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The rational business decision to destabilize the Earth's climate

David Beach  |  04/24/15 @ 3:00pm  |  Posted in Clean energy, Climate

If we are to have any hope of stabilizing the Earth’s climate so our children will have a tolerable future, most fossil fuel reserves must remain in the ground unburned. Fossil fuel companies, however, have other plans.

Stranded assets?<br />What will happen if most of the oil, gas, and coal has to remain in the ground? (Photo from 350.org)

A colleague recently showed me a copy of the 2015 annual meeting proxy statement of the Hess Corporation, a Fortune 100 oil company. The statement includes a number of proposals for shareholders to vote on, including one calling on the company to analyze its “carbon asset risk.”

The proposal says: “Shareholders request Hess to prepare a scenario analysis report by September 2015, omitting proprietary information, on the Company’s strategy to address the risk of stranded assets presented by global climate change and associated demand reductions for oil and gas, including analysis of long and short term financial and operational risks to the company.”

Activist shareholders are asking many oil, gas, and coal companies to conduct such analyses. (In this case, one of the shareholders is the Park Foundation, whose executive director, Jon Jensen, used to work in Cleveland at the George Gund Foundation). The goal is to change perceptions about the companies’ proven reserves -- the fossil fuels in the ground that give the companies most of their value. If use of these carbon-based fuels must be curtailed to prevent catastrophic climate change, then they will become stranded assets (i.e., assets that cannot be exploited), and the companies will be worth much less.

Climate scientists say that humanity has a budget for how much carbon can be released into the atmosphere by burning fossil fuels. If global warming is to be kept below the danger threshold of 2 degrees C. (or 3.6 degrees F.), only about 1 trillion tons of carbon can be released. We’ve already burned through about half of that since the dawn of the Industrial Age. And we’re on course to burn through the rest in the next 30 years or so. (These are round numbers; some scientists think they are too conservative and that, to be safe, warming should be held to much less than 2 degrees C.).

But the most sobering fact is that energy companies have several times the allowable carbon budget in reserves -- way more than can be safely extracted and burned. This, then, is the economic and political dilemma of our time. Most of the reserves -- representing the value of some of the largest economic entities in the world -- have to stay in the ground and be written off. How can that happen?

Certainly, oil companies like Hess are not planning to let it happen. In the Hess proxy statement, the company’s board of directors urges stockholders to vote against the proposal to analyze carbon risk. Such a study would be a waste of time and could mislead investors, the board says.

“Moreover,” the Hess board says, “a recent IHS Energy carbon asset risk study points out that the financial value of most publicly traded oil and gas companies is based primarily on the valuation of proved reserves, 90% of which are expected to be monetized over the next 10 to 15 years. For these reasons the company believes that there is not a substantial risk its reserves will not be monetized and that markets are currently valuing carbon assets rationally.”

Thus, the plan is to “monetize” everything. The rational business decision is to proceed to destabilize the Earth’s climate.

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