Red light is flashing on the fossil fuel economy. We need a change of approach

Burning all the currently-owned fossil fuels would cause untold environmental damage

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The abiding impression of the political debate on energy prices during the last few weeks is of politicians stuck between a rock and a hard place - caught between the need to invest in our (green) energy future and the need to respond to the rising bills squeezing people already suffering in the economic crisis.

But while our leaders argue about whether energy price rises have been caused by profiteering, market forces or green tax increases, too little attention is being paid to a looming crisis that could dwarf current concerns.

The shocking consensus among scientists is that if all fossil fuel reserves around the world that are already found and owned were burned then the world will be 6 degrees warmer by the end of the century.

That means that if we are to prevent catastrophic climate change wreaking havoc on people and planet then the energy sector is going to have to take a massive hit that goes far beyond the investment needed to secure a green energy future. And it will have implications not just for energy giants but for investors and the financial sector as a whole.

The problem is simple: energy companies currently are valued according to the profits they can make by exploiting reserves of oil, gas and coal. If we cannot burn those already paid for, let alone those being explored and developed then these assets are worthless - stranded in business speak. HSBC has warned that the value of coal reserves could fall by as much as 44 per cent.

Yet the short-term focus of investors - including those such as pension funds which you might expect to take a longer view - means this is not reflected in energy companies’ share prices. That means companies keep investing in more dirty energy and banks reap the big short term profits. The assumption is that despite the planetary red light flashing, the fossil fuel economy will drive on regardless.

You only need to stop a moment to consider the implications to realise this is a non-starter. We are already seeing an increase in natural disasters such as hurricanes and droughts that is predicted by climate change models. People, mainly in poor countries vulnerable to such extreme weather events, are already suffering, as are poor farmers whose crops are being devastated by more subtle changes in weather patterns.

History and science suggest that long before the planet warms by six degrees large parts of the Thames Valley and the Lancashire/Humber corridor will have become uninhabitable due to flooding and the Sahara desert will have crossed the Mediterranean into Europe. The last time the Earth underwent that kind of warming was at the end of the Permian period about 250 million years ago, when 95% of species were wiped out.

If the science doesn’t convince you then try Lord Stern whose report set out in great detail why the economic consequences of failing to act will far outweigh the costs of making change happen now.

The problem is that financial markets will continue to reap short-term profits even when they know that the bubble will burst and someone somewhere will lose everything. Financial institutions just hope and believe it won’t be them.

This doesn’t necessarily mean that they are wilfully blind to the future - rather that our financial system and their day-to-day incentives reward short-term thinking over long-term planning. It doesn’t help that much of our economic literature does the same.

A report published by the new Green Light campaign backed by Oxfam and other organisations from environmental campaigners to unions - sets out in detail what actions pension funds could take, starting right now. These include regular reporting on managing climate risk and switching investment from carbon intensive activities to low-carbon opportunities and calling for political action to support action to tackle climate change.

Such initiatives are important and can make a difference. But the experience of the financial crisis shows we cannot rely solely on markets and investors to make the shift in outlook we need. As late as 2007, amid signs of stress in sub-prime mortgage markets and rising concerns that this could trigger problems across other bits of the highly-leveraged financial system, there remained an unwillingness to ditch what had worked in the past.

Despite clear signs a bubble was about to burst, bankers and hedge fund managers carried on regardless - in the notorious words of Chuck Prince, former Citibank CEO: “...as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”  

It is now widely recognised that governments and regulators should have taken firmer action sooner to defuse the crisis, even if that had short-term economic costs. That lesson now needs to be applied to the energy sector. In the US, regulations on pollution have already led to sharp fall in the value of coal power companies.

We shouldn’t pretend this will be easy. Almost a fifth of the FTSE 100’s market capitalisation is currently attributable to just four oil and gas producers. Yet, as the Pensions Minister Steve Webb stated at the launch of the Green Light report, there are real opportunities for investors to get ahead of the curve prosper from investments that will help reduce carbon emissions and enable us to adapt to the changing climate.

We know how this story ends unless we change the tune. One look at the damage climate change is already inflicting on poor countries should be enough to persuade us to act before the damage spreads. Because if we keep inflating the carbon bubble, then when it goes pop, the damage to investors, pension savers and all of us living on the planet will be much, much worse than acting today.

Mark Goldring is the Chief Executive of Oxfam

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