Is the fossil fuel industry due a big fall? Mark Carney thinks it might be. The Bank of England governor warned companies that burn fossil fuels or drill them out of the ground that the vast majority of the world’s fossil fuel reserves could be “stranded”, becoming “literally unburnable” without expensive carbon capture technology”.
You ought to be able to take a central banker’s view on trust. Carney, after all, is not a man to form opinions lightly. Last month the BoE released its latest inflation report, a 46-page document bursting with charts and figures on everything from the confidence of purchasing managers to the number of extra hours workers say they would spend at work if only they could find a job.
It is a feat of research that people in other walks of life would undertake only if they were about to make a dramatic change of course. Yet when Carney and his colleagues finished studying the data, they decided to keep interest rates unchanged at 0.5 per cent for the 77th consecutive month.
This habit of meticulous analysis is also an obligation, for central bankers carry enormous influence. Usually, they use that influence to make the economy more stable. (Why do Britons on the whole expect the current era of extremely low inflation to be short-lived? In large part, because the bank believes that, too.)
Usually, they avoid remarks that might jeopardise their credibility. This is not an institution that is relaxed about getting it wrong.
So you might have assumed, when you heard Carney talk of the possible destruction of industries that account for about one-third of the value of the world’s equity and bond markets, that his words were backed by weighty evidence. What might that evidence be?
It is not that energy consumption is falling. Quite the reverse; billions of people in Asia, Africa and elsewhere are now enjoying better lives in large part because the world produces twice as much energy every year as it did in 1980 — 85 per cent of it derived from fossil fuels. The International Energy Agency reckons that energy demand will increase by another 30 per cent by 2040.
If those predictions are halfway right, fossil fuel reserves will be extracted more quickly in the coming years — not stuck in the ground.
Could growing demand for energy be satisfied by sources other than fossil fuels? There is no sign that it could. Anyone who sees humanity flicking the switch of a vast, affordable, zero-carbon energy system in the near future is staring at a mirage.
Carney’s remarks were based, not on any forecast of what will actually happen in energy markets, but on a “carbon budget” published by the Intergovernmental Panel on Climate Change. This is an estimate, compiled by climate researchers, of how much carbon dioxide humanity can afford to emit if it wants a reasonable chance of limiting warming to 2C above pre-industrial levels.
Limiting emissions is of course the right goal. But the inconvenient truth is that the reductions in carbon dioxide emissions that have been achieved in the industrialised world have either been excruciatingly expensive, or made possible by a different fossil fuel mix.
In the first category are wind and solar power — the technology chosen by Germany, whose environmental credentials have come at huge cost to consumers and businesses. Across the world, these industries have consumed gargantuan amounts of capital in the past 10 years yet supply only a tiny fraction of world energy needs.
Of course there is a place for carbon-free generation. But it is folly to believe that this embryonic technology is anywhere near making fossil fuels uneconomic.
The US has achieved dramatic reductions in carbon emissions whilst boosting economic competitiveness through intensive investment in a different fossil fuel mix. In the past decade, the shale gas industry has weaned electricity generators off much dirtier coal.
It is a revolution that could never have happened if gas prospectors had despaired of ever lifting their reserves above ground.
Such misplaced and counterproductive despair is precisely what remarks like Carney’s are likely to engender. Investors are already wary of the possibility that unforced errors by governments and regulators will strip useful assets of their value. That will deter them from investing the necessary hundreds of billions of dollars in crucial new oil and gas production capacity.
That would rob millions of people in the developing world of their best chance of escaping poverty. It would prevent world industry from switching from coal to cleaner fossil fuels. It would be a tragedy — and one that humanity need not endure.
Financial Times
The writer is chief executive of Lambert Energy Advisory.
