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When it comes to a changing climate, the energy industry faces more than just political pressure to transition toward cleaner power supplies. It’s also facing direct physical effects and financial risks. The bankruptcy filing by California’s largest electric utility last week is now Exhibit A – with a twist. Tottering financially due to its liability in California’s spate of big wildfires, PG&E is also a leading player in the state’s efforts to transition toward cleaner energy.
Bankruptcy will likely disrupt the company’s plans to bring in rising amounts of renewable power to the state. PG&E’s bankruptcy stems in part from California’s strict liability standard for wildfires. But from dry California forests to Texas refineries at risk of coastal flooding, climate threats are widespread. And they could influence wider policy debates over global warming.
“Up to now the conversation has been almost entirely about ‘What is the impact of business on the climate?’ ” says green-business analyst Joel Makower in Oakland, Calif. “Now the conversation is shifting to, ‘What is the impact of climate change on business?’ ”
For the oil company ConocoPhillips, a warming climate means risks for the annual construction of an ice road that brings heavy equipment and supplies to its facility on the edge of Alaska’s National Petroleum Reserve.
For energy companies in the Gulf region from Houston to New Orleans – home to key refineries for gasoline and other US fuels – it means heightened risks of storm and flood damage.
And amid litigation over devastating wildfires, warming is cited as a key factor tipping PG&E, California’s largest electric utility, into a bankruptcy filing last week.
These are all signs of how, when it comes to a changing climate, the energy industry is facing more than just political pressure to transition toward cleaner, lower-emission power supplies. It’s also facing direct physical effects and financial risks.
Given the industry’s central role in an expected global transition toward a low-carbon economy, this rising attention to risks has big implications. It may create more urgency for a switch to green energy.
“We're going through a very significant pivot around business and climate change, because up to now the conversation has been almost entirely about ‘What is the impact of business on the climate?’ ” says Joel Makower, chairman of GreenBiz Group in Oakland, Calif., which promotes environmentally sustainable business practices. “Now the conversation is shifting to, ‘What is the impact of climate change on business?’ ”
For everyone from CEOs to corporate shareholders and employees to consumers filling gas tanks or paying electric bills, he says, the concern may become: “How do you operate in a world where with fairly increasing certainty we’ll be seeing more extreme weather, more droughts, more floods, hurricanes etc.?”
The PG&E case is now Exhibit A – with a twist.
Is corporate liability too strict?
As the giant utility enters court-overseen bankruptcy proceedings, the spillover effects of climate change may slow California’s move to low-carbon power. Bankruptcy will likely disrupt the company’s plans to bring in rising amounts of renewable power to help the state meet its ambitious goals to address climate change. With those targets growing costlier to reach, electric utility ratepayers or taxpayers could be the ones to ultimately pick up the tab.
The connection between PG&E’s bankruptcy and climate change isn’t simple or universally agreed. Wildfires are a longstanding feature of the region it serves, and the company is being sued for the alleged role of its equipment in causing some of the fires. Moreover, California has a strict liability standard that, unlike in other states, can leave a company liable even if no negligence on equipment operation or brush-clearing is proved.
Still, the persistence of drought conditions in much of the state and two epic wildfire years are viewed by many scientists as features of a shifting global climate.
“PG&E is a wake-up not just for energy companies but for all companies,” says Nancy Meyer, director of business engagement at the Center for Climate and Energy Solutions (C2ES) in Washington. “The physical risks of climate change are here and now. Companies are trying to figure out how to better quantify and report and manage those kind of risks.”
The resulting costs pose questions not only for corporations but for the rest of society.
When companies are asked to bear the costs of climate change, they have an incentive to guard their own future. But is there a point at which help from outside is warranted?
Some environmentalists have raised that question in PG&E’s case.
“Victims’ interests aren’t served by pushing utilities into bankruptcy, because that will convert wildfire sufferers into one more class of frustrated creditors pursuing inadequate funds. The same goes for utility customers, who always end up paying more in the aftermath of bankruptcies,” Ralph Cavanagh of the Natural Resources Defense Council wrote in the run-up to PG&E’s bankruptcy filing. “Another substantial casualty could be billions of dollars of funding for PG&E’s nation-leading clean energy initiatives, which are designed to help fight the effects of climate change, like these tragic wildfires.”
He urged reform of what he called California’s “judge-made law” on strict liability, but also called for a broader rethink of “how we design our communities and insurance systems to reduce both individual and collective exposure.”
Spreading the costs
Others say that, at the very least, there’s a troubling irony in PG&E’s predicament. Even leaders on environment, social, and governance (ESG) practices aren’t immune from damaging climate effects.
“PG&E has a good record when it comes to ESG ... and yet they still find themselves victim to physical impacts of climate change, which are very systemic in nature,” Ms. Meyer says “So as we start seeing more and more physical impacts of climate change, to some extent it’s going to be very difficult for the corporate community to bear all of those costs.”
To some extent, the risks have long been known.
“Refineries, offshore facilities, those kinds of major plants are designed with a long life span,” says Sabrina Watkins, who spent a decade as head of sustainability at ConocoPhillips before retiring a few years ago. “And we included climate change considerations in that analysis so that the facilities’ design would be robust to potentially changing conditions.”
“Certainly electric utilities have been on the forefront of this work,” she adds, noting how some power suppliers are adapting to prospects for changing rainfall patterns in their hydropower systems, alongside risks such as storms or wildfires.
Also, oil-industry CEOs have shown increasing willingness to discuss climate change and even to sign on to some “carbon pricing” policies designed to nudge Americans away from fossil fuels.
Sustainability advocates say the oil and gas industry needs to do much more to address physical risks.
“Of all industries, the utility industry and the fossil-fuel industry should realize that they are exposed,” says Rachel Cleetus of the Union of Concerned Scientists in Washington. “And they are also in the driver’s seat and helping make the transition to a clean energy future.”