Donald Trump’s surprise victory in the U.S. presidential election should mean the end of the #ExxonKnew movement and government investigations into how it values its assets in the context of climate change.
Last year, New York Attorney General Eric Schneiderman launched an investigation under the hashtag #ExxonKnew into ExxonMobil on the grounds that it had “buried” research on climate change that was conducted by its scientists during the Carter administration. Then, when that investigation failed to produce evidence of a cover-up, Schneiderman joined with other Democratic state attorneys general to form the “AGs United for Clean Energy,” which initiated its own investigation into how ExxonMobil values its assets in the face of a changing climate.
The “AGs United” investigation is based on the premise that only a fraction of the world’s proved fossil fuel reserves can be extracted and burned without exceeding the global carbon budget. This so-called “stranded assets” theory holds that catastrophic climate change will only be avoided if governments ensure that a majority of existing and future reserves are left in the ground. Fossil fuels are primarily valued for their energy content and permanently leaving them in the ground would make the reserves worthless. In Schneiderman’s words, the refusal of fossil fuel companies to discount their reserves accordingly is potentially leading them to collectively overstate the value of their assets by “trillions of dollars.”
The AGs’ investigation reappeared in the news after The Wall Street Journal reported that the Securities and Exchange Commission is also probing how ExxonMobil factors climate change regulatory risks into its asset valuations. The involvement of federal regulators prompted speculation that ExxonMobil was just the first target in an effort that would ultimately encompass the broader oil and gas sector.
Trump’s election victory should put an end to this thought. The practical implications of the result are clear. As president, Trump will nominate commissioners to fill the SEC’s existing vacancies. He will also nominate a replacement for SEC Chair Mary Jo White when she steps down in the near future. It is unlikely that the incoming regulators will place the same emphasis on climate policy risks given Trump’s stated support on the campaign trail for U.S. fossil fuel production.
More important is that Trump’s pending inauguration disproves the critical assumption in stranded assets theory that U.S. policymakers will force fossil fuel companies to keep their reserves underground and unused. This election was characterized by many environmental groups as being humanity’s last opportunity to prevent the onset of catastrophic climate change. After all, if Trump withdraws the U.S. from last year’s COP21 agreement in Paris (or simply chooses not to enforce its carbon-reduction obligations under the same), then the entire edifice is likely to crumble as other major emitters take similar steps in response.
The U.S. would hardly be the first developed country to distance itself from its own climate policies. Australia’s government imposed a price on carbon emissions in 2011 only to repeal it in 2014. The European Union’s carbon price has hovered around 6 euros per metric ton, which is hardly high enough to change energy consumption habits, for years. The EU has rejected multiple opportunities to push it higher, the COP21 agreement notwithstanding. Most recently, voters in the state of Washington rejected a carbon tax proposal that was bizarrely opposed by both the Sierra Club and some fossil fuel companies.
As the above examples illustrate, climate policy is not preordained. A specific policy result is never guaranteed, especially in light of political forecasters’ recent track records. Whereas Democrats were discussing ways of resurrecting President Barack Obama’s failed national cap-and-trade legislation as recently as October, President-elect Trump and the incoming Congress are now working out how to quickly remove subsidies for renewable energy while simultaneously encouraging domestic fossil fuel production. The conventional wisdom on U.S. and even global climate policy has undergone a complete reversal in only a few weeks.
Efforts to use regulatory powers to replace the existing market-based valuation framework with one in which asset values are based on the speculated future impact of non-existent policies are misguided. Trump’s victory has shown the assumed inevitability of these policies to be the fatal conceit of stranded assets theory. It is time for the theory to be discarded as a regulatory tool now that this flaw has been so aptly demonstrated. If future fossil fuel use is to decline let it do so because renewable energy has become competitive rather than due to clairvoyance on the part of regulators.
Tristan Brown is an assistant professor of energy resource economics at the State University of New York’s College of Environmental Science & Forestry.
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