We have already written this year on the risk to the fossil fuel industry posed by potential carbon taxes. Consensus that such taxes are coming seems to be building surprisingly quickly, helped, it must be said, by a historic agreement between the USA and China to work together to agree on emission targets and add momentum for an agreement to emerge from the COPS21 conference planned in December in Paris.
The most noise is, not surprisingly, coming from fear that trillions of investments in fossil fuels, principally coal but also oil and even natural gas, could become uneconomic if some form of carbon tax is agreed upon. Probably more because of this worry than any more altruistic notion major investors are already beginning to turn their backs on coal in particular. The latest is the world’s largest sovereign wealth fund, Norway’s $916 billion fund has decided this week to pull any investments from companies whose business relies more than 30% on coal according to the FT.
Divesting ANY Business
The crucial point here is “any business,” so not just mining companies but power generators will be hit. The fund says it is trying to alter behavior in these firms, but if you are a major European power generator you have billions invested in coal-fired power production. That is some super-tanker to turn around quickly.
The fund is probably more concerned that their investments could fall in value than they are about saving the planet, indeed it is an irony that a wealth fund built on oil should be taking this approach but they are first and foremost financial investors.
As if such developments were not worrying enough for those investing in or involved in industries reliant on coal a potentially even bigger issue has hit the news. The International Monetary Fund has issued a report entitled “How Large Are Global Energy Subsidies” – alleging that the fossil fuel industry enjoys hidden support worth 6.5% of world GDP an article in the Telegraph newspaper reports.
WHO Revises Estimates
The article suggests this support will amount to $5.7 trillion in 2015, due to environmental costs and damage to health, and mostly stemming from coal. Meanwhile the World Health Organization has sharply revised up its estimates of early deaths from fine particulates and sulfur dioxide from coal plants, adding, if you will excuse the pun, fuel to the fire.
The IMF believes this subsidy is a “drag on economic growth” as well as a transfer from poor to rich. Further it pushes up tax rates and crowds out more productive investment – the world would be richer and more dynamic – if the burning of fossil fuels was priced properly the paper states.
One could, and many will, dismiss the IMF report as so much drivel, that, while there are undoubtedly costs due to health and pollution, the industry also pays huge amounts of taxes and provides low economic cost energy that allows our economies to function. But whatever we may or may not think of the validity of this argument we should remember the IMF rarely deviates from the thinking of the US Treasury. If the IMF have gone public with this approach, it will have widespread support among influential circles.