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Why BP’s Bernard Looney changed his tune

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Hello from London, where Prime Minister Rishi Sunak has grabbed headlines with a reshuffle of his cabinet. The most important casualty is the clunkily named Department for Business, Energy and Industrial Strategy. It will be split into three new units — including the new Department for Energy Security and Net Zero.

Is this a promising sign of commitment to the net zero agenda, from a leader who has not always seemed wildly enthusiastic about it? Perhaps. As Ed Matthew at climate change think-tank E3G observes, the net zero programme will need to be a priority right across the government, not just for a single department.

And as BP showed with its announcement yesterday, the goals of energy security and net zero do not always sit comfortably together. That’s the subject of our first item, followed by a look at what the putative next boss of the Bank of Japan could have in store for its climate policy. See you on Friday. (Simon Mundy)

With rising scrutiny from consumers and investors, and new regulations coming down the tracks, ethical issues in supply chains are attracting growing attention. What are the most pressing challenges here – and how can companies and investors navigate them? Our next FT Moral Money Forum report will explore these questions. We want to hear your views. Please share your thoughts through this short survey.

A discordant day for the energy transition

In May 2020, BP chief executive Bernard Looney told Moral Money about his eagerness to keep BP ahead of the energy transition curve, as the world looked to shift away from oil and gas. “I think it’s very clear to any of us that society wants a different energy solution,” he said.

Yesterday, Looney sounded a different tune, as BP conspicuously pared back the ambition of its transition strategy. The company had previously promised that its oil and gas production would fall 40 per cent from 2019 levels by 2030. Now, it says, the reduction will be 25 per cent.

Just as he did three years ago when explaining BP’s new zeal for clean energy, Looney justified the decision by pointing to the will of the people. “Governments and societies around the world are asking companies like ours to invest in today’s energy system,” he said.

Looney is, of course, right to highlight the international scramble for energy security that has followed Russia’s invasion of Ukraine, and the chaos that it sparked in global markets. Beyond good corporate citizenship, however, BP’s decision clearly also reflects the sharply enhanced profitability of fossil fuels.

The Brent crude price stands at about $83 a barrel — two-and-a-half times its level when Looney made his green-hearted remarks in 2020. BP’s full-year profits, unveiled yesterday, were the highest in its 114-year history: $27.7bn.

BP’s trimming of its green ambitions was attacked by the likes of Greenpeace, which condemned “pressure from investors and governments to make even more dirty money out of oil and gas”. Crucially, this is not just a matter of a quick dash for cash. By signalling an increase to its projected fossil fuel output into the next decade, BP is confirming the widespread fears that the rush for fossil fuel supplies will lock in higher production for many years to come.

That message contrasts with the upbeat one we heard yesterday from the International Energy Agency, delivering its annual assessment of the global electricity sector. Despite a surge in power-related emissions from the EU as coal-fired power was used in the face of gas shortages, the IEA forecast that European emissions would fall at an annual rate of 10 per cent over the next three years.

Renewable energy is “set to dominate” capacity additions to global electricity capacity in the next few years, it found — with renewables and nuclear together meeting more than 90 per cent of additional demand between now and 2025. That will take renewables’ share of generation up to 35 per cent, from 29 per cent in 2022.

Some promising lines emerged, too, around investment in battery storage, which will be crucial in the transition to a grid reliant on intermittent renewables. Capacity additions rose by more than 80 per cent last year in the US, and nearly 100 per cent in China.

In fairness, BP’s update yesterday also reflected this surging wave of investment in green energy, which now accounts for 30 per cent of its capital spending — up from 3 per cent in 2019. But it’s a stark sign of the moment that, while it pumps money into renewables, BP is strengthening its commitment to its legacy fossil fuel business.

And even as it trumpeted the rising wave of renewable investment, the IEA — which has warned that new development in fossil fuels has no place if global warming is to be limited to 1.5° — took care to sound a pragmatic note when it came to the phaseout of fossil fuels.

“Diversity is the source of supply security,” said Keisuke Sadamori, the IEA’s director of energy markets and security. “It will continue to be important to keep the existing assets and make wise use of them in case of necessity.” (Simon Mundy)

Masayoshi Amamiya for BoJ’s next chief?

Japan’s government approached the Bank of Japan’s deputy governor Masayoshi Amamiya to become the next head of the central bank, Nikkei has reported.

In Amamiya, the BoJ would find a strong proponent of the idea that responding to climate change is an important part of its mandate (one of the hot issues in 2023, my colleague Kenza Bryan reported earlier this year). Government officials, however, say they have not yet reached a final decision.

Amamiya has had few public speaking engagements in the past six months. Some BoJ observers interpret his silence as a sign that the career central banker is the leading contender for the top job. It’s worth noting that his last public speech in November was titled “Climate change and finance”.

In the speech, Amamiya argued that climate change can cause significant disruption to price stability and the wider financial system — which supports the idea that regulating the private sector’s response to climate change falls within the BoJ’s remit. In addition, the BoJ veteran said that supporting a smooth energy transition would “contribute to price stability in the medium to long-term”, as it would reduce the chance of price swings in fossil fuel and other energy sources as well as their impact on other goods and services prices.

The current governor Haruhiko Kuroda’s term ends on April 8. The nominee for his successor is expected to be presented to parliament later this month.

If Amamiya officially becomes the head of the BoJ, will the central bank of the world’s third-largest economy start to implement more aggressive measures to encourage decarbonisation?

Few BoJ watchers expect drastic changes, including green finance. Amamiya is a longtime BoJ heavyweight who has been involved in forming many of the bank’s policies and is considered the closest to a continuity replacement among the candidates. Kuroda also believes that helping society tackle climate change is within the central bank’s mandate. Under his watch, the BoJ launched a scheme that offered zero-interest loans to banks to boost green and transition finance.

The main task the next governor will face is normalising ultraloose monetary policy without causing huge side-effects. Climate change may take a back seat.

Acting on climate change can result in a greater burden on companies and households, and it may increase inflationary pressure, Satoru Kado, principal economist at Mitsubishi UFJ Research and Consulting, told Moral Money. Avoiding these outcomes under the current economic and political situation, Amamiya would be likely to adopt a “wait and see” stance for a while before making changes to climate change policies, Kado added. (Tamami Shimizuishi, Nikkei)

Smart read

Oil companies’ bumper profits have sparked calls for hefty windfall taxes. But an alternative option — charging them a “carbon takeback obligation” — is also worth considering, writes Pilita Clark.

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