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Want to Derail the Energy Transition? Take Fossil Fuels Out of the Mix.

Policies that attack supply to reduce demand will create substantial collateral damage.

By , the Baker Botts fellow in energy and environmental regulatory affairs at Rice University’s James A. Baker III Institute for Public Policy, and , the fellow in energy, minerals, and materials at Rice University’s Baker Institute for Public Policy.
Motorists line up at a Sinooil gas station in Almaty, Kazakhstan.
Motorists line up at a Sinooil gas station in Almaty, Kazakhstan.
Motorists line up at a Sinooil gas station in Almaty, Kazakhstan, on Jan. 8 after violence that erupted following protests over hikes in fuel prices. Alexandr Bogdanov/AFP via Getty Images

Amid steadily increasing atmospheric carbon dioxide levels, governments worldwide face a multidecade challenge: how to decarbonize without jeopardizing their hold on power. Energy is modern civilization’s blood oxygen—an afterthought unless something crimps access to it, at which point a multiple organ crisis rapidly ensues. Consider the tumult following staple fuel price increases in Kazakhstan in early 2022, in Iran during 2019’s “Bloody November,” and in France that triggered the yellow vest protests beginning in 2018.

No case offers universal insight, but when insulated elites promote energy transition ideas that the common people disproportionately bear the costs and consequences of, turmoil often follows. At present, a U.S.- and European Union-centric alignment of political and environmental activists and money managers are increasingly promoting restricting investment and production as a viable path to decarbonization.

In 2021 alone, climate activist money managers gained board seats at ExxonMobil; a group of Dutch nongovernmental organizations persuaded the Hague District Court to order Royal Dutch Shell to reduce the worldwide emissions attributable to both its operations and products sold by 45 percent by 2030, relative to 2019 levels; the New York state pension fund has divested or is in the process of divesting from nearly 30 coal and oil producers; and BlackRock, the world’s largest asset manager, warned portfolio companies: “No issue ranks higher than climate change on our clients’ lists of priorities.” Meanwhile, ructions have erupted across Europe as this winter season has uncovered weaknesses in assumptions about whether and how to continue to provide conventional fuels.

Amid steadily increasing atmospheric carbon dioxide levels, governments worldwide face a multidecade challenge: how to decarbonize without jeopardizing their hold on power. Energy is modern civilization’s blood oxygen—an afterthought unless something crimps access to it, at which point a multiple organ crisis rapidly ensues. Consider the tumult following staple fuel price increases in Kazakhstan in early 2022, in Iran during 2019’s “Bloody November,” and in France that triggered the yellow vest protests beginning in 2018.

No case offers universal insight, but when insulated elites promote energy transition ideas that the common people disproportionately bear the costs and consequences of, turmoil often follows. At present, a U.S.- and European Union-centric alignment of political and environmental activists and money managers are increasingly promoting restricting investment and production as a viable path to decarbonization.

In 2021 alone, climate activist money managers gained board seats at ExxonMobil; a group of Dutch nongovernmental organizations persuaded the Hague District Court to order Royal Dutch Shell to reduce the worldwide emissions attributable to both its operations and products sold by 45 percent by 2030, relative to 2019 levels; the New York state pension fund has divested or is in the process of divesting from nearly 30 coal and oil producers; and BlackRock, the world’s largest asset manager, warned portfolio companies: “No issue ranks higher than climate change on our clients’ lists of priorities.” Meanwhile, ructions have erupted across Europe as this winter season has uncovered weaknesses in assumptions about whether and how to continue to provide conventional fuels.

Policies that misguidedly emphasize attacking supply to reduce demand will instead create substantial collateral damage—and potentially trigger equal and opposite political reactions that could set energy transition efforts back by years.

The global base of power plants, cars, trucks, ships, planes, materials, food, and fiber production still overwhelmingly relies on carbon fuels. (Oil and gas combined supplied nearly 60 percent of global primary energy in 2020, with another 27 percent coming from coal, and are the global platform for materials.) As such, artificially constraining carbon-derived energy supplies and essential materials will not structurally reduce carbon fuel use—but it will create scarcity and price spikes, as European gas consumers are now experiencing.


Actions that serve tomorrow’s aspirations but neglect today’s reality will leave billions of people globally increasingly caught in a pincer movement. Mass economic pain (and in cases of blackouts and food and fuel shortages, real physical suffering) could usher in an era of vehement pushback centered on three primary vectors.

First, restrictions that artificially constrain supply without addressing demand will drive consumer backlash but also incentivize new capital flows and financing structures that may not be as climate oriented as the present ones. Globally, funds that apply environmental, social, and governance data as a key motivator of investment decisions held about $40 trillion in assets under management in 2020—a massive sum. But the corollary is that about $70 trillion worth of investable assets remain outside such strictures and could invest at greater scale in so-called traditional energy producers.

Corners of financial markets more insulated from climate-related pressures, such as hedge funds and private equity firms, already recognize the opportunity in assets disfavored in the contemporary consensus view. Private equity firms, for instance, have invested more than $800 billion in the fossil energy space over the past decade, according to a report by the Private Equity Stakeholder Project.

The source of capital matters for several reasons. First, hedge funds and private equity firms are typically much higher-cost capital providers than banks, debt and equity markets, pension funds, and other sources. To quantify the difference, a premium midsize oil and gas producer can raise capital by selling long-term bonds bearing interest rates of between 3 and 6 percent annually, while loans from a specialty financier may have interest rates of 13 to 14 percent and in some cases require the borrower to hold large reserves of cash as collateral.

Second, while alternative investors’ assets under management are collectively huge, they likely cannot sustain the $500 billion-plus in annual investment needed to meet the call for oil and gas globally. Third, alternative investors must often ultimately still answer to root capital providers such as pension funds, which are increasingly subject to anti-fossil fuel investment constraints. Higher capital costs and, likely, insufficient capital deployment capability ultimately mean slower resource development—and if demand persists, higher energy bills paid by consumers.

Capital restrictions can also reshape the oil market in ways potentially inimical to longer-term environmental and strategic priorities. Private producers such as the Texas-based Mewbourne Oil Co., which in late 2021 was running more rigs in the United States than Chevron and ExxonMobil combined, will constitute a growing slice of global production as they acquire assets divested by traditional Big Oil as it struggles to remake itself according to climate mandates. The second group will be private commodity traders such as Koch Industries, Vitol, Trafigura, and others, which already collectively handle more than one-third of global oil flows and would be well positioned to acquire and integrate large upstream oil and gas producing assets. The third group consists of national and quasi-national oil companies.

Oil and gas are existential interests in Kuwait, Iran, Iraq, Qatar, Russia, Saudi Arabia, and other key exporters. Even as their diplomatic rhetoric increasingly accepts climate change and emissions concerns deeply held in Western Europe and, increasingly, the United States, they see themselves as the last suppliers standing in a carbon-pressured world and will continue investing to ensure their firms’ ability to supply global oil and gas demands.

In short, more of the world’s oil and gas supply portfolio may shift to less transparent actors (to potential environmental detriment) as well as lower-scale and more expensive capital (to consumers’ detriment) and could empower national oil companies located in often challenging regions that the United States has sought to strategically extricate itself from.

Second, carbon energy shortfalls would jeopardize supplies of other life-critical goods, especially food. The prices of multiple critical global commodities—including staple food grains—often move in close synchronization with oil prices due to the prevalence of petroleum-based agricultural inputs such as fertilizers and the use of grains to produce biofuels that compete with and are blended with oil-derived fuels. During the last oil price upswing in 2004-2008, grain price shocks catalyzed unrest in multiple developing countries, including Bangladesh, Egypt, and Haiti.

While the mid-2000s food riots occurred in the developing world, food insecurity now stalks some developed countries as well. The COVID-19 pandemic has revealed that many Americans also live on an economic knife edge with respect to food security. Accordingly, a spike in grain prices on the back of higher oil and gas prices could drive food costs high enough to force painful household budget reallocations—or even outright deprivation. Scholars from the University of California system and Northwestern University found that in 2020 during the pandemic, almost 25 percent of U.S. families surveyed said food supplies “just didn’t last” and that they could not afford to buy more—a proportion roughly triple the pre-pandemic level.

Third, tightening restrictions on investing in carbon fuels may impede Wall Street’s ability to deliver the minimum returns thresholds necessary to meet obligations to hundreds of millions of current and future retirees. Key capital stewards already question the wisdom of divestment. For instance, the CEO of the California Public Employees’ Retirement System, which now manages close to $500 billion in assets, noted in 2018: “Divestment limits our investment options. With a targeted return of 7 percent, we need access to all potential investments across all asset classes. Divesting does the exact opposite—it shrinks the investment universe.”


Capital starvation, consumer backlash, and fiduciary imperatives to deliver returns increasingly appear poised to deliver a carbon resurgence. Unlike the green insurgency-turned-tsunami, a push to keep carbon longer will not require much in the way of indoctrination or subsidies. Instead, economic forces will mediate based on affordability, reliability, and scale.

Anti-carbon politics coexisted uneasily with pension investment policies during the golden decade between 2010 and 2020, when shale gas abundance cushioned renewables’ entry into the market and effectively allowed both camps to claim progress. But as renewables prove unable to scale sufficiently to push carbon meaningfully out of the system on short time frames, a correction appears increasingly likely. Managing the externalities of the energy transition will be a signature global challenge for the 2020s and likely beyond.

Correction, Jan. 18, 2022: A previous version of this article incorrectly stated that climate activists had secured a board seat at Chevon.

Gabriel B. Collins is the Baker Botts fellow in energy and environmental regulatory affairs at Rice University’s James A. Baker III Institute for Public Policy, whose funding sources are listed here, and a senior visiting research fellow at the Oxford Institute for Energy Studies.

Michelle Michot Foss is the fellow in energy, minerals, and materials at Rice University’s Baker Institute for Public Policy.

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