Fossil fuel subsidies

End of the road for fossil fuel subsidies

Governments face hard choices over $5 trillion in annual giveaways.

By RYAN HEATH

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How financially sustainable is an industry if it is distorted by $5 trillion in annual subsidies? That's the challenge laid out by United Nations Secretary General Antonio Guterres, who is taking direct aim at government subsidies for producers and consumers of fuels such as oil, gas and coal. “Fossil fuel subsidies must end, and polluters must start paying for their pollution,” Guterres said Wednesday.

In many respects, Guterres is a toothless tiger: he’s not in charge of national laws or big budgets. But Guterres does lead the U.N. climate machine, which has framed the global climate debate for 30 years.

Guterres and his allies see that turmoil in global oil markets, combined with massive expansions of national budgets to help economies recover from the coronavirus, is a once-in-a-generation opportunity for them to green national economies.

After all, which consumers need free or nearly free oil subsidized? And which government wants to subsidize a company that might collapse anyway?

Five trillion dollars can pay off a lot of debt or buy a lot of green infrastructure. And that means subsidy policies that once seemed impossible to shift, may suddenly be impossible to maintain.

Oil prices ranging from zero to $20 a barrel also force investors and executives to confront deeper issues about fossil fuel companies.

What is the relative risk in paying to turn off and restart shale production as prices fluctuate, versus investing in a solar panel or wind turbine that works every day?

Those investment calculations are starting to overlap with reputation and recruitment concerns. Thirty large banks, including most of Europe’s largest banks, have already decided: it's not worth investing in new coal projects. Shell this week became the latest oil company to make a “net zero” emissions commitment.

Francesco Starace, CEO of Italian electric provider ENEL, put it this way: “The crisis is a confirmation of a stakeholder trend that was already underway. It’s about longer term sustainable practices. A company needs to address deeper issues than just quarterly results. They need to find the roots that justify their existence.”

Mark Lewis, global head of sustainability research at BNP Paribas Asset Management, raises another possible problem: an oil consumption plateau. Fiona Hill, a former official of the U.S. National Security Council, this week raised the possibility of “depressed demand for oil for many years to come.”

It's not only private investors who may suffer from these tectonic shifts: Plenty of large fossil fuel companies are owned by governments. Those governments and the international institutions that fund them — in the case of poorer countries — may also trip up in the rush to cleaner energy sources.

Rachel Kyte, a former World Bank adviser who now leads The Fletcher School at Tufts University, said the World Bank and IMF spring meetings were “a missed opportunity.” A chance to push for policies that would improve the competitiveness of poorer countries was passed over in favor of simply allowing government to pause their debt payments. Kyte warned that in this oil market, “the money will (now) go into propping up the oil company.”

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Green Bond Treasurer Survey 2020: Eighty-six treasurers from organizations issuing green bonds describe their experiences in a survey by Climate Bonds Initiative

LGIM throws its ESG weight around: Legal & General Investment Management, the fifth-largest institutional asset manager globally, opposed over 4,000 company directors in 2019 and took sanctions against 11 companies under its Climate Impact Pledge, according to its latest Active Ownership Report published Thursday.

Finance eco-labels in EU? European fund managers and investor advocates are at odds over the criteria intended to single out best-in-class green investment funds in the EU. The EU’s research arm proposed a series of thresholds that funds would have to exceed, measured by looking at the companies in a fund portfolio, then determining what portion of their revenue came from environmentally accredited activities. The European Fund and Asset Management Association (EFAMA) says the thresholds are too high and would force “a too-narrow pool of qualifying investments.” Better Finance said the thresholds (some as low as 18 percent) were “extremely weak” for equity funds and overly complex.

Fidelity International’s Natalie Westerbarkey suggests an alternative to an all-or-nothing label: a rating system, with scores changing as companies’ green revenues grow or shrink.

Brown taxonomy: Ulrich Volz, director of the Centre for Sustainable Finance at SOAS University of London, says we should look closely at what does not get financed. We may also need new words to describe high-risk investments in 2020 and beyond. “It is important that we focus not only on a green taxonomy but also on a brown taxonomy.”