Thursday, October 31, 2013

Al Gore's WSJ Editorial on Carbon Intensive Portfolios

The Vice President makes some hard headed arguments about the risks that companies such as Exxon and mutual funds who invest in such fossil fuel companies are likely to face in the future.   While I like his piece, it is a convenient piece for an activist to write and he misses some basic economics.  First, suppose that he is correct that in the near future that carbon assets (such as billion dollar oil fields owned by Exxon) will become worthless as significant carbon pricing arises and as the world's economy turns to zero emissions technology. If Exxon anticipates this, then it will accelerate its depletion of this resource now and flood the market with oil. This will lower the price of oil and natural gas and discourage investors from demanding low carbon technologies such as the Toyota Prius.  The timing of the GHG emissions release will be front loaded and the atmosphere will face even greater challenges because Exxon's bosses anticipated the low carbon future.   Second, Vice President Gore ignores the rising demand for energy in China and India. Developing countries will seek their energy using cheap sources.  Third, he over-states the power of boycotts.  I wish he was right but there is some serious wishful thinking embodied in this paragraph;

"Third, sociopolitical pressures (e.g., fossil-fuel divestment campaigns, environmental advocacy, grass-roots protests and changing public opinion) could create an environment in which carbon-intensive businesses could lose their "license to operate," thereby stranding assets."    

The economics of boycotts is simple. If there is a large buyer who does not join the boycott (think of China) then the boycott doesn't work.  The green boycott will simply allow China to buy these resources at a lower price. There will be no impact on the environment instead there is just a transfer of wealth to China who buys at a lower price.

Where the Vice President is correct is that the energy companies do have  a strong incentive to think about diversifying their energy supply that they sell over the next 30 years.  Is Exxon investing today in serious R&D to become a natural gas company and an energy company rather than being an oil company?  Is Exxon investing in futures for oil to hedge price risk in the future?   

Where I have thought about Vice President Gore's point is in the case of West Virginia coal miners. If these guys only know how to drill for coal and carbon pricing takes coal out of the equation as President Obama bans coal fired power plants and cheap natural gas leads to substitution away from coal to natural gas power plants, what happens to these high carbon workers? Gore focuses on high carbon firms but they are more nimble to adapt than these workers.  What will Al Gore do for them?  This is why these workers have such a distaste for low carbon policy. They know that their jobs are on the line.   Read my paper with Cragg et. al.