As scholars who study global business trends and their impact, Paul A. Griffin and Amy Myers Jaffe are great role models for their students at the Graduate School of Management—and dispelling financial myths like the carbon bubble.

The two colleagues tackle a range of corporate social responsibility issues across the global stage such as energy and sustainability, use of conflict minerals and greenhouse gas emissions.

“My research on accounting reports and corporate disclosure provides some unique insights about managers’ actions and consequences,” says Professor Griffin. “This knowledge is more important than ever as companies strive to meet the global challenges of climate change and sustainability.”

Jaffe, executive director of energy and sustainability for UC Davis, is a global expert on energy policy, geopolitical risk, and energy and sustainability. She holds a joint appointment with the UC Davis Institute of Transportation Studies.

Increasingly we live in a globalized society where problems of environment, social justice and security do not end at national borders.
– Amy Myers Jaffe

“Increasingly we live in a globalized society where problems of environment, social justice and security do not end at national borders,” she says. “In my research on sustainability and energy, I see clearly how campus efforts like UC Davis’ West Village project can contribute to global solutions and how much global solutions are needed for local problems across the world.”

Recently, they teamed up on research that found investors in U.S. oil and gas companies have not ignored science when considering whether a potential carbon asset bubble exists.

Drawing on the findings of their study, Jaffe and Griffin co-authored this column in the May 20, 2014, Wall St. Journal’s Ask the Experts feature in the energy sector.

How Investors Are Evaluating Oil and Gas Companies

By Amy Myers Jaffe and Paul Griffin

The oil industry is confident that consumers cannot get by without its products. Recently, Exxon Mobil, responding to a shareholder proposal for more disclosure about the risks to their share value from future climate change regulations of greenhouse gas emissions, said it was confident that the oil and gas reserves on its balance sheets would not become “stranded” by carbon caps or other environmental policies. Oil and gas are “essential to meeting growing energy demand world-wide” the company noted in its explanation of why tighter regulations of carbon dioxide emissions won’t be impacting its bottom line any time soon.

Oil’s currently overwhelming dominance in transportation may actually erode over time

But the latest report of the United Nations Intergovernmental Panel on Climate Change (IPCC) offers the first scientific glimpse that oil’s currently overwhelming dominance in transportation may actually erode over time. In fact, the recent IPPC report noted that technological and behavioral mitigation measures in the transport sector could reduce final energy demand in 2050 by up to 40%, with new vehicles seeing as much as 50% efficiency improvements over time. The IPCC transportation chapter leaves open the possibility that new technologies and efficiency gains might mean the expected rise of the middle class in the developing world could happen without the kind of breakneck growth in oil use that accompanied the past decade. The panel notes that in the OECD countries advanced vehicle technologies and urban sustainability policies are combining rapidly to reduce oil demand. In its 2013 Energy Outlook, even oil giant BP concedes that oil demand has peaked in the OECD.

Only 5% of the general population of drivers in the U.S. currently drives a hybrid car, much less a plug-in electric vehicle (PEV). But this small, core elite of early adopters are switching over fast to new advanced vehicles as they become available. As many as a third of all PEV owners in California, for example, previously drove a hybrid car. And a bevy of new EV models are due to launch in the next couple of years, including some that integrate with your home.

On the other hand, despite what is likely to be a significant wave of affordable and attractive advanced vehicles coming to market, the average American only buys a new car only every 7 to 10 years. That means de facto it will be a slow process before electric or other alternative-fuel vehicles are truly commonplace. Even the IPCC Panel cautions that institutional, legal, financial and cultural barriers could constrain the rapid shift to alternative fuels, with energy storage remaining an ongoing technical challenge.

Investors’ rational expectations for future cash flows are based on all possible scenarios, not just particular negative ones that crop up in the media. This explains why Exxon Mobil probably felt comfortable telling its shareholders that it has nothing to fear from carbon-related public policy trends.

But Stanford University’s recent divestiture of coal stocks gives room for caution. Closer analysis finds that investors do, in fact, care about carbon risks and acted upon such concerns back in 2009 in response to an initial story published in 2009 in the scientific journal Nature that concluded that only a fraction of the world’s oil, gas, and coal reserves could be emitted if global warming by 2050 were not to rise more than 2 degrees Celsius above preindustrial levels. A financial market study, conducted jointly between University of California, Davis and the University of Otago in New Zealand, examined how U.S. oil and gas company stock prices reacted to media coverage about the potential consequences of unburnable carbon for fossil-fuel companies.

The research showed that there was an initial $27 billion drop in market capitalization or about 2 to 3% of total valuation for the 63 largest U.S. oil and gas company stocks, like Exxon Mobil, on the major U.S. stock exchanges in the aftermath of the original Nature article.

There was an initial $27 billion drop in market capitalization…for the 63 largest U.S. oil and gas company stocks…on the major U.S. stock exchanges in the aftermath of the original Nature article

Beyond the moral and ethical issues related to climate protection, whether investing in fossil-fuel companies is a sound financial investment or exposes shareholders to risk from future regulation towards cleaner fuels needs fuller debate and more analysis. The current assumption that all fossil energy–even the most remote Arctic and deep water resources–can eventually be utilized using carbon capture and storage technologies may be overly optimistic given the scale of the resources now on the books for dozens of oil and gas companies. And the 2014 IPCC report hints that the more optimistic forecasts for rising oil demand may not materialize. Still, the future of the global energy mix remains uncertain, and given investors’ net present value basis for valuing companies, any change by 2050 in today’s dollars may not justify the more hysterical claims that a market carbon-related bubble exists in oil and gas share valuations. As our research shows, investors are rationally considering the evidence from science as they evaluate their future oil and gas holdings.

Paul Griffin is a professor at the Graduate School of Management at the University of California, Davis. Amy Myers Jaffe is the executive director of energy and sustainability at the Graduate School of Management at the University of California, Davis.

Reprinted with permission from the Wall St. Journal.


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With over 10 years experience as a online marketing strategist and design professional, Hardy manages the school’s content strategy, social media marketing, online advertising planning and overall design of the schools’ digital footprint


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