High Market Valuations of Fossil-fuel Companies Do NOT "Contradict" Government Pledges to Reduce Carbon Emissions

This "profound contraction" reportedly originated with Lord Nicholas Stern, who as an economist should know better, and has been publicized by Grist writer David Roberts (here and here). The claim is premised on a simplistic presumption that market valuations of fossil fuel companies are based (exclusively?) on the further presumption that all known reserves of fossil fuels will be extracted and sold, which cannot happen under government pledges to prevent global mean temperature increases beyond 2 degrees Celsius.

But the claim of a contradiction (either logical or as a matter of policy) is false because the premises and presumptions underlying it are false. In the first place, it is erroneous to presume that the market value of any company depends exclusively on its existing stock of assets, as if features such as (changeable) market demand, good will, and competition have no bearing on a company's value. Moreover, even if government regulations tie up some amount of carbon in the ground, that does not necessary mean that a coal company's market valuation must decline. Assuming demand is reasonably price elastic, so that the market price of coal rises as a consequence of reduced supply, fossil fuel companies could (in theory) remain equally profitable selling lower quantities of coal and oil at higher prices. They might also diversify into alternative, low-carbon energy sources, as many energy companies are in fact doing. Thus, the relation between a regulatory supply constraint does not necessarily equate with a reduction in overall profitability or market value for any particular company. (It is worth observing, in this context, that financial services companies like American Express and Wells Fargo are still highly valuable a century or more after their initial cartel-based transportation businesses were heavily regulated by the US government.)

It is even possible that regulations could increase the market value of a fossil fuel company that meets regulatory standards, for example, by improving productive efficiency. As former BP chairman Lord Browne bragged in a 2004 article in Foreign Affairs (here), his company reduced overall emissions by 10% (below 1990 levels), while increasing shareholder value by $650 billion, simply by reducing leaks and waste. Of course, because higher levels of emissions reduction are increasingly expensive emissions reductions do not invariably lead to direct increases to shareholder value. But just as companies have managed to increase profitability and market value despite increased costs of doing business (due to various market and non-market constraints) in the past, no reason exists simply to presume that (even stringent) GHG regulations would reduce their market valuations.   

Even if a regulatory restriction did reduce the profitability and market valuations of fossil fuel companies, it is a mistake to conflate a mere "pledge" by governments to reduce greenhouse gas emissions with the actual imposition and enforcement of regulations (either quantitative or tax-based) that reduce either the supply or demand (or both) for carbon-based resources. The history of international climate negotiations to date suggests that "pledges" are worth little more than the paper on which they are printed. In other words, mere pledges do not equal credible commitments of the type generally required to move markets.     

In short, there is no contradiction between government pledges made earlier this month in Durban and market valuations  of companies that are heavily invested in fossil fuels.