The End is Near for Dirty Energy: Fossil Fuels are Being Abandoned by Investors, Insurers and Banks

“I’m done with fossil fuels. They’re done. They’re just done. We’re starting to see divestment all over the world.” - CNBC’s Jim Cramer

The fact that investors, insurance companies and banks are abandoning the fossil fuel industry is a clear sign that coal, oil and gas are in the final stage of their energy dominance. Those who refuse to come to terms with this fundamental reality will by punished financially and in the court of public opinion.

Jim Cramer is a stock market pundit and he sees the writing on the wall. "I’m done with fossil fuels. They’re done. They’re just done. We’re starting to see divestment all over the world,"  Cramer said on CNBC.  He also said the industry is in the "death knell phase" comparing them to the tobacco industry before its collapse. "You’re seeing divestiture by a lot of different funds. It’s going to be a parade."

According to the Guardian, a report at the end of last year concluded that coal-fired power stations were, "on the way to becoming uninsurable". At least 35 insurers have begun pulling out of coal investments. The number of insurers withdrawing coverage for new fossil fuel projects has more than doubled over the last year.

Fossil fuels are not only imperiling life on the planet they are also bad investments. Despite one of the most bullish stock runs in decades, the share prices of many major oil companies are falling short of expectations.  Even if they were providing stellar returns it is hard for investors to justify supporting an industry that augurs death. 

"I think we’re at the point in the global warming story where anyone with an eye to history might want to ask, 'Do I really want to be trying to profit off the wreckage of the planet?'" said environmentalist and 350.org co-founder Bill McKibben. "Also, considering how badly the fossil fuel sector is underperforming the economy, politicians might want to ask themselves, 'Do I really want my constituents to think I’m this bad at managing my money?'"

According to a 2019 study published in Nature Energy, the energy return on investment (EROI) for fossil fuels is not what many believe. While a ratio of 25:1 is a commonly sited EROI for fossil fuels, this study suggests it is closer to 6:1 putting them in line with renewable energy. As the study's co-author told Bloomberg "The transition from fossil fuels to renewables actually might not be as bad as people thought," he said.

By 2016 it was becoming clear that divestment was a serious and growing movement. This became irrefutable when in 2017 the world's largest equity investor, Norges Bank Investment Management ("NBIM"), Norway's $1 trillion sovereign wealth fund, announced that it was selling its $35 billion stake in oil and natural gas stocks. As of 2020 most investors now accept that fossil fuels are terminal.

BlackRock, the world’s largest asset management firm, has recently announced that it is launching new investment products that screen fossil fuels. BlackRock CEO Larry Fink used his most recent annual letter to warn of a "significant reallocation of capital". With more than $7 trillion in assets under management, this represents a seismic shift in the investment world. Goldman Sachs announced it wouldn’t fund drilling in the Arctic National Wildlife Refuge and they have signaled that they intend to decrease their financing of of new coal-fired power projects and diversify away from the fossil fuels.

Riksbank, Sweden's central bank has sold off bonds from parts of Canada and Australia due to concerns about fossil fuels. Reuters reported that Riksbank Deputy Governor Martin Floden said the bank would no longer invest in assets from issuers with a large climate footprint, even if the yields were high. "As a result of the new investment policy, we sold our holdings of bonds issued by Alberta in the spring. For the same reason, we have recently sold our holdings in bonds issued by the Australian states of Queensland and Western Australia," Floden said.

It looks as though 2020 will be they year that the shift away from fossil fuels goes mainstream. The European Investment Bank (EIB), the EU’s lending arm said as of the beginning of this year they will no longer finance fossil fuel projects. In 2017 The World Bank pledged to stop funding oil and gas projects beyond 2019. As reported by Reuters Matthew Green, a total of 130 banks worth $47 trillion are moving away from fossil fuels. This includes Deutsche Bank, Citigroup, and Barclays, all of which have adopted UN backed climate policies that would shift them away from fossil fuels to align them with the 2015 Paris Agreement. Other banks to join the "Principles for Responsible Banking" initiative included Danske Bank, ABN Amro, BNP Paribas, Commerzbank, Lloyds Banking Group and Societe Generale, according to a statement.

The fossil fuel industry is indeed dying, but unless they end quickly they may still take us all with them.

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The World's Poor are Hurt Not Helped by Fossil Fuel Subsidies

Governments argue that fossil fuel subsidies are designed to help the poorest members of society, however, this is not borne out by the research.  The true beneficiaries of these subsidies are wealthier people and wealthier nations not the poor.

According to an IEA report, more than 85 percent of these subsidies go to middle and higher end income earners while only 8 percent of the aid is reaching the poorest 20 percent. These subsidies encourage energy consumption as people with the lowest incomes tend to be lower energy users and rarely drive.

"Fossil-fuel subsidies as presently constituted tend to be regressive, disproportionately benefiting higher income groups that can afford higher levels of fuel consumption," the report said. "Social welfare programs are a more effective and less distortionary way of helping the poor than energy subsidies."

Impediment to renewable energy 

 

Not only do fossil fuel subsidies not help the poor they actually impede the growth of renewables. This is particularly true for rural poor, where renewable energy would be both well suited and highly competitive.

"These subsidies contribute to the inefficient use of fossil fuels, undermine the development of energy efficient technologies, act as a drag on clean, green energy deployment and in many developing countries do little to assist the poorest of the poor in the first place," former Executive Secretary of the UN Framework Convention Christiana Figueres said.

Green climate fund

Fossil fuels subsidies are harmful to both the poor and poorer nations. Wealthy nations spend as much as 40 times more money on fossil fuel subsidies than they invest in the Green Climate Fund to help poor countries adapt to global warming. Eight industrialised nations (Australia, Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) spend a combined $80 billion a year on public support for fossil fuel production, but have pledged only about $2 billion a year to the Green Climate Fund, Oil Change International said.

"Eliminating fossil fuel subsidies could be a massive double win," Alex Doukas, said Oil Change International's senior campaigner, said. "It would stop a huge waste of public money that's driving the climate crisis, while at the same time freeing up money that can help poor countries adapt to the impacts of climate change and make the shift to renewable energy."

Climate costs

Almost all economists agree that climate change hurts the economy. This view was presented in a 2018 article in the Bulletin of Atomic Scientists, titled, Benefits of curbing climate change far outweigh costs, by Dana Nuccitelli. In fact global warming has been hurting the economies of poorer countries for about 40 years.

The medical costs alone justify climate action. A recent WHO report concludes that the health gains from meeting the terms laid out in the Paris Agreement would more than make up for the financial costs. The Lancet report points to the costs of inaction. "About 712 climate-related extreme events were responsible for US$326 billion of losses in 2017, almost triple the losses of 2016," the report says. What makes this even more troubling is the fact that almost all of these losses occurred in uninsured low-income countries.

Urgent priority

In 2015 a coalition of eight national governments (Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden and Switzerland), with the support of the International Institute for Sustainable Development (IISD), called the phasing out of subsidies an urgent priority.

"Accelerating the reform of fossil-fuel subsidies is therefore an urgent priority," the coalition known as Friends of Fossil Fuel Subsidy Reform wrote In a communiqué. "The International Monetary Fund views that fossil fuel prices should reflect not only supply costs but also environmental impacts like climate change and the health costs of local air pollution. The majority of fossil-fuel subsidies are also socially regressive, with benefits disproportionately skewed toward middle- and upper-middle income households..."[removing subsidies would also] free up financing for sustainable development and support both national and international environmental priorities. At the same time, accelerated subsidy reform needs to be undertaken alongside measures that protect the poor and vulnerable groups from the impact of higher energy prices."

The brunt of climate impacts are being felt by people who have contributed the least to the climate crisis and who can least afford to deal with it. Fossil fuel subsidies are not a solution, in fact they are a central part of the problem.

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Fossil Fuel Industry Pays Legislators to Protect their Subsidies

Image credit: The Price of Oil

The fossil fuel industry spends tens of millions of dollars each year to defend subsidies. This is part of their longstanding practice of buying influence so that they can shape political outcomes.

The Price of Oil quotes research that estimates the fossil fuel industry gets a 5,800 percent return on these investments in the form of fossil fuel subsidies. Estimates of the value of U.S. federal subsidies (excluding climate and health impacts) to the domestic oil and gas industry range from $4 billion a year, to $41 billion annually. One recent comprehensive study of U.S. energy subsidies identified $72.5 billion in federal subsidies for fossil fuels between 2002-2008, or just over $10 billion annually. Taxpayers provide $7bn a year for fossil fuel subsidies on public lands.

There have been many calls to phase-out fossil fuel subsidies. A decade ago President Obama began his relentless - but ultimately doomed - efforts to eliminate oil and gas subsidies. Although Republicans are the largest recipients of oil industry campaign contributions their are a handful of Democrats who welcome donations and block efforts to repeal subsidies.

In 2011 three dozen members of Congress sent a letter to the Super Committee urging an end to fossil fuel subsidies. The committee ignored the request although this would have saved as much as $122 billion over a decade. It failed because of the influence of fossil fuel industry money on the Super Committee. Eight Super Committee members received over $300,000 in contributions from the fossil fuel industry since 1999: Senators Baucus (D-MT), Kyl (R-AZ), Portman (R-OH), and Toomey (R-PA), and Representatives Camp (R-MI), Clyburn (D-SC), Hensarling (R-TX), and Upton (R-MI).

There have been a number of bills to end subsidies but they have all been killed by members of the GOP. A 2011 bill to end fossil fuel subsidies was killed by the Senate Republicans (45 Republicans and three Democrats voted to keep oil subsidies). Senators who opposed eliminating the oil subsidies received an average of 5 times as much cash as those who voted to eliminate the subsidies.

"The industry finances corrupt politicians, who in turn help them keep fossil fuels economically viable at a time when the science suggests most oil, gas and coal needs to be kept in the ground," Jason Kowalski, policy director at 350.org said in a Center for Biological Diversity press release. "They set out to rig the system and they succeeded. History will judge them harshly."

Opponents to ending subsidies put forward an old and deeply flawed economic mythology. They contend this would hurt industry, eliminate thousands of jobs, and reduce tax revenue. However, close scrutiny does not bear out their concerns. Natural resource extraction jobs are less than 1 percent of state jobs and the industry gets more in state subsidies than it pays in taxes. The health benefits alone far outweigh the costs.

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What Would Happen if Fossil Fuel Subsidies Were Redirected Towards Renewable Energy?

Subsidies are at the heart of energy issues. Clean power receives a tiny fraction of this money while the fossil fuel industry continues to reap the lion's share.  Fossil fuel subsidies are four to ten times larger than those given to renewable energy.

Governments around the world gave about $490 billion in subsidies to the fossil fuel industry in 2014 and only $112 billion in subsidies for renewable power generation.  Governments are planning on continuing their preferential allocation of resources to fossil fuels. According to the IEA, over the next 25 years, only 15 percent of the G20's investment in energy will be devoted to renewables.

Two recent studies support the contention that ending our use of oil gas and coal could solve the climate crisis. The transition away from fossil fuels towards renewable energy is already underway. However, we need to expedite the process. One of the fastest ways we can do this is by ending fossil fuel subsidies and redirecting these subsidies to renewable energy. This would allow carbon pricing schemes to work better, reduce health hazards from air pollution and promote job growth.

Simply removing subsidies for fossil fuels would benefit renewables as dirty energy subsidies are inversely correlated with the growth of clean energy. Redirecting subsidies from fossil fuels to clean energy and efficiency would provide immense environmental and social benefits.  Redirecting such subsidies would significantly reduce greenhouse gas emissions.

A recent study shows that if we immediately phased out fossil fuels, we have a 64-66 percent chance of keeping temperatures from increasing more than 1.5 C. We have known that we need to end fossil fuel subsidies for many years. As explained a decade ago in the Leader’s Statement from the G20 Pittsburgh Summit, fossil fuel subsidies are inefficient, they "encourage wasteful consumption, reduce our energy security, impede investment in clean energy and undermine efforts to deal with the threat of climate change".

Christina Figueres, the former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), was instrumental in bringing about the positive outcome at COP21. She has repeatedly spoken out against fossil fuel subsidies. "These subsidies contribute to the inefficient use of fossil fuels, undermine the development of energy efficient technologies, act as a drag on clean, green energy deployment and in many developing countries do little to assist the poorest of the poor in the first place,"  Figueres is quoting as saying in a book called "Making the Switch".

Right now fossil fuel prices are artificially low because they include subsidies and do not reflect environmental and health impacts. If we were to end fossil fuel subsidies it would allow increasingly cost competitive renewable sources of energy to out compete dirty energy.

While IEA figures show that government subsidies for fossil fuels are around 10 times greater than those for renewable energy, when we factor climate and environmental costs, then the fossil fuel subsides increased another 10 times to nearly $5 trillion a year according to the IMF. The IMF in partnership with the World bank has said:

"Subsidies distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources."

What would happen if we diverted subsides away from fossil fuels and towards renewables?  We would be well on our way to addressing the climate crisis while at the same time we would improve air quality.

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Ending Fossil Fuel Subsidies is a Crucial First Step

Ending fossil fuel subsidies is the first step towards addressing climate change. We know that the climate crisis is a genuine emergency and we also know that fossil fuels are the leading cause, hence transitioning away from them is central to addressing the crisis we face.

"The first step towards that is to stop supporting the industry with our public dollars," Stephen Kretzmann, the executive director of Oil Change International is quoted as saying in a Center for Biological Diversity press release. "These subsidies are a raw deal for American taxpayers, and a disaster for our climate."

Fossil fuel subsidies are antithetical to carbon reduction efforts by governments, businesses, cities and communities worldwide. They are harmful to the environment and economic development. As Jake Schmidt, of the Natural Resources Defense Council, wrote in a blog: "Given tight budget times and the need to address global warming, subsidizing activities that are heating the planet just doesn't make sense. The only beneficiaries of fossil fuel subsidies are oil, gas and coal companies that are raking in record profits at the expense of the rest of us."

As explained on the Price of Oil website, a fossil fuel subsidy is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers. There are a lot of activities under this simple definition—tax breaks and giveaways, but also loans at favorable rates, price controls, purchase requirements and a whole lot of other things.

Fossil fuel subsidies have been around since 1926, despite the fact that it is the most profitable industries in the world. As explained by Denmark’s Minister of Trade and Development Cooperation, Mogens Jensen, "Fossil-fuel subsidy reform are a key climate change mitigation policy with clear economic, social and environmental benefits."

Globally, the combination of production and consumption subsidies for the fossil fuel industry amount to more $600 billion annually.

According to the OECD production subsidies are estimated to be between $45 billion and $75 billion (budgetary support and tax expenditures) by the 24 richest OECD countries. Fossil fuel subsidies distort energy markets and each OECD country averages between $160-200bn each year. According to the International Energy Agency (IEA), consumption subsidies in 37 developing countries were worth $557bn annually.

According to a 2015 IMF publication when we factor the cost of damage from pollution and climate change, fossil fuel companies are getting $5.3tn a year in subsidies. To put this number into context that is equivalent to $10m a minute every day, that is more than the total health spending of all the world’s governments. Let that sink in, we spend more on energy that is killing people and the planet than we do on helping people to be well.

As reported by BBC News phasing out fossil fuel subsidies could reduce carbon emissions by 10 percent by 2030. In combination with the right carbon pricing scheme a 40 percent reduction in emissions is possible in some countries.

In 2015 a coalition of eight national governments (Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden and Switzerland), with the support of the International Institute for Sustainable Development (IISD), called for the "phase-out of subsidies to fossil fuels in the lead-up" to COP21. :

"The International Energy Agency (IEA) highlights fossil-fuel subsidy reform as a key component of a set of energy measures to combat climate change and estimates that even a partial phase-out of fossil-fuel subsidies would generate 12 percent of the total abatement needed by 2020 to keep the door open to the 2°C target. Accelerating the reform of fossil-fuel subsidies is therefore an urgent priority," the coalition known as "the Friends of Fossil Fuel Subsidy Reform" wrote In a communiqué. "The International Monetary Fund views that fossil fuel prices should reflect not only supply costs but also environmental impacts like climate change and the health costs of local air pollution. The majority of fossil-fuel subsidies are also socially regressive, with benefits disproportionately skewed toward middle- and upper-middle income households..."[removing subsidies would also] free up financing for sustainable development and support both national and international environmental priorities. At the same time, accelerated subsidy reform needs to be undertaken alongside measures that protect the poor and vulnerable groups from the impact of higher energy prices."

France has joined in calling on governments to eliminate fossil fuel subsidies. Despite a G7 pledge to end subsidies by 2025 and a 2013 commitment from the US and China to eliminate and consolidate fossil fuel subsidies we are not seeing much action on this front.

According to the IEA, the estimated value of global fossil-fuel consumption subsidies decreased by 15 percent to $260 billion in 2016, the lowest level in a decade. However, we are not seeing major reductions and in countries like the US and Canada these subsidies are actually increasing.

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The Energy Paradox: Environmental Defence on Canada's Escalating Oil Subsidies

Both Canada and the province of Alberta want to have it both ways. They want to be climate leaders and major oil and gas exporters.  The Canadian federal government and the provincial government in Alberta provide massive subsidies to the oil and gas industries in the form of tax breaks, fiscal support and direct grants.  Canada is the largest provider of government support for oil and gas production per unit of GDP in the G7.

After decreasing federal payments to Big Oil by $150 million in 2017 Justin Trudeau's Liberal government appears to have changed direction in 2018. Last May the Canadian government announced it was going to buy Kinder Morgan's Trans Mountain pipeline for $4.5 billion. Last December the Liberals announced that they were giving oil and gas companies $1.65 billion in new grants, loans and financial supports. This is in addition to Export Development Canada, the country’s export credit agency, that provides, on average, $10 billion in government-backed support for oil and gas companies every year.

This is inconsistent with the government's decision to phase out coal and implement a national carbon pricing scheme. It is at odds with government investments in public transit, energy efficiency, and renewable energy. This also does not fit with Canada's commitment to phase out all of its inefficient fossil fuel subsidies by 2025.

Alberta's fossil fuel subsidies have increased dramatically in the last few years.  Premier Rachel Notley's provincial government has provided $4.8 billion in subsidies to the oil, gas and coal industries in the last three fiscal years. She gave away more than $2 billion dollars in fossil fuel subsidies for the 2017/18 fiscal year (tax incentives, royalty holidays, research grants and direct subsidies). That is almost double the previous years total of $1.2 billion 

Like Canada Alberta's desire to have it both ways is creating an energy paradox.  These subsidies are in stark contrast to the goals of Alberta’s Climate Leadership Plan (CLP)  which includes phasing out coal electricity, increasing renewable electricity, funding energy efficiency, more public transit and placing a cap on oil sands emissions.

A recent Environmental Defense report titled, Doubling Down with Taxpayers Dollars, chronicles fossil fuel subsidies in Alberta. The report was co-written with the International Institute for Sustainable Development (IISD).

"[T]hese subsidies work directly against the goals of the CLP by enticing fossil fuel companies to expand their operations. For Canada to fulfil its commitment to phase out inefficient fossil fuel subsidies by 2025, all provinces must also end public support for oil, gas and coal companies."

In 2017, the aggregate gross profits of the Big Five oil sands producers were $46.6 billion.  In a recent Environmental Defense article,  Joshua Buck wonders how the Canadian oil industry can make billions in profits and yet receive ever increasing corporate subsidies.  Particularly when the industry is using some of these subsidies to expand extraction at a time when we should be winding down.  

"The science is telling us we have to pretty drastically reduce production of oil and natural gas, and in the face of headwinds in Canada around the price of oil and opposition from communities and opposition from First Nations, Canadian governments have really bent over backwards to try to help the industry with all these subsidies," said Dale Marshall, a program director with Environmental Defence.

Environmental Defence, along with Stand Earth, released a report titled Canada's Oil and Gas Challenge, at COP24.  The report indicated that emissions from the oil and gas sector are rising making it all but impossible for Canada to meet its Paris targets. Canada has agreed to 30 percent reduction in greenhouse gas (GHG) emissions from 2005 levels by 2030.

The report also reviews how fossil fuel lobbyists have succeeded in pushing back against the federal government's efforts to reign-in emissions. They point out that only 20 percent of Canadian fossil fuel emissions will be taxed under the national carbon plan.

Realizing the compromising optics oil industry insiders were tripping all over each other to distance themselves from the hand-outs. As reviewed in an article by Patrick DeRochie the fossil fuel industry claims it does not get nor does it want subsidies.

Tim McMillan, CEO of the Canadian Association of Petroleum Producers, Canada’s primary oil industry lobby group, said the industry "didn’t ask for money under federal government programs." The CEO of Alberta oil and gas producer Whitecap Resources, Grant Fagerheim, said "this is absolutely not what is needed" and that "the energy sector is not looking for handouts, it’s not looking for support in the form of loans."

Alberta Opposition Leader Jason Kenney said, "None of them—none of them—are asking for handouts," and Alberta Premier Rachel Notley said the oil and gas sector "doesn’t want free money."

Although this is political theater and public relations, it is hard to disagree with DeRochie when he says we should take them at their word and cut all subsidies.

Without the fossil fuel industry Canada would be justified in calling itself a climate leader. 
"The oil and gas industry, it’s fair to say, is one of the only things standing in the way of Canada showing leadership on climate change," said Marshall. "In every other respect there are really good initiatives happening in Canada, and yes, the oil and gas sector continues to get a free pass and that’s unfair. It’s unfair to other sectors and it’s unfair to other Canadians who are facing climate policies and are seeing the oil and gas industry be let off the hook."

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