The scientific community has raised the need to reduce greenhouse gas (GHG) emissions and prevent further accumulation of gases in the atmosphere. How to deal with the situation? Who should lead the transition process?
Initially, most of the initiatives focused on the markets with the design of incentive mechanisms, the pricing of carbon emissions, in order to stimulate the search for renewable sources. Whatever the intentions and the mechanisms implemented, emissions continued to grow. The oil industry continued to expand, bringing the planet closer to a limit.
Something must be done, and now. The scientific community has proposed a change in approach, and the idea of conserving underground reserves is starting to gain ground. This implies limiting oil prospecting and exploration and linking them to a “carbon budget”, i.e. a certain amount that a country, sector or city must still emit GHGs over a period of time. time without compromising the goal of maintaining a temperature rise of less than 1.5 ° C or 2 ° C.
Globally, we are talking about a carbon stock of 460 gtC02, the remainder of the “carbon footprint” if the objective is to keep the rise in temperatures below 1.5 ° C. At the current rate of annual emissions (flux: 41.5 gtC02) this budget will be exhausted in about 11 years. Hence the urgency. Otherwise, the consequences would be irreversible. This raises the need for a state that sets limits and encourages transition.
For too long, world leaders have ignored the call of the scientific community and ignored the call to action of young people. But the risks posed by global warming are palpable. This explains the behavior of insurance companies, who quickly decide to abandon the “carbon boat”.
Investors are also reacting by urging oil companies to implement conversion plans so that their assets (stocks) are not affected by the “carbon bubble”. This bubble is associated with the idea of stranded assets, which is the financial side of the risk described above. The closer we get to the carbon budget limit, the more shareholders are interested in leaving their position in the sector, which translates into an accelerated sale of shares.
Few believed in the weight of activism in 2011, when the call for divestment was first heard on American college campuses. The idea of ”leaving reserves underground” was considered utopian, impossible. The economic equation did not bode well for renewable resources either, forcing the state to grant generous subsidies to the sector in order to make it competitive with fossil fuels. And the oil companies were legally “protected”, whatever the origin of the request, since the courts have always ruled in their favor.
Everything changes quickly. Activism has spread among investors and renewables are getting much cheaper, as oil companies are starting to sit in the dock. This only accelerates the transition, bringing the industry closer to the bottom line and investors seeing their assets devalue.
Last May, the International Energy Agency (IEA) published a report stressing the need to abandon all projects in order to meet the commitments made. To achieve a sharp drop in emissions, exploration and exploitation must be immediately abandoned. The publication was a shock, a “slap in the face” for the oil industry.
To move forward with the transformation and ensure that targets are met (net zero emissions by 2050), Carbon Tracker stresses the need to make companies’ actions transparent.
But that’s not all. On May 26, a Dutch court ruled that Royal Dutch Shell was facing prosecution because its traditional operations (production, distribution, marketing) had exacerbated the problem of climate change. The tribunal found that non-state actors such as oil companies are also responsible agents. The condemnation forces the oil company to design a more ambitious transition plan and to increase the emission reductions initially promised. This conviction could trigger a massive chain reaction.
Are the oil companies starting to readjust?
The momentum for change is also reaching the boards of directors of major oil companies, as evidenced by the recent general meeting of shareholders of Exxon Mobil, where one group ended up imposing a more ambitious adaptation plan on the company. While some investors take an active stance, others refrain from participating and more and more investment funds are deciding to stop funding the oil industry.
A United Nations report was also published recently, which highlights the harmful effects of methane gas emissions into the atmosphere. Unlike carbon dioxide which lasts for hundreds of years, methane lasts for a short time, about a decade, although it is much more dangerous. According to the Intergovernmental Panel on Climate Change (IPCC), the effect of methane on global warming is 86 times stronger than that generated by CO2, therefore, methane is considered a “carbon with steroids ”. Thus, in order to rapidly reduce global warming, a growing number of experts are also suggesting the abandonment of gas projects.
Little by little, the climate lobby is gaining momentum. Not only in the street, but also in meeting rooms and court offices. All of this should sound the alarm and worry those who continue to bank on oil exploration in Latin America. This involves a huge economic challenge, but also a financial risk. There is an urgent need to rethink which sectors could generate currencies and how to reintegrate this region into the world.
Ignoring the problem and continuing to invest in an industry that is doomed to disappear would only worsen the crisis that we have to face relentlessly.
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