The midterm elections are over, and many in the fossil fuel industry could not have hoped for better results. Many political friends of the industry will soon be in positions of power not held by the GOP since the heyday of President George W. Bush's first term in office. It would seem to be a time for the industry to be celebrating.
However, in contrast to the political landscape, market forces are not treating the fossil fuel industry nearly as kindly. For several years, domestic coal companies have been watching in horror as their market values plummet. In addition, the recent drop in oil prices has been so rapid that the financial investments in hydrofracking and tar sands mining may never be as profitable as the industry once imagined. Just as the political winds appear to be at its back, the industry finds itself at a crossroads. Should it stay the course and continue conducting business as usual, or should it consider a new direction?
Fundamentally, this choice comes down to whether or not the industry is prepared to play a constructive role in society's transition to a clean-energy economy. PricewaterhouseCooper's Low Carbon Economy Index for this year makes it clear that, without such a transition, society is on a collision course with dangerous climate change before 2035. Extrapolating from today's trends, cumulative carbon dioxide emissions are projected to enter the danger zone by that date. To avoid such dangerous climate change, society must become effectively carbon neutral by mid-century or be prepared to remove excess carbon dioxide from the atmosphere by the latter part of the century.
These climate science realities pose a huge financial dilemma for the fossil fuel industry. Current fossil fuel reserves of the top 200 energy companies listed on the world's stock exchanges correspond to potential carbon dioxide emissions equivalent to the threshold for dangerous cumulative emissions. The dilemma becomes even greater when the industry considers what to do about the world's remaining undeveloped reserves. When these undeveloped reserves are added to the mix, the potential cumulative carbon dioxide emissions jump to three to four times the danger threshold. The climate science tells us that without some form of carbon capture and storage (CCS), all of these undeveloped reserves are unburnable if society is to avoid the impacts of dangerous climate change. Unfortunately, two of the largest oil and gas companies in the industry, ExxonMobil and Royal Dutch Shell, have recently assured investors that despite the known risks of climate change, they have no economic incentives at present to switch their basic business models. Both have concluded that policymakers are unlikely to act quickly enough to strand their current fossil fuel assets nor make it unprofitable for them to continue exploring for new reserves.
In drawing such a conclusion, the industry is gambling on a business-as-usual model that responds to shareholder demands for maximizing short-term, quarterly profits while placing long-term, sustainable profits at risk. And the stakes involved are huge. During 2012, the top 200 energy companies spent $674 billion to develop new reserves, $593 billion in the oil and gas sector and $81 billion in the coal sector. Conservatively extrapolating this capital expenditure out to 2035 leads to around $14 trillion investment in new reserves. This investment would represent a staggering amount of wasted capital should policymakers determine these reserves are unburnable. And, should the industry's conclusions about the incompetence of energy policymakers be borne out, then we would all find ourselves having committed our future generations to centuries of dangerous climate change.
The fossil fuel industry understands the stakes involved, and there are alternative business models that could sustain the industry's long-term profits while safeguarding the planet's habitability. Royal Dutch Shell has a 40-year history of exploring alternative energy scenarios for the future, and it and ExxonMobil have contingency plans for adapting to evolving energy policy. Society would benefit tremendously if these companies decided to play a constructive role in the transition from fossil to non-fossil sources of energy. Shell has taken a tentative first step in this direction by joining over 1,000 other companies from around the world in signing the Trillion-Tonne Communique, agreeing to cut cumulative carbon emissions low enough to limit global warming to less than 2 degrees Celsius above pre-industrial levels. However, actions are more important than signatures, and without clear market signals from a well-defined energy policy, the industry appears to have little incentive for innovation in clean-energy technologies.
So, where does this leave us? For the past two centuries, fossil fuels have provided society with a level of prosperity unimaginable during the first five millennia of human civilization. However, society's dependence on fossil fuels is ending. The primary reason for the inevitable demise of fossil fuels is simply that our reserves are running out — oil in this century, natural gas during the next century, and coal a few centuries later. Therefore, the question is not whether society will discontinue using fossil fuels, but rather whether the transition to a clean-energy economy can be completed before we do irreparable damage to the Earth's climate system. The fossil fuel industry can lead the transition to a sustainable, clean-energy future or assume responsibility for gambling it away in the pursuit of short-term profits. The coal sector has shown that it would rather fight than switch. Now, the oil and gas sector must decide what its legacy will be for future generations.
Greene is a professor in the Department of Earth and Atmospheric Sciences at Cornell University.