Investors pulling out of coal, oil and gas companies threaten India’s growth, warn lYDIA POWEll and AKHIlESH SATI
At lima, the climate negotiators have not issued a death warrant on the use of coal, oil and gas. But is such a warrant likely in the futureIJ Going by civil society activism against fossil fuels, the warrant is being drafted actively and the possibility of it reaching formal negotiating tables cannot be ruled out. If this happens, India would have to re-write its plan for poverty eradication and economic growth.
Climate science says that the amount of carbon that can be emitted to limit average global temperature increase to two degree celsius is 565 giga tonnes of carbon dioxide from 2011 to 2050. This means that all the coal, oil and gas that energy companies have accumulated over the years cannot be burnt. If they are burnt to generate power, then carbon that is over 4.5 times the allowed budget will be released pushing the world over the brink of climate disaster. Does this mean that all the fossil fuels that energy companies count as valuable reserves today are likely to become worthless or become sub-prime assets in the futureIJ Yes, say many research reports including those by the activist Carbon Tracker Initiative. CTI argues that fossil fuel reserves held by the top 200 listed energy companies, estimated at $7.42 trillion in February 2011, are likely to become worthless soon and that investors would be better off exiting these companies.
CTI and other activist organisations seeking radical action against investment in these companies remain optimistic on large scale divestment from fossil fuels. They point out that over 27 cities, 29 religious institutions and 17 major investment foundations have already agreed to divest their interests in these companies. They have convinced the President of the World Bank and the Governor of the Reserve Bank of England to endorse the move. Institutional investors including Stanford University and the Rockefeller Fund have announced that their funds would exit this sector. The US Natural Resources Defence Council along with the big investment house Blackrock are promoting a global equity index that specifically excludes fossil fuels.
If investors pull out of these listed companies, how will India and Indian fossil fuel companies fareIJ Preliminary investigation by Observer Research Foundation reveals that eight Indian coal and power companies and two oil and gas companies appear in CTI's list of the top 200 listed companies, including Coal India limited and the Oil and Natural Gas Corporation. Risk to these companies is uncertain because the Government of India owns about 90 per cent of CIl shares and 70 per cent of ONGC shares. The Government is unlikely to declare its own assets worthless and divest its interests. But foreign institutional investors hold about five per cent of CIl shares and about six per cent in ONGC shares. If they were to divest their interests, the valuation of these companies and consequently their ability to borrow and invest may suffer. Even if they were not to divest immediately, the growing negative connotations attached to investment in fossil fuel companies will certainly impact the divestment programme planned by the Government.
On the positive side, Indian companies hold only two per cent of the total ‘un-burnable' carbon among the top 200 listed companies. But production from these companies accounts for two-thirds of the India’s power generation and about a-third of its oil consumption. Any constraint on the exploitation of fossil fuel reserves could result in substantial reduction in economic growth and the pace of poverty reduction in India. The impact on power generation, transportation and other economic activities could be far more widespread and damaging than the impact of frequent floods and droughts that could be attributed to climate change.
However, CTI targets only investors in listed fossil fuel companies. This means that fossil fuels will continue to be available globally because listed companies represent only 27 per cent of the global proven fossil fuel reserves. The remaining 73 per cent of reserves are owned by unlisted national companies. listed fossil fuel companies could even de-list to avoid assault by activist organisations. However given that even a marginal fluctuation in supplies sends Brent prices into a tizzy, any restriction on global fossil fuel production will result in the prices of globally traded fossil fuels sky rocketing.
Energy markets, known to react to impending risk, do not seem to be concerned that fossil fuels will become stranded assets in India or elsewhere. As Copenhagen Consensus Center director Bjorn lomborg, best known for his controversial book The Skeptical Environmentalist, has pointed out, $100 invested in fossil fuels in 2002 will be worth $238 today while the same invested in renewable energy will be worth only $28 based on broad market indices. The president of Stanford University, even as he pulled funds out of coal had to acknowledge that, “Stanford like the rest of the world, runs mostly on fossil fuels”. The concern for us is: If the death warrant against fossil fuels becomes a reality, what will replace fossil fuels and at what costIJ Sure, path-breaking energy technologies can change everything but is it equitable to ask millions of households to wait in poverty for yet to be discovered energy technologiesIJ
(lydia Powell is a Senior Fellow and Akhilesh Sati Programme Manager at the Observer Research Foundation, Delhi)