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Alliance Trust: why we like natural gas and our qualified position on fracking

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Investment house Alliance Trust invests in non-fossil fuels, but makes an exception for natural gas, which it describes as a “beneficial transition fuel”. It adds that shale gas from fracking can also be positive to sustainable development. Mike Appleby, a sustainable and responsible investment analyst at the firm, explains why.

Hydrocarbons, such as oil, gas and coal, emit carbon dioxide when burnt and this is the main contributor to manmade climate change. For this reason we avoid companies with high exposure to carbon intensive fossil fuels such as coal and oil (in particular tar sands).

These three hydrocarbons have very different carbon intensities (emissions per unit of energy derived from their combustion). Estimates vary, but burning natural gas to produce energy results in significantly lower emissions – approximately 30% less carbon emissions than oil and about half the carbon emissions as coal.

Source: World Resources Institute: Taxing carbon to finance tax reform (Hanson C, Hendricks JR) March 2006*Million metric tons of carbon per quadrillion Btu.

Natural gas: a transition fuel with genuine environmental benefits

We like natural gas as we believe it is an important transition fuel to substitute more carbon intensive fossil fuels. For example, it is estimated in the US that substituting the existing average coal-fired power station with a natural gas powered power station would result in a reduction in carbon dioxide emissions of over 60% at a similar cost.

We also like natural gas as a substitute transport fuel, especially replacing diesel in trucks as it results in an improved emissions profile and reduces CO2 emissions in this fast growing sector.

We prefer non-fossil fuel forms of energy and investing in these areas as well as energy efficiency which will be key to us moving towards a more sustainable energy system. We firmly believe that a “shale-gas revolution” (which we believe is unlikely in the UK) is not a substitute for a step change to increase investment in renewables and energy efficiency measures to reduce our reliance on fossil fuels.

Our position on oil and gas companies: we have very limited investments in this industry

We do not invest in the majority of the oil and gas sector mainly due to the emissions associated with using these products. We make an exception for companies that are predominantly focused on developing natural gas and measure this in terms of the proportion of the company’s reserves that are natural gas as opposed to oil or tar sands.

Companies with 70% of their reserves in gas are potential candidates for investment in the Sustainable Future funds, if they also have strong management and a good track record of operating in a high impact and difficult industry. These criteria exclude the vast majority of companies in the oil and gas sector.

Our position on fracking: qualified support – if done properly, but wary of pure-play fracking investments

Shale gas is held tightly in the rocks and requires some new drilling and extraction techniques involving hydro-fracturing (aka fracking) which essentially pumps large amounts of water (with sands and chemicals) to break up the rock and allow the gas to escape and be extracted.

This is controversial due to the amounts of water it uses and its potential negative impact on the quality of drinking water, local objections to this as well as the disruption caused, potential local land tremors and also the amount of natural gas that escapes into the atmosphere (fugitive emissions) which can significantly increase emissions associated with this unconventional way of extracting natural gas. In turn, this undermines the ecological benefits of using natural gas as a substitute for other more carbon intensive fossil fuels.

We believe that, if done to the highest operational standards, and with the majority consent of the local people affected by the exploration activities, shale gas and its associated fracking is a net positive activity due the substitution of more polluting fossil fuels and to increase energy security. So, in theory, we won’t exclude a company just because it is involved with fracking on sustainability grounds – assuming they manage it carefully.

That said, from an investment perspective, there are reasons to be wary of companies with high exposure to shale gas as we believe the expected economics of these projects are over optimistic, mainly due to underestimated lifting costs, and decline rates – which results in expectations of investment returns being too high – not uneconomical but lower than hoped. We do not own any shale gas companies other than natural gas companies where there is limited involvement and we are purposefully wary of looking for exposure to the pure shale gas theme.

Recent exploration for shale gas in the UK: no material exposure and happy to keep it that way

We are less excited about prospects for shale gas in the UK than many and do not have any material exposure to UK shale gas exploration in the Sustainable Future funds. The main reason for our caution relates to local opposition and an over simplistic analogy of shale gas in the UK being a repeat of what has happened in the US.

While the UK government is trying to make local communities get more meaningful compensation rates for the inconvenience and potential risks of fracking – this is very different from the US where, generally, the mineral rights are owned by the occupier (not the government) and where the owner of the land is paid substantial royalty rates from exploration companies, greatly facilitating local consent.

Local opposition will likely remain high while it is perceived that locals have to put up with exploration close to them so that private companies can profit from shale gas.

We think that the UK has very limited fracking experience. It will take time before costs come down and they are able to conform to best operating practice to minimise the potential risks of water contamination and fugitive emissions. We also believe that the geology is unknown and decline rates (how quickly production falls over time) will need to be re-assessed before the economics of this shale gas exploration are better understood.

In the meantime, we are happy to avoid pure-play shale gas exposure in the UK (and note, there is limited listed investment opportunity exposed to this) as we see better investment opportunities elsewhere, mainly from non-fossil fuel power generation and companies providing products that enable us to use energy more efficiently, which saves us money as well as reducing emissions and improving our common environment.

Mike Appleby is SRI analyst at Alliance Trust Investments. This article originally appeared in the Alliance Trust SRI Hub, where you can also find a fully referenced version.

Further reading:

Three facts on fracking

Ed Davey: fracking can support ‘wider environmental aims’ if done properly

Claims that fracking will lower energy bills is ‘baseless economics’, says Lord Stern

Church of England calls for balance in fracking debate

Lord Lawson takes on climate scientist on fracking. And the winner was…

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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