Divesting From Fossil Fuel Would Cost $5 Trillion
Investors face a tremendous challenge moving forward in an increasingly environmentally-conscious world, where environmental concerns, so-called ‘ethical’ investment strategies, and fears that fossil fuel assets could eventually become “stranded” by emission regulations are forcing gradual fossil fuel divestment.
However, according to new research from Bloomberg New Energy Finance, such movements are up against a $5 trillion fossil fuel challenge, making complete or even-partial fossil fuel divestment tricky.
Bloomberg New Energy Finance (BNEF) has released figures which show that oil, gas, and coal companies currently make up one of the world’s largest liquid asset classes, registering a combined stock market valuation of nearly $5 trillion.
“Fossil fuels are investor favourites for a reason,” said White Paper author Nathaniel Bullard. “Very few other investments offer the scale, liquidity, growth, and yield of these century-old businesses with economy-wide demand for their products.
Fossil fuel companies have simply stood the test of time, and the inherent stability of fossil fuel energy generation has made them literally invaluable the world over.
“Given their scale and performance, oil and gas companies are attractive to institutional investors,” Bullard added. “Coal firms, smaller and recently underperforming wider markets, are less of a focus for institutions.
Alongside this mammoth trillion-dollar entrenchment is the sheer distance renewable energy has to go to compete on a larger scale with fossil fuels. BNEF forecast that $5.5 trillion is needed and expected over the next 15 years to build out renewable energy sources as a competitive energy infrastructure, and even with this gigantic hurdle, Bloomberg points out that “pension funds or institution asset managers may not integrate clean energy into their portfolios” due simply to the risk-factor associated these days with renewable energies.
Renewable energy investment is by no means a struggling investment opportunity — one need only read back through our Green Economy-Investment category to see the proof of that. Millions and sometimes billions of dollars are invested each month into a variety of projects ranging from the small to the absurd. However, to challenge fossil fuel as the dominant energy investment choice, there’s a long hill to tread.
“The $5.5 trillion needed to build out clean energy through 2030 will offer many new opportunities for investors, but a major switch into that and out of fossil fuels would require a massive scale-up of new investment vehicles,” explained Bullard.
Beyond the simple challenge of meeting fossil fuel-level investment figures is the fact that the future of renewable energy investment is simply not as secure as we might like. Political uncertainty abounds throughout the world, none more blatantly than in Australia where the current climate of renewable energy investment is likely to take a dramatic turn if the current government has its way.
A new report published earlier this month by the Green Alliance also raises its own problems, stating that the aging Generation-Y is simply not likely to invest as thoroughly and confidently in renewable energy technologies as their predecessors.
While the numbers predict a gloomy future for those of us hoping renewable energy can usurp fossil fuel’s crown, let us hope that it only spurs us on towards bigger and better things, rather than putting a halt on things.
The White Paper is available for download here, and the press release with further numbers regarding both the fossil fuel and clean energy industries is available here.
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I read $5 trillion required to build out renewables, and all I really see is, “that’s about $1000 per person, total accumulative over the next 15 years… so… $67 per person, per year.
That’s not so bad.
There is a moral issue here. The world council of churches, major universities, and politicians with a conscience, all know change comes with a cost. But the cost of not doing it, is more expensive. Pension fund managers need the consent and advocacy of their investors to go green, even if it costs a bit. It is not an easy sell of course. I remember a line from a George Bernard Shaw play: “Have you no morals, man!” “Can’t afford ’em guv’nor.”
A truly terrible headline. Suppose over the next 30 years the asset value of the oil and gas industry shrinks to zero, and that of renewable energy assets rises to $5trn. Why should this change be described as “costing” anything at all?
All cost is opportunity cost: in other words, you compare an expenditure to something else you could do with the money. The energy transition has a “cost” only if there’s an alternative energy future that is less expensive. Expert opinion concurs that this cost (compared to a largely fossil BAU) is negligible: 0.06% off the expected growth rate of GDP according to IPCC WG3.
Excellent point. The cast of this story made me think of the disruption of the horse and buggy industry a hundres hears ago.
Agreed and the big point here is that bar emissions (whether Nox and Sox or ozone and carbon dioxide) the biggest reason to switch is that once we do we don’t have to pay hard earned money for fuel to power the things we like. Ever. Just the cost of the infrastructure to do it. That is something that is shockingly missing from the conversation. Investing $5 trillion for society for free fuel afterwards? That sweetens the pot quite a bit.
Yep the headline is terrible because it goes into the framing of something we should do, like eating brocolli or brushing our teeth, rather than there is an investment benefit of putting money into renewable energy that costs more intially, but pays off quickly and will make people much more over the long run.
Really if people looked at the cost (both financial and time wise) of college the same way they look at investments of renewable energy over fossilf fuels there wouldn’t be any college graduates since, for much less time and effort, you can work at McDonald’s flipping burgers!
Yes, I was thinking the same thing. The analysis seems to basically amount to “Right now, fossil fuels are king, therefore they will be for a long time, at least.” But change is not always linear–not in the real world, and still less in the world of finances and markets. (One number regarding that last: 2009.)
I wanted to comment this, you did.
totally true.
Utilities are big steam engines. steamboats are gone and so are steam trains. There will be no more investments in coal fired steam utilities.
they are the fossils of the past.
solar and wind make just more money on investment. and that is where the dollar goes.
If I were a pension manager I would be looking to divest before it becomes mainstream. You wouldn’t want to be left holding the bag when prices collapse.
We are building towards a massive tipping point, and it will likely come sooner than many expect.
I think so, too. That whole ‘stranded assets’ thing…
prices collapsed In Germany of the big 4.
google – Eon, RWE, Vattenfall, enBW
stock price history
If we want to see this change happen the conditions for it to do so are very much related to the policies and regulations instituted by our governments and the politicians running them.
So once again want to encourage everyone to get off your butts this fall and in ’16 in the US (and whenever the opportunity comes up in other countries), and let your opinion be known. Please try to motivate friends and family to do the same.
Don’t think that your one vote is to small to matter, the only way we are going to see the changes that we want is going to be to have enough of us letting the controlling organizations know in what direction the world, our country’s, and our lives need to go for us to live safely and healthy.
And in the meantime, take time to comment on the carbon emissions rules under EPA review:
http://www2.epa.gov/carbon-pollution-standards/how-comment-clean-power-plan-proposed-rule
More context, one click ‘back’:
http://www2.epa.gov/carbon-pollution-standards
Thank you for pointing out this opportunity for any others that may not have heard about it before.
Unfortunately with the way that EPA funding and power to regulate being reduced and under the control of politicians being paid off by the fossil fuel companies I still see voting as the primary issue to stress.
This isn’t just on the federal level, so many changes have happened on the state and city level it is a priority that we make sure that all of our politicians on the federal, state, and local level are willing to make the choices that surveys show the people want and not allow themselves to be influenced by corporate or special interests groups money.
Thanks again and let’s keep on fighting for what is right in every way we can.
Quite right. It’s helpful to support the regulations now, but also critical to prevent their repeal in the future.
Stock market valuation for oil, gas, and coal companies are worth 5 T USD does not means that these companies will have to continue to spend more money to search for and to drill more oil and gas wells forever. They may decide to halt any further spending on new oil and gas infrastructure in order to keep decent prices and hence profitability on existing investments, while investing in solar, wind, battery, synthetic fuels, H2, etc. Renewable energy will require a lot of future investment, while these energy companies have very deep pocket, perfect match. The only challenge is how to convince these Energy companies to make the change toward a more secure and profitable future.
Good point. It’s already happening: the oil majors are cutting back on capital expenditure, which has soared for no corresponding increase in output. Look at Steven Kopits’ presentation here (link).
Thank you James. I have been spreading Kopits video, too. 🙂
Everyone. Please watch this video to learn how oilcos profits are impacted by the scarcity of fossil fuels. Its big change happening and relevant to this discussion. We should add divestment to it.
What really pisses me off is that they spend a lot of their money just buying back their own stock instead of using it to find more / cleaner / better sources of energy. Maybe they know the party won’t last for too much longer and they’re gettin’ while the gettin’s good.
If they are buying back their own stock (in an attempt to support stock price, I would assume) they are simply speeding their demise.
If they can’t find places to invest their capital to produce future income but buy up shares from others they are just collapsing their businesses.
If you’re running a fossil fuel company and you can’t stomach getting into the wind farm business, whatever, then get into the screen door business or the paper towel business or do something wise with your money, credit and name while you can.
If you will not watch the hold hour the at least watch from 15:00 to 17:40, watch it twice $2.5T to maintain conventional oil supply since 2005 and it has drop 1Mb/bay. There is so much good here spend the 64min and you will be glad you did. Note at 20mins he misses China peak coal you read here this week. Even if it is your job, you can miss these things. 39-41 up stream speeding in oil 5x since 2000 oil production flat. 47-48 must see chart. James thanks so much for this link. This is a must watch, all you USA peeps got a long weekend coming invest a hour.
Solar power gives Power to the People.
just install Solar and make money from day one.
Solar is cheap clean and easy. and War safe.
big companies will fail. big companies are not rich, they have money because you pay them.
It is not a “cost” — it is a TRANSFER of $5 trillion in wealth from the fossil fuel corporations to other sectors of the industrial economy, in particular to the renewable energy industries.
And the damages from the pollution these companies cause are a transfer too, except it’s more like letting hundreds of billions of dollars go up in smoke every year.
Better headline, “$5T in today’s FF assets will be stranded when people decide that killing their descendants isn’t a good idea. Move you money to renewable now so you do lose it”
I hate these “well saving the world is going to hurt the oil company so better not do it”. Then we see “pension funds or institution asset managers may not integrate clean energy into their portfolios” they are too risky, but the risk from FF externals is fine and dandy!
Ok having a bad day. But I can see it on FOX now. “Even CleanTechnica (#1 green site on the web) claims, turning from FF will cost at least $5 T over sticking with FF”
nice comment Matt.
I wanted a green pension and the answer was.cannot.
You might want to come back and fix a few typos. I suspect that this sentence “Move you money to renewable now so you do lose it” was really intended to say, “Move your money to renewable now so you don’t lose it”
Your last sentence is absolutely 1000% true.
Yes fixed that, I have a mental condition where I can’t see the missing “negatives” like no or not.
So you have an overactive optimism gland?
Let me bring in something a bit off point, but related.
Someone reading the headline would likely assume it will cost us $5 trillion to build a renewable energy system.
It might. But we need to discount whatever the number is by the amount we would have spent even if we stayed with fossil fuels (and nuclear). Our thermal plants are aging, many are close to the average lifespan (~ 40 years) of plants we have already closed. We would be spending some hundreds of billion/trillions on new plants over the next 30 to 40 years regardless.
Someone should do an analysis of what we would spend to replace our expiring infrastructure were we to stick with old tech. Then do an estimate what the “extra” cost might be.
They should do that and then have it readily available/accessible and then people should actually read it, which is or may be parts of the problem. Lack of interest. But in some areas of the U.S. they are doing economic analysis on coal and other fossils that includes the deeper dives into re vs fossil fuels due in part to the Sierra Club’s anti coal campaign. But overtime I think it’s inevitable that re will be much less expensive the fossils, any way one looks at it; ev’s, pv, wind, ee. It just makes too much economic sense for people to ignore it despite the clean aspect of it. In some places we are already there.
That’s nerdy enough that I might just do that…
Let me see if I can get you kick-started.
Coal nameplate in 2012 = 336,341 MW.
Nuclear nameplate in 2012 = 107,938 MW.
http://www.eia.gov/electricity/annual/html/epa_04_03.html
Overnight median cost for coal = $2.95 Thousand/kW.
Overnight median cost for nuclear = $5.30
http://en.openei.org/apps/TCDB/
I assume doubling overnight cost to cover financing costs during construction. I end up at just over $3 trillion that we’d have to spend if we were to replace like with like.
I will caution readers not to trust numbers I’ve calculated until someone more use to dealing with very large numbers has confirmed.
I hope someone is checking my homework. But making the (perhaps faulty) assumption that I’m roughly correct I went a step or two further.
Amount of the $5 trillion uncovered by repositioning necessary spending on worn out plants is $2 trillion.
Spread over 20 years, the amount of time it would likely take to replace existing coal plants and nuclear reactors reaching their 60th birthdays, the cost would be about $25 per person per month. As long as that was paid for by our somewhat progressive income tax structure no one would be hurt. Hardly inconvenienced.
Looked at another way –
“The numbers are startling: simply tallying public health impacts, the study found that coal costs the United States economy $140 billion to $242 billion a year.
Much of this burden is borne by mining communities in Appalachia, where premature deaths associated with coal mining cost local economies an estimated $74.6 billion a year.
“We really don’t appreciate the public health dimension of what this is costing us,” said Dr. Paul Epstein, lead author of the study and a public health expert at Harvard Medical School. “I think we’ve been sticking our heads into the sand.””
http://green.blogs.nytimes.com/2011/02/17/tallying-coals-hidden-cost/
$140 billion per year saved by getting coal out of our lungs. 14.3 years to recover the $2 trillion.
$242 billion per year saved by getting coal out of our lungs. 8.3 years to recover the $2 trillion.
The IEA just released this report that explains the investment required.
http://www.iea.org/newsroomandevents/pressreleases/2014/june/name,72035,en.html
Bob what a lovely chart, I assume it is for USA. Can clearly see that in the last 20 years not much coal, hydro, or nuke added.
Yes, only US.
Here’s another version. The yellow and green stuff on the far right is interesting….
Very flawed headline. Change the subject from fossil fuel to any other older technology that is in the process of becoming extinct and you have no story… Divesting from vacuum tubes to solid state, divesting from buggies to cars, from coal fired locomotives to diesel. I have yet to download the report and analyze it further so I cannot say anything specific about the analysis, but it smells of big oil buying influence to scare people. BTW, this is not unusual, I have found that several of these investment reports use one-sided assumptions, incomplete analysis and selective data sets, which led me to concluded that the report’s main objective is to advance a pet position. As a result, I have stopped reading and believing all of these reports.
This IEA report explains the future investment required and the sources that will probably receive that investment (Subject to Change)
http://www.iea.org/newsroomandevents/pressreleases/2014/june/name,72035,en.html
If the environment reaches a tipping point, the cost of going with renewables may not look so bad. Also, some of that expenditure will be made by individuals that will determine that they can save money by installing renewables as James pointed out. Thus, it is an expenditure but the alternative might be even more costly.
Start by calculating the cost of writing off the southern half of Florida.
Add in the cost of building sea walls around our coastal cities such as New York. The cost of replacing all our infrastructure that lies only a modest distance above sea level.
The cost of hundreds of millions of climate refugees.
(I think I could have stopped earlier. We probably passed the $5 trillion mark in the first sentence.)
Amen
As long as there are people who can’t see past their own interests and are willing to acquire wealth ( I call it Illth) at the expense of the environment then the “mandatory” transition to ‘alternative’ fuels will proceed at a snails pace. Worse, if we drag our feet too long, we may die before we get there.
The mindset expressed here is a definition of the problem..
I wonder how much global warming and the total destruction of California will cost? Bloomberg is stupid.
Does anyone know what is the return in investing green? Do not reply with just a humanity reason. I am actually wanting to know the APR. I see a problem with the divest logic on fossil fuel companies. Say ten percent average is lowered on capital from the divest movement then the quarterly return to share price will increase ten percent. So that would just look better to other investors to buy the divest shares. I could see people investing green for a long term 7% APR in a world where stocks are 8-10%.
There are some renewable energy funds. I haven’t followed them as I don’t invest in sectors.