Giving Up Fossil Fuels to Save the Climate: The $28 Trillion Writedown

June 26 (Bloomberg Businessweek) -- “We’re not going to be able to burn it all.” With those 10 words, Barack Obama uttered one of the most stunning, far-reaching statements ever made by a U.S. president. He also completely contradicted his own energy policy. Yet no one seemed to notice.

In an interview that Showtime television’s climate documentary series Years of Living Dangerously aired on June 9—which also ran in the New York Times —Obama was asked about the international goal of limiting global temperature rise to 2 degrees Celsius (3.6F) since the start of the industrial era. Going past 2 degrees, noted the interviewer, columnist Thomas Friedman, would “cross into some really dangerous, unstable territory: Arctic melting, massive sea-level rise, disruptive storms.” The International Energy Agency has concluded that meeting the 2C target will require leaving two-thirds of the earth’s known reserves of oil, gas, and coal underground, unburned, Friedman said. Did Obama agree with that conclusion?

“Well, science is science,” the president replied. “And there is no doubt that if we burned all the fossil fuel that’s in the ground right now, that the planet’s going to get too hot and the consequences could be dire.”

“So we can’t burn it all?” Friedman asked.

Obama agreed, effectively affirming the two-thirds estimate, before adding, “I very much believe in keeping that 2 degrees Celsius target as a goal.”

This new scientific imperative—to leave the bulk of earth’s fossil fuels in the ground—has not yet penetrated most government or private-sector policy discussions, much less mainstream media coverage or public awareness. Its political and economic implications, however, are huge.

First, it’s worth clarifying that the International Energy Agency is no den of Greenpeace radicals; the U.S. and other advanced capitalist countries established the organization in the wake of the OPEC oil embargo in 1973. The IEA’s analyses of global energy trends and technologies have been relied upon by government finance ministries, corporate planners, and academic specialists throughout the world for decades. The two-thirds imperative was enunciated in the 2012 edition of the IEA’s annual World Energy Outlook : “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 degrees C goal, unless carbon capture and storage (CCS) technology is widely deployed. This finding is based on our assessment of global ‘carbon reserves,’ measured as the potential CO2 emissions from proven fossil fuel reserves.”

Leaving two-thirds of the earth’s fossil fuel reserves in the ground would revolutionize global energy practices. It would mean that over the next 30 years the nations of the world, especially the U.S., China, and European countries, have to decarbonize their economies almost entirely. By 2050 they’d have to produce electricity, run vehicles, heat and cool buildings, and grow food, not mainly with oil, gas, or coal but rather with solar, wind, and other methods that emit few greenhouse gases.

Enforcing the two-thirds cutoff would also invalidate the business plans of some of the richest and most powerful enterprises in history: the international oil companies. Exploring for more oil and gas would have to stop. Why spend tens of billions of dollars a year to look for fuel that will not be burned? Also ruled out would be fracking, the whole point of which is to access deposits that conventional drilling can’t reach—some of the very deposits the two-thirds imperative puts off-limits.

If the world goes along with the 2C ceiling, a huge amount of prospective profits will vanish. Today’s fossil fuel reserves represent trillions of dollars of wealth, both on the balance sheets of companies such as ExxonMobil and in the asset valuations that inform investors the world over. Being unable to sell most of those reserves would translate into a massive markdown on this wealth ($28 trillion according to one estimate). Its holders would surely resist mightily; ExxonMobil declared in April that it plans to find and market as much petroleum as it can, regardless of the 2C limit. The two-thirds imperative would therefore trigger titanic political battles as well.

Which may begin to explain why Obama’s words provoked so little comment. Is the notion of walking away from fossil fuels, which have been the lifeblood of the global economy for 200 years, simply inconceivable to most people?

Certainly the president’s own policies clash with leaving fossil fuels underground. His “all of the above” energy strategy has dramatically increased federal support for improving energy efficiency and developing solar, wind, and other low-carbon technologies. Their market share has grown rapidly: Renewable energy sources have accounted for 54 percent of new U.S. electrical generating capacity in 2014; in May, their share was 88 percent. But Obama’s “all of the above” policy has at the same time showered much more lavish support on oil, gas, and coal. As Obama boasted while running for reelection in 2012, his administration has helped open up millions of acres for oil and gas exploration. “We’ve quadrupled the number of rigs to a record high [and] added enough new oil and gas pipeline to encircle the earth and then some,” he said. Fracking has expanded so much, especially in Texas and North Dakota, that the U.S. has almost surpassed Saudi Arabia and Russia as the world’s leading producer of oil and gas.

Still, for the president of the U.S. to acknowledge the need to abandon fossil fuels creates political space for others to press further. Advocates can now invoke Obama’s words to pressure him and other public and private officials to bring their policies in line with the new scientific requirement. The campaigners urging universities, pension funds, and other institutions to divest their fossil fuel stocks—as Stanford University, which boasts the nation’s third-largest endowment, has begun to do—have received powerful ammunition.

Meanwhile, Obama’s call in the Showtime interview to put a price on carbon—which could be done directly through a carbon tax, or indirectly through a cap-and-trade system of emissions permits—was echoed on June 24 by Michael Bloomberg, the former New York City mayor (and the founder and majority owner of Bloomberg LP, which owns Bloomberg Businessweek ); Tom Steyer, a former hedge fund manager turned climate activist; and Henry Paulson, the Treasury secretary under President George W. Bush. “Putting a price on emissions will create incentives to develop new, cleaner energy technologies,” Paulson wrote in a New York Times editorial on June 21. He concluded, “We’ve seen and felt the costs of underestimating the financial bubble [of 2008]. Let’s not ignore the climate bubble.”

Alarmist. Radical. Unrealistic. For decades, defenders of the status quo have thrown those accusations at anyone who suggested a transition away from fossil fuels. Now, because the status quo prevailed for so long, humanity must make this transition with unprecedented speed or face unprecedented catastrophe. President Obama and leaders everywhere dare not forget: Science is indifferent to half measures and rationalizations. It cares only about results.

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