Climate change and fossil fuel: An examination of risks for the energy industry and producer states

Abstract

Burning coal, oil, and natural gas is the source of two-thirds of the world's emissions of greenhouse gases. Sales of these fuels also represent the economic underpinning of resource-rich countries and the world's largest firms. As such, steps taken to abate emissions undermine commercial opportunities to monetize fossil fuel reserves. Risks to the industry correlate with progress on climate goals.This article analyzes recent literature on climate action strategy and finds that a new or intensified set of risks has arisen for the fossil fuel industry. These include government policies and legislation, financial restrictions among lenders and insurers, hostile legal and shareholder actions, changes in demand and geopolitics, as well as the onset of new competitive forces among states and technologies.The exposure of carbon-based businesses to these risks and the potential for loss is neither distributed uniformly across the sector, nor adheres to a uniform time scale. Shareholder-owned firms in the developed world will be incentivized to react sooner than large state-owned resource owners in developing countries. The fates of the three fossil fuels also appear likely to play out differently. Demand for oil appears insulated by its lack of viable substitutes, while coal businesses are already undergoing climate-related action, pushed by decreasing social acceptance and constraining financial regulation. At the other end of the spectrum, climate action has improved the medium-term viability of low-carbon natural gas. What appears clear is that, as effects of climate change grow more pronounced, the industry faces a future that is less accepting of current practices.

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