Oil demand growth could near zero globally by 2028 — fossil fuel subsidies are a hidden problem in the green energy transition: Arthur van Benthem

Arthur van Benthem is Associate Professor of Business Economics and Public Policy at Wharton, the University of Pennsylvania. Speaking to Srijana Mitra Das, he discusses metrics reflecting environmental impacts:
Q. What is the core of your research?
A. I am the co-director of the Wharton Climate Center.

My research studies the effectiveness of energy and environmental policies. I look at how these can be efficient at reducing pollution but can at times have unintended consequences, like being very expensive for tax payers. I also study carbon trading markets and policies which improve the fuel efficiency and local air pollution emissions of vehicles. Recently, I’ve begun to study land protection policies as well.

Q. Which are the three kinds of emissions investors are focusing on now?
A. One categorisation is Scope One, Two and Three emissions. Scope One are from sources owned and controlled directly by a firm — that could be like a refinery which uses natural gas for an industrial furnace. Scope Two emissions are associated with the electricity, heating and cooling a business purchases — these are part of the life cycle emissions of a firm’s products. Scope Three emissions result from activities which are upstream or downstream in the value chain.

A company doesn’t directly control these and they can be very hard to quantify — consider a car manufacturer importing leather for its seats from Brazil. They could indirectly be causing tropical deforestation — that’s part of Scope Three emissions.


Investors care significantly about all three categories now. Scope Two and Three are indirect emissions but they could be regulated down the road — that would increase the cost of the energy or inputs a business buys, affecting its cash flows and profits.

Q. With climate risks, how are investors allocating capital or managing their oversight of businesses?
A. Broadly speaking, investors are doing three things — first, they engage with the companies they are partial owners of through proxy voting at shareholder meetings or talk to the management directly about, say, shifting to a lower carbon strategy or better climate disclosures. In extreme cases, they can even vote out board members, as in Exxon Mobil in 2021 when a majority of shareholders elected three new board members proposed by an activist hedge fund. They can also divest, sell or deliberately decide not to own high carbon stocks. Another option is to align with companies which are currently high carbon but have a credible commitment to reducing their emissions.

Q. Are key principles emerging that are helping investors measure climate risks in their portfolios?
A. There are all kinds of metrics, scorecards, dashboards and third party companies offering ESG reporting services — but it’s very difficult to compare ESG performance across industries. There is a push for standardised reporting in response to new disclosure regulations in the European Union (EU) and a similar ongoing process in the United States — hopefully, that will make it easier for investors to assess climate risks between firms on an apples to apples basis.

Q. How much of a risk is greenwashing to accurate climate reporting?
A. It is a problem — interestingly, to some extent, it tells you firms are worried enough about climate risks to go through the trouble of doing this. The lack of data and incomplete unified ESG reporting frameworks, especially for Scope Three emissions, give firms leeway for selective reporting and greenwashing. Hopefully, as more standardisation happens as a result of regulations, it will become harder to do this.

Q. How are climate risks impacting debt and real estate markets now?
A. Recent studies have found climate risks — specifically floods — are impacting housing markets. One study found in Florida, high-flood risk homes stay in the market for longer now and ultimately sell for less. Other studies have looked at municipalities facing high risks of flooding — their municipal bonds receive less favourable terms. Investors are wary about lending them money because of potential future flooding and lower property values.

Another effect is wildfire risk — California has seen several insurers pull out of the market as their losses from home owners’ insurance premiums have accumulated.

Q. Why did the Ukraine crisis, which raised fossil fuel prices, see more usage?
A. Initially, the Ukraine crisis led to an oil and gas shock which caused very high prices. But generally, prices have come down as the immediate impacts of the crisis subsided — importantly, there was pent-up Covid recovery demand for transportation and energy.

It is not so certain though that this growth in oil and gas will continue. The International Energy Agency (IEA) predicts that growth in oil demand globally could slow to almost zero by 2028 as many regions start moving in a greener direction, aided by more stringent regulations.

Q. The IEA also discusses subsidies as supporting the oil and gas sectors — do you see these gradually diminishing?
A. Subsidies for fossil fuels are very pervasive worldwide — while some countries have tried to change these, they’ve tended to be quite persistent. This is one of the biggest hidden problems in the transition to green energy — I see this as a major issue for reform which is needed to move in a lower carbon direction.

Views expressed are personal