Thursday, October 10, 2013

A New Study on the Fossil Fuel Industry and the Bursting of the Carbon Bubble

Try as they will, a new study indicates that fossil fuel companies cannot afford to ignore carbon concerns without risking severe damage to their reputation.  The study suggests that despite its inordinate financial power, the petrochemical industry cannot resist changing attitudes. As pressure grows for serious action on climate change we will see a substantial reduction in our reliance on hydrocarbons. This will inevitably drive corporate devaluations in the fossil fuel sector, a phenomenon known as the bursting of the carbon bubble.

Oil and gas companies constitute about 20 per cent of the value of the London financial index and about 11 per cent of the value of the New York financial index. Despite their enormous financial might, a new study from the Smith School of Enterprise and the Environment at Oxford University suggests that this will not protect the industry from a backlash if it ignores climate change.

In the US and in much of the world, regulations limiting carbon emissions are increasingly common as are fossil fuel divestment campaigns. These divestment campaigns are growing due a growing understanding of the link between hydrocarbons and climate change.

The study explores initiatives like 350.org's Fossil Free campaign alongside similar efforts to divest from the apartheid regime in South Africa, as well as the tobacco, munitions and gaming industries.

The study highlights several phases including an initial phase of raising public awareness. The second phase involves targeting specific institutions, and universities in particular. Finally, the movement comes into its own as it goes global and reaches big investors such as pension funds.

Even though only a relatively small proportion of funds are actually withdrawn, they can nonetheless prove effective through a process the report calls 'stigmatisation' which undermines corporate reputations. This can have a ripple effect that extends to suppliers, sub-contractors, potential employees, and customers.

Politicians tend to avoid corporations seen as controversial for fear of jeopardizing their popularity with the electorate and shareholders are increasingly demanding changes from management. This could then decrease the number of public contracts they can secure, it also makes banks think twice about lending. It can also make it increasingly difficult for oil and gas companies to raise funds from investors.

Many believe that a carbon tax is the most effective way to combat climate change. The study says that a carbon tax, or even the belief that such a tax is likely, will depress demand for fossil fuels. While the report says that rebranding can help, it does not suggest that petrochemical companies try to play hardball with campaigners.

"The outcomes of stigmatisation will be more severe for companies seen to be engaged in willful negligence and 'insincere' rhetoric − saying one thing and doing another....Evidence suggests that hardball strategies intensify stigmatiation, focusing attention on companies that are unrepentant about violating social norms."

To see the study, Stranded Assets and the Fossil Fuel Divestment Campaign click here.

© 2013, Richard Matthews. All rights reserved.

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