock markets, the buyers of these polluting projects are frequently rather shady private equity firms. This means that polluting assets disappear off the stock market, out of public sight and free from the pressure of sustainable shareholders.
Private equity firms themselves say that their acquisition of these projects actually benefits the energy transition: out of the spotlight and without interference from (activist) shareholders they can much more efficiently take steps to reduce CO2 emissions. This is like a prisoner arguing that a prison without guards is much safer. Meanwhile, a record amount of 2.9 billion euros is waiting to be invested by these same private equity firms. The pressure to buy lots of these highly polluting fossil fuel assets projects and spend hardly any time on making individual projects more sustainable is therefore considerable.
So whichever way you look at it, there appears to be little sign of fossil fuel assets being phased out. In line with the recommendation given by the Dutch central bank, it is indeed necessary for governments to enforce the energy transition. This means that CO2 emissions will need to be taxed (more heavily), meaning that the bill for the real social costs is finally presented. Currently, a price is charged for only 20% of global emissions - and usually at a very low rate. So, what we need is swift and substantial action. Unfortunately, we cannot expect this from politicians who have already banged their heads against the same fossil wall so many times. We will have to wait for a new generation of policymakers who are still capable of feeling the pain.
This is a translation of Joeri de Wilde's column on , published 15 February, 2022.
Also read Joeri's previous column 'Reset the data'