By Alexander Wylie
With the considerable increase of the sight of orange paint, powder and clothing flooding our newsfeeds, one wonders to what capacity the efforts made by a certain activism group go towards tackling the climate issue we face as a species. From getting dangerously close to Formula 1, necessitating a hoover to be brought out at the snooker and Johnny Bairstow requiring to carry one protestor off the Lord’s turf; the costs to major sporting events and local communities to heighten security have certainly been hit, but what about those of the large oil and gas companies they supposedly target. With the goal of stopping new oil and gasi one questions the extent that the organisation has met this aim, or rather if their efforts have been harsher upon the working class trying to get to work through their blockages. Have they hurt profits of Oil and Gas or simply bolstered those of orange dye makers and is there perhaps a more transitional and economically sound route to climate change targets.
There is consensus that traditional economic theory in finance and climate action are mutually exclusive in the sense that a drive for profits will forgo any action to cull the harmful emissions escaping into the atmosphere for the whole population to deal with the consequences. In a free market economy, with costly negative social externalities unhonoured by the producer and the subsequent exclusion of this from the profit maximisation mechanism leads to the overproduction of the good involved. In the case of oil and gas, this means the optimal level of output is superseded and pollutants are created in excess of the social optimum level. It is important to know the extraction of oil and gas is still present as the benefit to society as an energy source for heating and transport still outweighs the integrated costs and the externality combined.
In the real-world regulation can play a part in curbing this overabundance of output, in hopes to return it to the social optimum. Taxes per unit equivalent to the cost per unit of the negative value to society of the pollution or limits in production placed at the required level, can act to appropriate the output to the favourable level. So, if there is a known solution, why doesn’t it happen in practise?
With the global nature of these externalities the cost is not borne by one singular legislative region. Therefore, if agreements cannot be made between all countries to tax each of their home nations oil and gas exploiting firms, then a lack of universal accountability will always make it so abnormal profits can be made. In game theory, it is such that the best response to any other countries decision would be to not regulate their own firms and as such the Nash Equilibrium of said game is to let them pollute to their own content. With Western politics transitioning into a state of isolationism, a singular global legislative body for pollution may be difficult to achieve. However, initiatives like the EU Emissions Trading System (EU ETS)ii appear to be a step in the right direction towards climate accountability.
With future cash projections internalised into a stock’s current price. Predicted growth rates in years to come can account for a considerable part of a stock’s current market capitalisation. Growth’s intrinsic nature means investment decisions by a firm’s CFO must be to maximise ROI (Return on Investment) to maximise shareholder value. With Shell a frontline target of many climate protests due to their considerable pollution levels, it is promising to note that almost a third of their investment in 2022 was in ‘low-carbon energy and non-energy products’iii, with the trend of this proportion allocated to said investment growing year over year. Global investment in energy transition has shown promising increases also.
Source: BloombergNEFiv
A concern of many however is the difficulty for those saving in retirement funds to have a say in where their capital is allocated and the researched and effort required to circumnavigate companies with poor ESG scoring. However, pressure from shareholders of pension funds and asset managers seems to have influenced their willingness to invest in fossil fuel companies. ‘As of early September 2022, around 1,500 institutions had publicly committed to divesting from some form of fossil fuels, representing just over $40 trillion in assets.’v This demonstrates both firms own consensus to transition away from fossil fuels and fund managers or individual investors.
While the race to net-zero is certainly off the mark, spurred on by individuals firms and climate organisations alike and the view that Shareholder Value Maximisation will achieve this; will the current trajectory be capable of executing this path in the most harmless possible way to the individual or does orange dye need to see a further hike in demand if we are to attain our most socially affluent future.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Image courtesy of Micheile Henderson via Unsplash
1 https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en