2030 Finance | April 2, 2020

The carbon bubble has burst. Let’s not re-inflate it

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, April 2The coronavirus likely jumped from animals to humans. Now it has leaped from humans to the fossil fuel industry.

As oil prices sunk to new lows this week, Goldman Sachs analysts called the virus a game-changer that will “permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalizes and shift the debate around climate change.”

It is the supply and demand of capital that matters, not the supply and demand of barrels, write Goldman’s Jeff Currie and a team of analysts. “As long as there is capital, companies can withstand difficult periods and the barrels always come back.” This time around, things “will almost certainly take a different course when the global economy emerges from this and is faced with the prospect of having to make large-scale investments into carbon-based industries.”

Concludes i(x) Investments’ Trevor Neilson, “The oil industry as we know it is dead — a victim of math, the coronavirus and the world’s response to it.”

COVID-induced social distancing policies have led to steep declines in emissions that would have been unthinkable just a few months ago. The key now is not to backslide as the economy emerges eventually from the corona crisis.

Already there are signs that climate concerns could take a back seat to health and economic concerns, at least in the short-term. On Wednesday, organizers postponed the COP26 global climate summit scheduled for November in Glasgow. The summit was to mark a key milestone five years into the Paris accord, with nations ratcheting up their commitments to cut emissions. Organizers said they would push for the expanded commitments – nationally determined contributions, or NDCs, as they’re known – to be submitted as planned.

“Our determination is to make sure that the momentum for climate ambition will continue, particularly for the preparation and submissions of new NDCs this year,” said COP25 President and Chilean minister of the environment Carolina Schmidt.

And oil and gas companies may yet get a handout as part of the U.S. coronavirus relief efforts; the heads of Exxon, Chevron and other oil conglomerates are reported to be meeting with President Trump on Friday. Energy companies, including renewable energy providers, had not explicitly been included in the government’s $2 trillion stimulus package.  

Accelerating the disruption

Oil and gas companies faced structural challenges well before COVID-19 hit. Forty-two fracking companies filed for bankruptcy in 2019 under a cumulative $26 billion in debt, double the $13 billion in bankruptcy-related debt filed in 2018, according to IEAAF.  “Expect continued oversupply and oil prices that are much lower for much longer,” warn the research firm’s Tom Sanzillo and Kathy Hipple. “After the crisis passes ‒ none too soon ‒ there is little likelihood of a fast rebound for oil and gas.” 

Nor is financial support likely to bounce back. Climate campaigns like Stop The Money Pipeline are targeting banks, asset managers and other financial enablers of fossil fuel production. Barclays, the top European funder of fossil fuels, this week became the latest bank to bend to investor pressure and commit to a net-zero carbon goal by 2050. 

The pandemic and resulting economic slow-down are accelerating the disruption of fossil fuels, including the dirtiest: coal. In 2019, coal generation fell by 3%, and power sector emissions by 2%, the largest drops in three decades, according to climate think tank Ember. And so far this year, more electricity has been generated from renewables in the U.S. than coal. Half of coal plants operating today cost more to run than building new renewables, according to CarbonTracker, putting as much as $600 billion in planned coal power – and investor money – projects at risk. 

We must now institutionalize the reductions and make them the new normal even when the emergency eases. Much of that will rests on the actions of governments – ramping up their COP26 commitments and embedding climate-friendly policies in their corona-related stimulus. Global carbon subsidies, for example, remain double those of renewable energy. 

As trillions of dollars are being mobilized to inject support into ailing global economies, “How this money is used will mean the difference between seeing a big rebound in CO2 emissions, or setting the world on a more sustainable pathway through investing in renewables and low-carbon alternatives,” writes Dave Jones electricity analyst with climate think tank Ember.

Adds Greenpeace’s Jennifer Morgan, via Twitter: “COP26 being put on hold should make governments double down on their efforts to ensure a green and just way forward in handling this health crisis and the climate emergency. Going back to ‘business as usual’ is completely unacceptable.”