Banking's risky oil bet; Germany's climate election, and so long, Keystone

By David Callaway, Callaway Climate Insights

When the history of the world’s energy transition away from fossil fuels is written, the Keystone XL oil pipeline battle of the past decade will be recorded as a major turning point. The collapse of the project this week, coming on the heels of historic legal and shareholder victories against Shell and ExxonMobil this spring, no doubt will enshrine 2021 as a milestone year in the fight against global warming.

Yet even as climate activists celebrate these hard-fought victories, the true scope of the transition risk to the economy and the markets is beginning to take shape. In my ZEUS column this week, I look at a report which starkly details the impact a carbon tax might have on the earnings of energy and materials companies. And a new report out today (See our Subscriber Insights below), illustrates how Europe’s largest 11 banks have fossil fuel assets on their books that are the equivalent of almost 100% of their core capital and equity.

There is no going back in the transition. The victories this spring show it is gaining momentum. In Mark Hulbert’s column today, he discusses the boom in sustainability-linked loans, which along with other forms of green bonds passed the $3 trillion mark this month, according to S&P Global.

The dramatic shift in assets, which BlackRock’s Larry Fink famously predicted two years ago, is starting to happen. Now the trick is to follow through in a way that doesn’t bring down the financial system. As the fossil fuel asset class deflates, environmental, social and governance (ESG) securities must fill the void.

Symbols are always more attractive in hindsight. At the moment, they portend a bumpy ride ahead.

More insights below. . . .

Hulbert: The promise and pitfalls of sustainability-linked loans

. . . . Sustainability loans have grown so much in the past few years that they are now considered an asset class of their own, writes Mark Hulbert. But a study of the premiums and penalties included in their interest rates shows they are so tiny as to be less than a penny a share for some of the big companies that have taken them out lately. Hardly enough to influence decision making around climate, and more marketing than impact. Still, demand for the loans is strong enough to drive real change if investors and businesses are willing to accept a bit more risk. . . .

Read the full column

ZEUS: Could carbon taxes cause the next financial crisis?

. . . . As Europe prepares to impose the first carbon border levies on polluting importers this summer, the prospect of taxes on greenhouse gas emitters continues to attract fans. But a new study by Oxfam and Swiss Re has illustrated what the bite of carbon taxes might do to the biggest energy companies and industrial materials firms. It’s not pretty. David Callaway argues in his ZEUS column this week that carbon markets are a much more gradual and precise way to put a price on carbon, without the type of pain that could wipe out 40% to 80% of some companies’ earnings per share, and devastate entire regions. . . .

Read the full ZEUS column

EU notebook: Fuel price hike takes center state in German election

. . . . Germany’s goals of reducing emissions in the next decade are under threat — from voters in the September election. Plans by the Green Party to raise fuel prices to meet the goals have cost them the lead in polls and reduced all the candidates to squabbling over how to meet the current government’s goals without cutting fossil fuel usage, writes Vish Gain from Dublin. The Greens and their popular leader, Annalena Baerbock, are in a corner. But don’t underestimate the voting power of the young, climate friendly vote in Germany.

Plus, Biden’s first European trip as president begins, with an attack of the cicadas . . . .

Read the full EU notebook

Thursday’s subscriber insights: Europe’s subprime moment with fossil fuels

. . . . Banks are under pressure like never before to reduce their fossil fuel holdings. Perhaps for good reason. A new study shows the top 11 banks in Europe have oil and gas holdings equivalent to almost their entire Tier 1 capital. Remember the subprime loan crisis, anyone? Read more here. . . .

. . . . The nascent offshore wind industry in the U.S. received a dramatic boost this spring with the green-lighting of the Vineyard Wind project in Massachusetts. Now everyone is getting in on the act, including authorities in California on the West Coast and in the Gulf of Mexico. Europe has a big lead in offshore wind, but U.S. investments are cranking up. Read more here. . . .

. . . . Fiat has become the latest automaker to announce a shift to total 100% electric vehicle production this weekannouncing a target date of 2030. About 5% of European vehicles are currently electric, though analysts expect that to surge in coming years as battery power expands and more charging stations are built. . . .

. . . . And finally, we can only assume GOP Rep. Louie Gohmert (R-Texas) was kidding when he asked a National Forest Service official yesterday at a hearing whether she could alter the orbit of the earth and moon to address climate change. He obviously meant to ask Jeff Bezos. . . .

Editor’s picks: Wind could produce green hydrogen; another Dust Bowl tragedy looms

Wind could produce affordable green hydrogen by 2030, Siemens Gamesa says

In a new white paper, Siemens Gamesa says wind power could produce green hydrogen by 2030. Engineering News reports that policy makers see green hydrogen, which is made with renewable power without emitting carbon, as a vital tool to help shift economies away from planet-warming energy sources and to stave off climate change, but want to reduce its sky-high costs. The turbine maker says in its report: “By eliminating greenhouse gas emissions from today’s hydrogen production by using renewable energy instead of fossil fuels, we will deliver a cleaner, more sustainable future. The unlimited supply of renewable energy and capabilities having proven by the renewables value chain mean that the volume of green hydrogen production is almost unlimited.

Despite better farming practices, another Dust Bowl looms

Improved agricultural practices and widespread irrigation may stave off another agricultural calamity in the Great Plains. But scientists are now warning that two inescapable realities — rising temperatures and worsening drought — could still spawn a modern-day Dust Bowl, Nathaniel Sharping writes for Yale Environment 360. The report notes that “In a world where drought and heat waves become routine, the two might combine to tip the country into a situation where agriculture becomes increasingly threatened, with profound impacts on U.S. food supplies.”

WEF: AI’s reinforcement learning could help in climate battle

An AI technique called reinforcement learning could help us solve some of the world’s most complex problems, the World Economic Forum reports, and applying this technique to test climate-saving initiatives across a digital twin of Earth could help us tackle climate change. The WEF says such an application is possible, because we have enough global data and ocean monitoring has improved dramatically. More importantly, the WEF says, reinforcement learning could assess the effects of corporations’ net-zero initiatives. “… As new AI tools and other technologies continue to become more viable and powerful, we should look for such ways to combine efforts in industry, academia and public institutions to help us collectively move the needle on important global issues.” Read more about how this AI technique could use a digital version of Earth to help fight climate change.

Latest findings: New research, studies and projects

Pull CO₂ from the ocean, turn it into rocks

Researchers are working on a plan to fight climate change by pulling CO₂ from the ocean by running seawater through an ocean carbon capture plant that could chemically convert carbon dioxide to limestone on a grand scale. Smithsonian Magazine reports on the work of Gaurav Sant, a civil and environmental engineering professor and director of the Institute for Carbon Management at the University of California Los Angeles, and his team. According to the report, “Sant and his colleagues’ idea is that if you can remove carbon from the ocean, the water will absorb more from the atmosphere to maintain a state of equilibrium. Now, they’re proposing an innovative way of getting carbon out of the ocean — by turning it into rock.” Seawater contains a lot of calcium and magnesium, Smithsonian notes. When the calcium or magnesium ions combine with carbon dioxide, they form calcite or magnesite. The chemical reaction is similar to how many marine organisms build their shells. But by introducing a third ingredient, electricity, Sant and his team can make that reaction happen quickly, efficiently and, perhaps eventually, on a large scale.

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