Climate change and fossil fuel: An examination of risks for the energy industry and producer states
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REVIEW Climate change and fossil fuel: An examination of risks for the energy industry and producer states
Jim Krane, Wallace S. Wilson Fellow for Energy Studies, Baker Institute for Public Policy, Rice University, Houston, Texas 77005, USA Address all correspondence to Jim Krane at [email protected] (Received 9 December 2016; accepted 8 February 2017)
ABSTRACT This article compiles and categorizes the various forms of climate risk facing the fossil fuel industry. The type and intensity of risk differs greatly among the three forms of fossil fuels, as well as between countries in the developing and developed world. The paper finds heightened risk for the coal industry and reduced risk for oil businesses, due to its lack of substitutes. Burning coal, oil, and natural gas is the source of two-thirds of the world’s emissions of greenhouse gases. Sales of these fuels also represent the economic underpinning of resource-rich countries and the world’s largest firms. As such, steps taken to abate emissions undermine commercial opportunities to monetize fossil fuel reserves. Risks to the industry correlate with progress on climate goals. This article analyzes recent literature on climate action strategy and finds that a new or intensified set of risks has arisen for the fossil fuel industry. These include government policies and legislation, financial restrictions among lenders and insurers, hostile legal and shareholder actions, changes in demand and geopolitics, as well as the onset of new competitive forces among states and technologies. The exposure of carbon-based businesses to these risks and the potential for loss is neither distributed uniformly across the sector, nor adheres to a uniform time scale. Shareholder-owned firms in the developed world will be incentivized to react sooner than large state-owned resource owners in developing countries. The fates of the three fossil fuels also appear likely to play out differently. Demand for oil appears insulated by its lack of viable substitutes, while coal businesses are already undergoing climate-related action, pushed by decreasing social acceptance and constraining financial regulation. At the other end of the spectrum, climate action has improved the medium-term viability of low-carbon natural gas. What appears clear is that, as effects of climate change grow more pronounced, the industry faces a future that is less accepting of current practices. Keywords: carbon dioxide; energy generation; fossil fuel; sustainability; transportation
DISCUSSION POINTS • C ommercial activity in fossil fuels is increasingly at odds with action to reduce the threat of climate change. • T he fossil fuel industry faces exposure to at least five distinct risk categories. Many businesses will change strategic direction to align activity with climate goals. • T he nature and intensity of risk differs greatly among the three fossil fuel types, as well as between the developing and developed world.
Introduction Fossil fuel-producing businesses and governments find themselves in an in
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