8 February 2018
Study Explores Climate Policy Triggers on Investors and Owners of Fossil Fuel Assets
UN Photo/Kibae Park/Sipa Press
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Instead of accelerating the burn of fossil fuel reserves, implementation of the Paris Agreement and related climate policies will lead to divestment from coal and other fossil fuels, says a study published in the journal 'Nature Climate Change'.

The study found that divestment prevailed in almost all cases with an overall reduction in emissions, which will only increase if CO2 pricing is at a low level and does not begin before 2050.

30 January 2018: Implementation of the Paris Agreement and related climate policies will lead to divestment from coal and other fossil fuels, according to a recent study published in the journal, ‘Nature Climate Change.’ The analysis, undertaken by the Potsdam Institute for Climate Impact Research (PIK) and others, found that if carbon pricing is anticipated and climate policy signals are “strong, clear and credible,” divestment will prevail over the “green paradox,” a phenomenon where carbon emissions increase in response to climate policies aimed at reducing them. The research describes how, ten years prior to the implementation of climate policies, investors act on signals to divest from the coal power sector, realizing that future policies will shorten the profitability of coal power plants. Such divestment reduces emissions by 5-20% before climate policy is implemented.

The study explains how climate policy triggers opposing actions by investors and fossil fuel owners. While the anticipation of strong CO2 reduction policies might increase emissions, since fossil fuel owners will accelerate resource extraction to maximize profits before the regulations take effect, investors may stop investing in coal power plants to avoid potentially stranded assets. This study investigates both of these effects that, to date, have only been discussed separately.

The study also concludes that coal is more susceptible to carbon pricing than oil. Adding a carbon price of US$20 per ton of CO2 doubles the cost of using coal, and investors will shift their portfolios towards low-carbon electricity sources. However, the “green paradox” is more likely to occur in oil markets, where oil production may be increased due to fears of stranded assets. However, the study notes that this effect will be smaller than the divestment effect from reduced coal use.

To observe how fossil fuel markets react in anticipation of such climate policies, the study ran simulations with a range of CO2 pricing levels, reaching between US$25 and US$300 per ton CO2 by 2050, with a medium scenario of US$100, and various implementation delays based on different degrees of climate policy stringency and credibility. The study found that divestment prevailed in almost all cases with an overall reduction in emissions, which will only increase if CO2 pricing is at a low level and does not begin before 2050. The report also found that while some emissions-intensive production facilities may move from high-regulation areas to those with low standards, the effect will be limited.

CO2 emissions pricing schemes are emerging in China. The EU is fixing its trading scheme, and CO2 prices are in place in the UK, Chile, Canada and the US state of California. The study is based on the assumptions that: policymakers can commit to introducing strong climate policies several years in advance; carbon pricing is uniform across regions; investors believe policymakers will do as they say; and investors are “shrewd in adapting their investment strategies” as needed. [Potsdam Press Release] [UNFCCC Press Release] [Nature Climate Change volume 8, pages 130–134 (2018) Study: Divestment prevails over the green paradox when anticipating strong future climate policies]

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