Oil and gas have been an almost incomprehensible part of human life and the business world for a century or more. The risk and impact of climate change are causing policymakers, businesses, regulators and consumers to rethink energy use and sources. A big part of this is moving away from fossil fuels. Undoing the infrastructure, financial investment and current human expectations of low cost and immediately available energy will be challenging, to put it mildly. Today’s world faces additional complications (some would say “catalysts”) of a global pandemic, a war in a region highlighting fossil fuel dependence and growing loss of water resources due to aridification in the U.S.
I’ve frequently talked and written about the transition economy which is pretty much what it sounds like – a multi-decade period of replacing fossil fuel energy with a low carbon, renewable energy source. In a perfect world, this would be relatively orderly – ensuring vulnerable populations are not ignored, managing the economic impacts of such a truly global change and minimizing business liabilities in a generally predictable manner through business changes and reasonable policy.
Remember I said that is in a “perfect world” and, well – we simply don’t live in a perfect world. The reality is that the transition will be messy, unpredictable, full of conflict, confusion and uncertainty – especially at the beginning. I think the beginning may have begun.
For instance, just in the past few weeks the U.S. federal government has been simultaneously anti-oil and pro-oil & anti-solar and pro-solar and environmental conservationists are fighting against a renewable fuels product.
Oil is Well That Ends Well
Against anti-fossil rhetoric (and regulatory action), the US government is pushing for a significant increase in oil production/export globally. Why? A combination of global inflation – with energy arguably being its foundation – and the Ukraine situation impacting Russian oil and gas supplies on which Eastern Europe rely. The EU and UK have been hit particularly hard by energy cost increases, triggering calls to change their own regulatory plans and pricing mechanisms for carbon emissions.
Even so, the U.S. has also restricted oil production on federal land and is pushing to regulate financial impacts of carbon emissions through actions by the SEC, CFTC and other federal bodies.
Sunny Days Ahead?
Even though alternative energy technology and sources should be encouraged, other important ESG issues have arisen. In solar, concerns about human rights abuses in the supply chain lead to the Uyghur Forced Labor Prevention Act, which may result in a prohibition on the US importation of some solar panels. Additional concerns about allegations of tariff matters by one US solar company led to an investigation by the Department of Commerce that brought more immediate uncertainty to the U.S. solar sector.
But yesterday, the White House announced a number of actions to “create a bridge to [an] American-made clean energy future.” The actions:
- Authorize use of the Defense Production Act (DPA) to accelerate domestic production of clean energy technologies, including solar panel parts;
- Put the full power of federal procurement to work spurring additional domestic solar manufacturing capacity by directing the development of master supply agreements, including “super preference” status; and
- Create a 24-month bridge as domestic manufacturing rapidly scales up to ensure the reliable supply of components that U.S. solar deployers need to construct clean energy projects and an electric grid for the 21st century, while reinforcing the integrity of our trade laws and processes.
The last point includes
Temporarily facilitating U.S. solar deployers’ ability to source solar modules and cells from Cambodia, Malaysia, Thailand, and Vietnam by providing that those components can be imported free of certain duties for 24 months in order to ensure the U.S. has access to a sufficient supply of solar modules to meet electricity generation needs while domestic manufacturing scales up.
In California – the heart of the alternative energy world – environmental activists filed a lawsuit to block the expansion of a biodiesel production operation. As background, according to this article on the situation:
Biofuels are considered by many to be an important source of renewable energy, a way to achieve energy independence and cut greenhouse gas emissions. The federal government deems biodiesel to be “carbon neutral,” reasoning that the plants used to produce the fuel — often soybeans or palm oil trees — absorb carbon dioxide as they grow. Both federal and state governments have poured millions of dollars into subsidizing the biofuel industry. In fact, the AltAir facility in Paramount, the subject of the lawsuit, received a $5 million grant from the California Energy Commission.
These are only three examples of the messiness and complications that should be expected as the world works out what the future of energy looks like.
What This Means
It will be easy to get distracted by the noise of confusion and ambiguity of a transition economy, especially in its first few years – possibly decade. Uncertainty and differing opinions will come from investors, regulators, customers and other stakeholders. Companies will need to accept a meaningful amount of inconsistency concerning climate risk management pressures and will need to continually monitor, evaluate and prioritize trends using their own judgement and assessment of potential impacts on the business.
One thing to consider is that emissions reductions from a company’s own operations are more controllable, more certain and less ambiguous than other avenues of carbon risk management solutions such as relying on offsets or potential policy relief. In addition, companies that are able to directly drive revenue growth, hard dollar cost reductions and new market entry by implementing climate programs that are customer-focused and operational will be better prepared to survive the messy transition than those who simply choose to limit their activities to “sprinkling ESG fairy dust on their stock.”
Strap in – it is likely to be a long and wild ride.