Disinvestment, Investment, Subsidies and Tax



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A History of Energy Growth

Every year, for a very long time, we humans have grown the economy. We have achieved this though a fundamental positive feedback mechanism; the plowing back of a small proportion of our available energy into an investment for the future. A few millennia ago this primarily took the form of holding back a small proportion of our food for replanting. A couple of centuries ago it importantly included using some of our coal, not for our own consumption needs, but to drive the pump engines that would drain the mines and enable the extraction of yet more coal. Since records began, in about 1850, our energy growth has been an incredibly steady and predictable process. We have maintained a more or less constant energy growth of 2.4 percent per year, with only small deviations—which are no more than random noise—from a mathematically exponential curve. And through our energy we have enabled the entire economy.


A History of Emissions Growth

Since 1850, energy growth has come largely from fossil fuel and therefore it is no surprise to find that carbon emissions from human energy use have also grown exponentially, mirroring that of energy growth. The only real difference in the trajectories of energy and carbon is that emissions have grown at only three quarters of the rate—1.8 percent—with the difference in growth rates being accounted for by a continuous carbon efficiency improvement of 0.6 percent per year.

Figure 1: Annual carbon emissions (fossil energy + land use change)



A Historical Link between Carbon and Money

Since the growth of emissions and world GDP have gone hand in hand, some have called, radically, for an end to economic growth itself as the only and essential way to cut emissions. But, while it is true that we have to cut emissions, there are two, not one, logical possibilities: cut the economy or break the long-standing link between the economy and fossil fuel.


A New Choice

It is clear that investment drives our growth, but what we also need to grasp is that the shape of our growth, what we grow into, is defined by what we invest in. Growth in energy and growth in carbon have gone hand in hand for the last hundred and seventy years because most of our energy investment has gone into fossil fuels. We have invested in finding new reserves, working out how to get them out of the ground efficiently, building pipelines, tankers, terminals, and filling stations to deliver them to anyone who wants them and can pay for them. Additionally, we have invested in the products that burn them for a million different uses.

The form of our growth and the direction in which we expand is determined by exactly what we invest in. We owe a huge debt, mainly of gratitude, for everything that fossil fuel has given us to date. However, the circumstances have now changed. We need to invest differently to steer a different course. Our investments determine our future.

While it is essential that we stop investing in fossil fuel, it is equally important that we start investing elsewhere. The good news is that money taken from one can amply fund the other. Subsidies can really be seen as just state-funded investment, and taxes as the opposite: state-organized disinvestment.

So far I have described how the shape of our investment determines our future—and how we have chosen a fossil fuel future through fuel investment. That was appropriate in its day, but it is time for an urgent change. Next I am going to outline why it is so urgent to pull out of fossil fuels and why the liberated investment is so urgently needed.


The Urgency of Cutting Carbon Investment

At this point, a very quick tour of some key numbers is important. Much of the broad arguments that I skim over here first hit the popular press in 2011 with Bill McKibben’s famous “Do the Math” article in Rolling Stone magazine. Months later Duncan Clark and I published our book The Burning Question, in which we also drew strongly on papers by Andrew Jarvis at Lancaster University and many helpful discussions. Similar analyses, sometimes with slightly varying numbers, can be found in the IPCC reports and a range of think tanks. The next three paragraphs are now well trodden ground about which we need to be crystal clear.

Following the Paris summit of 2015, the world has at long last agreed that temperature rise should be kept below two degrees and ideally below one and a half degrees. The science is clear that in the absence of emerging and yet-to-emerge technologies for taking greenhouse gases out of the atmosphere, this puts an all-time total budget on our carbon emissions. Furthermore, there is good consensus, at least in rough terms, about how much of that budget has been spent and how much remains to stand a good chance (carefully defined by the IPPC as meaning a 66 percent chance) of limiting temperature rise to two degrees. This can be used to work out how much fuel we can burn from now on. The total fuel budget can be compared to estimates of the total fossil fuel reserves that exist. These estimates are not exact, but reserves are described in different ways: “proven reserves” (95 percent probability of being profitable to extract with today’s technology and prices), “probable reserves” (50 percent chance) and
“resources” (extractable, but not necessarily profitable with current technology and today’s prices).

Figure 2 shows that we have far more fuel in the ground than we can possibly burn to stay within two degrees. Considering this limit, we can’t burn more than a small fraction of the oil and gas available, even if we were to leave all the coal in the ground. Our fossil fuel problem is one of abundance, not scarcity. In fact if only we had a scarcity problem, we might even be saved from having to take effective deliberate action on climate change. And far from being drained by human usage, net fossil fuel reserves and resources are going up all the time. Powered by current investment, new reserves are continually being discovered and new technologies are being developed for extracting them profitably; from the Arctic, from shale, from tar sands, from the deep sea and so on.

One thing is dazzlingly clear: we need fossil fuel investment like we need a hole in the head. Investment in yet more coal, oil and gas either has to be written off or it will be used to take us into a future that the world has finally agreed is highly dangerous.



The Equal Urgency of Diverting that Investment Elsewhere

The very good news is that by eliminating fossil fuel investment, cutting subsidies and imposing taxes on fossil fuel, enormous funds will be redirected from the creation of a highly dangerous future to the enablement of a better future for us and our children. The word divestment sounds inherently negative, but we must remember that it comes with an equally and opposite positive counterpart: the liberated opportunity to invest elsewhere. In the same way tax is often talked about as negative, but it is essential to remember that the other side of the coin is the funding opportunity that taxes generate.

So we know we need to divest and tax fossil fuel, and cut subsidies. We know that this frees us to invest in a different kind of growth. The questions, then, are what shall we choose in its place, and will it be good enough to enable us to live well.


Critical Investments

1. Renewable Energy

Energy growth has been tremendously consistent since records began, and probably since the pyramids were built by hand, perhaps even well before that too. There are some who advocate breaking that long-standing trend, and perhaps they are right in that we could and should—but for now let us be conservative in our thinking and assume that the “business-as-usual” long-term energy growth trend of 2.4 percent is either desirable or inevitable or both. If this is the case we had better substitute fossil fuel for renewables at speed. Luckily everything is set for a solar revolution. The only thing missing is the scale of investment to enable its domination of human energy supply. Global growth rates of solar power are in excess of 30 percent per year. Costs are starting to rival or beat fossil fuels and look to be falling by about 10 percent every time total capacity doubles. By ignoring rooftop installations, both BP and the International Energy Agency grossly underestimate total global solar power at around half of a percent of world energy, whereas in reality it is probably at least double that. If growth rates could stay at their current level, we would be awash of green power by 2030. Clearly, keeping the growth rate high as the scale increases is a challenge but there are no inherent barriers to total capacity. There is no foreseeable land shortage and no shortage of raw materials to make the solar panels. The most critical factor for the growth rate is the investment level.

While solar is the number one renewable energy good news story, not everywhere in the world is well placed for solar power. Luckily, many of the less sunny places have great wind and wave potential. So, in the global mix, these technologies are also of key importance. They too are doing well and require investment.

2. Transport from Solar Energy

Liquid hydrocarbon fuel has the great advantage of being a compact and lightweight energy store. For all the pollution, noise and grime it produces, it has enabled cars to travel hundreds of miles without refueling and planes to fly halfway around the world carrying all their energy needs on board.

The low-carbon world needs to invest in the technology and infrastructure necessary for the electric car to produce similar results. The most critical element of this is probably battery technology: we need lightweight, durable, non-toxic storage for billions of cars without trashing the world’s mineral resources.

For air transport, there is currently no alternative on the horizon to liquid fuels, so we either need to make them directly from solar energy, or grow them as biofuel. The former requires the development of emerging technology, while the latter requires smart investment in food and land systems in order to create the capacity for biofuel without trashing biodiversity or causing hunger, even as the population rises to ten billion or more.

3. Infrastructure for Low-Energy Living

This includes smart urban design and the retrofitting of energy efficiency into old building stock, with the priority to target the buildings that leak the most energy, such as the worst parts of the UK’s creaky old housing stock, along with retrofitting basic insulation and low-energy lighting. The urban design priorities are to enable life without daily car use. Towns and cities need to be compact rather than sprawling, so that life can be conducted comfortably on foot or by bike, with huge benefits for wel-lbeing as well as carbon. We need to divest from sprawling suburban detached housing projects so that we can invest instead in compact city centers.

4. Carbon Capture

Carbon capture matters hugely because all realistic scenarios for limiting temperature change to two degrees or less depend on taking carbon back out of the air. At whatever level we finally cap our emissions, we will still encounter some adverse effects of climatic change, and so risk triggering more catastrophic changes, perhaps of a kind that we don’t even yet envisage. Taking a clear-eyed look at humankind’s lack of light-footedness so far on the climate change challenge, it is highly likely that we overspend our two degree budget, perhaps by a long way. Given all this, it makes incredibly good sense to develop and deploy technologies for sequestering carbon. Neither of these will take off without not-for-profit investment and/or subsidies and taxes in place, because there is very little salable utility to be had from either of them. Carbon capture and storage from power plants simply adds to the cost of electricity. To be clear, the free market is simply unable to support carbon capture.

Our divestment from fossil fuels and our emissions taxes can powerfully enable two types of carbon capture. The first of these is the roll out of carbon capture and storage at the point of combustion. This technology is just about ready to go whenever the funding arrives and is useful while fossil fuel persists in the energy mix, even though it will only ever be capable of capturing a modest proportion of our emissions. The second is the development and deployment of technologies for the extraction of carbon from ambient air. Although this is in a much earlier stage of development, all the responsible climate scenarios now rely upon its deployment to reduce atmospheric carbon from an unavoidably high peak. Four years ago I remember writing that it would be unwise to rely on such an uncertain emerging technology. Now I write that however uncomfortable this might be, we need to roll back the clock and undo damage that we will have caused. When I hear speculation that this technology looks to be decades away I can’t resist turning to the British wartime analogies that I was brought up with of the urgent development of radar, Spitfires, and code cracking machines at super-high speeds. It is very difficult to say how fast development might be possible. Since we just don’t know, it is uncomfortable to rely on it, but given that in the best of cases it could be a game-changer, we should still push for it hard—through investment.

5. Land and Food Investments

The global land and food system is in urgent need of improvement. While we grow more than twice the edible calories that we require, there are huge problems in the journey from field to fork that result in not everyone getting the nutrition they need. Meanwhile we are trashing our biodiversity at an alarming rate and pouring greenhouse gasses into the atmosphere through our land use, to the extent that agriculture is responsible for between a quarter and a third of all greenhouse gasses.

What we need to divest from, and what critical investment opportunities this will create, will allow us to deliver a future that we can look forward to for ourselves and the generations to come

Many of the necessary improvements should not require multi-billion dollar investments. The single most important change will be an amazingly simple dietary shift towards less meat and dairy consumption, with a particular focus on reducing beef. This will markedly reduce greenhouse gasses, improve the nutritional output of our land and, by relieving land pressure, ought to be pivotal in stemming deforestation. The net infrastructure investment requirement should be nothing—or perhaps even less than that! We also need to cut waste throughout the food chain but, here again, the infrastructure requirements are not vast.

However, there are two critical areas for which investment is required. The first is research. We don’t yet know nearly enough about the impact of different arable practices on the environment and, in particular, what farming systems store or release carbon and in what quantities. Research is needed into how to grow efficiently while encouraging biodiversity. There are promising manufactured alternatives to meat that need further looking into. We also need to understand how land can be used to create the liquid hydrocarbons that we will almost certainly need if we are to continue with aviation in the low-carbon world.

The second area in which investment is needed concerns farmers. We need to understand that the best ways of dealing with our land are not the cheapest. To do a really good job of producing food, cutting emissions and promoting biodiversity care and attention are needed. It requires plenty of people. The good news is that we have more of this resource than ever before, and will soon have at least another couple of billion more still. For the past couple of centuries we have been looking to minimize the number of people working on the land. This is crazy, given the abundance of person power. We should be looking to employ more people to do a better and more careful job of looking after our land and growing our food. We need to invest in farmers and subsidize them to do the right things. The money for this, of course, is made available by ceasing the deeply unhelpful subsidy of fossil fuels, divesting from them and better still, applying serious taxes.

How much funding can divestment and the withdrawal of subsidies liberate? In 2013 global investment in fossil fuels stood at over a trillion dollars while investment in renewables stood at just a couple of hundred billion.

For a two-degree world, the remaining carbon budget is roughly three hundred billion tons CO2. Imagine a carbon tax of $300 per ton. This sounds high to many people—it would, for instance, add about a dollar to a liter of gasoline. The funds raised, however, would be around $90 trillion—if half of that were distributed as a$6,000 life subsidy to every adult and child in the world, the global reduction of inequality would be significant. Those who burned more fuel would still be worse off, but those who were frugal would be richer. Meanwhile a colossal $45 trillion investment pot could transform the energy landscape. Pension schemes that might suffer from the drop of fossil fuel assets could be compensated to top up the profits from their re-investment in the low-carbon world, and even oil companies could be subsidized in developing their low-carbon business models.


What Does this Mean in Practice?

Every financial decision is an investment in one kind of future or another. At the small scale, every small buying decision supports a supply chain and rejects others. Even bike maintenance is an investment in low carbon infrastructure. At the higher end of personal decisions, pensions and housing stand out. Pension portfolios now require scrutiny not just for the returns they offer but for the type of global future they support. Those signed up to employee schemes may feel powerless, but can still help by making their views known at work. Housing investments can support energy efficient homes and sustainable urban design, rather than suburban sprawls of leaky homes that necessitate long commutes and high energy consumption.

For businesses and governments, exactly the same principles apply for all investments and spending, taxes and subsidies. Fossil fuels need taxing and, of course, their subsidies removing. The same goes for related infrastructure and research and development. The revenue raised here can be used to invest in the critical areas outlined above as well as to provide a degree of temporary support for industries and people made unavoidably vulnerable by the speed of transition. Just as at the individual level, company and state pension scheme portfolios stand out as key investment areas to get right. Obviously and importantly, electricity can be purchased from renewable sources; and this is becoming a more mainstream option, even among large corporations. But beyond this, every line in the purchase ledger steers the future towards or away from fossil fuels; towards or away from a future we would wish for our children.




An expert in carbon emissions, the scale of climate change and the sustainability agenda, he is the founder of Small World Consulting. He has written the books How Bad Are Bananas? and The Carbon Footprint of Everything, and has coauthored The Burning Question, among other books on the environment. He is a professor at the Institute for Social Future of the Lancaster University, where he studies the great challenges for sustainability in the twenty-first century. He contributes to various media and has worked in areas related to energy and emissions for various organizations in the public and corporate sectors.

Download Paths to sustainability S.M.A.R.T. (PDF)

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