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Climate Policy Chaos Raises Risks for Big Oil

Copyright © 2021 Energy Intelligence Group

The risks of climate change have been coming into sharper focus in recent months, with scientists and experts warning of the danger and cost of not taking action. But while increasing public concern is prompting some politicians to embrace a faster transition to lower-carbon energy sources, translating this into effective action remains challenging, both at the local and global levels. The lack of clear long-term policy frameworks makes it more difficult for industry to plot a course, increasing the risk of a dislocated and more chaotic transition, and potentially leaving Big Oil firms exposed to more hostile scrutiny from frustrated environmental campaigners (NE Aug.1'19). Last weekend's G7 meeting in France highlighted the problems in moving international policy forward, with US President Donald Trump skipping a leaders' session on climate, and later in a press conference saying he would not sacrifice US energy wealth "for windmills." Summit host and French President Emmanuel Macron had sought to use the G7 summit to highlight deforestation in the Amazon, but drew flack from Brazilian President Jair Bolsonaro, who defends what he sees as the country's right to exploit its resources. This exposes the fault lines lingering around the 2015 Paris Agreement, just ahead of a climate summit in September. UN Secretary-General Antonio Guteres has called on countries to come forward with targets to achieve net zero emissions, however, only a small handful of countries are expected to come anywhere close to this (NE Jun.20'19). This may have echoes of the failure of the 1997 Kyoto Protocol, which the US also walked away from, but this time the concerns about the changing climate and the need for action are more pressing and unlikely to vanish. The insurance and financial communities are paying increasing attention to climate risk, while campaigners are dialing up the pressure on politicians to do more locally and nationally given that international action is lagging. Following protests in London earlier this year, for example, the UK government announced a climate emergency and pledged to move to net zero emissions by mid-century (NE Aug.22'19). Similarly in Germany, Chancellor Angela Merkel has embraced stronger climate action than before following a surge in support for the Green Party in European elections earlier this year. This could lead to a faster mandated move away from fossil fuels, just as the economics of renewables are looking increasingly irresistible. A recent report from Chatham House pointed to the danger of underestimating the speed and depth of the transition from fossil fuels to renewables, suggesting that "group think, safety in numbers mentality" and the need for international oil companies "to maintain confidence of shareholders," could mean than long-term oil demand is being overstated. This ongoing low-carbon energy transition is now being driven by technology and could be faster than previous transitions. While a faster transition to low-carbon energy sources could result in oil and gas demand peaking sooner than expected in some key markets, undermining industry growth expectations, companies may also face a potential backlash if business continues as usual. Big Oil has already seen some climate-related lawsuits in the US and will likely face more hostility in the coming years, particularly since the industry is perceived as benefiting from policy inaction. Indeed, some Democrats seeking the US presidential nomination have pointed a finger of blame at fossil fuel companies. Ronan Kavanagh, London

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