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A sign of things to come

Fort Mcmurray
An aerial shot of Fort McMurray. Photo courtesy of the Regional Municipality of Wood Buffalo.

Economic drivers and innovation, not necessarily concerns about climate change, will put the planet on a more sustainable course over the next few decades, according to Jeremy Oppenheim, head of McKinsey’s sustainability and resource productivity practice.

“It’s a story about a different model of economic growth, a story about innovation, and a story about building the economy we want to see over the next 25 years, almost irrespective of climate,” Oppenheim told a small gathering in Toronto at a recent event co-sponsored by Corporate Knights and Ottawa-based think tank Sustainable Prosperity.

Oppenheim has taken a sabbatical from McKinsey to lead the New Climate Economy project, a flagship initiative of the Global Commission on Economy and Climate, which is chaired by former Mexican president Felipe Calderón and made up of former heads of government, former finance ministers, and top experts in economics and business.

Their work will be released in the form of a massive report on September 17, just days before government and business leaders are expected to attend a UN Climate Summit in New York City. Oppenheim said he’s thinking of calling the paper “Degrees of Freedom,” a play on efforts to keep average global temperatures from climbing more than 2 degrees C and on the need to free ourselves from the bondage of fossil-fuel infrastructure that has humankind on a dangerous course.

“We don’t want a world which is all of a sudden locked into such a high-carbon and high-risk set of choices, and then find ourselves facing impossible tradeoffs,” said Oppenheim, disputing the idea that mechanisms such as carbon pricing or polices that create a more level playing field for renewable energy sources are an attack on liberty and the free market. “We are the ones on the side of freedom. It’s the other bunch that is practically against freedom.”

Ultimately, however, what wins in the end will come down to what makes the most economic sense. On that note, Oppenheim said oil sands assets in Alberta are going to face an uphill battle.

“The Canadian oil sands are at the right-hand side of every cost curve you can look at. They are always the most expensive play, and they are the most-carbon-intensive of any oil supply on the planet,” he said. “If the internationals majors were looking at taking out of their portfolio any assets over the next 25 years, those are the ones they will take out.”

That is one reason, in Corporate Knights’ view, why some of the biggest oil sands players are gobbling up low-carbon patents and quietly running the numbers on different scenarios, such as when they should exit the oil sands or make the shift to becoming predominately alternative fuel and green energy firms.

Exxon has seen the writing on the wall, hedging with a big move into natural gas and quietly pursing an intellectual property diversification strategy. Indeed, the ‘personification of big oil’ is now the largest holder of low-carbon patents in the world according to the author of a related report by Chatham House.

Total SA’s pullback from the oil sands last week is another telling case in point. The French energy giant cited high costs as the reason for suspending work on its $11-billion Joslyn mine. Royal Dutch Shell made the same decision months ago with its Pierre River mine.

“It seems a safe bet that Total’s Joslyn North mine won’t be the last cancelled oil sands venture that we hear about,” predicted economist and author Jeff Rubin in a commentary on Huffington Post. Rubin attended Oppenheim’s Toronto talk. “If such projects don’t make sense with today’s oil prices, how good can the economics possibly look once the world gets even more serious about carbon emissions down the road?”

Oppenheim said innovation is adding another level of destabilization in the marketplace for fossil fuel companies, and while there may be climate benefits, climate is not the driving force. Cities, which represent two-thirds of the world’s economic growth, are being designed to be more efficient and livable. Countries, such as China, are exploring entirely new economic models to support sustainable growth in the 21st century and GDP with lower pollution intensities. Renewable and clean energy technologies – from the way we manufacture them to the way they are installed – continue to fall in cost, putting increased pressure on conventional fossil-fuel sources.

He pointed to wind as an example of a renewable energy source that no longer needs large-scale government subsidies to flourish. In jurisdictions such as Texas or Brazil, wind is already competitive with coal on an unsubsidized basis, he said. Saudi Arabia, meanwhile, has begun to embrace solar power on an “astonishing” scale out of economic self-interest – that is, so it can stop burning oil to produce power.

“Half of the investment capital in the power sector last year was for renewable energy,” Oppenheim said. “The great thing about renewable energy is it solves multiple problems, not just the climate problem. It gives you energy security, it creates jobs, it’s got great learning curves, and it’s clean. It does all sorts of things for you beyond and in addition to the climate effect it has.”

On the other hand, he added, technologies developed by the fossil-fuel industry for one purpose only – to reduce carbon emissions – will have a difficult time scaling up. “Carbon capture and storage… it’s good for one thing, and only one thing, and it’s not actually that good at it.”

The fact that so many oil and gas companies are eager to support a $40 to $50 price on carbon hints at an industry in an episode of Survivor. Oppenheim said these companies know that such a carbon price would “knock out coal” – i.e. kick coal off the island — and allow for more of the carbon budget to be used up through oil and gas consumption.

Infighting within the fossil fuel family should serve as a warning for pension funds, sovereign funds and other larger investors with high carbon exposure. While institutional investors can influence the direction of future capital investments, Oppenheim said it is governments – which own two-thirds of the world’s hydrocarbon assets – that are most guilty of standing in the way of change.

Convincing governments to give up the jobs, royalties, economic value creation and other benefits that sit on their balance sheets won’t be easy. To ease the transition, political leaders will have to send the right signals.

“When governments send coherent signals into the market, then the capacity of markets and entrepreneurs and investors and business leaders to do amazing things is very, very high.”

Those signals, added Oppenheim, are currently lacking in Canada. So much so that Bruce Heyman, the new U.S. Ambassador to Canada, urged the Canadian government to more aggressively pursue a low-carbon future through increased energy efficiency and by diversifying energy choices to include zero- or low-carbon options.

The U.S. unveiled plans this week to cut greenhouse-gas emissions from coal-fired power plants by 30 per cent by 2030. Heyman warned Canada not to get fixated on the “newfound energy abundance” that the oil sands and shale gas represents. It should not, he said, “distract us from the need to improve efficiency and combat climate change.”

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