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phkamp

We'll see on monday when the stock exchanges open if this agreement actually matters.

If Oil/Coal companies tank: Yes

If not: No

Always follow the money.

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While I agree with you that following the money is best practice, there should only be a movement in price if the final agreement is significantly different to what was expected on Friday.

In regards oil the big producers are already flooding the market to try and kill alternatives. If something scares the likes of OPEC more than anything else it is cheap renewable energy. Wind and solar are getting very close to knocking out everything else at an oil price above $60 a barrel.

Arguably, cheap oil might exactly what clean energy needs right now, since environmentalism is a tough sell in bad economic times. (Paraphrasing Stewart Brand here...)

Trouble is, right now cheap oil hasn't been boosting the economy the way it usually does.

The value of oil and coal companies would not necessarily be that effected by say banning coal and oil 20 years out. The depreciation, depletion etc on their wells is typically less than that so they could pump their oil, not bother with new wells and maybe try moving to renewables. The oil price falling in the short term due to everyone pumping too much has a much larger effect. (disclosure, oil investor).

Yes the present value of these assets 20 to 30 years in the future at fossil fuel industry capital cost is not that high. Given how cheap long term interest rates are right now, just issue a bunch of long dated zero coupon bonds and buy options to scrap all the fossil fuel assets in 30 years time from the current owners.

Wasn't an agreement well known in advance? Shouldn't this have already been baked into stock prices?

And since oil prices are near 10-year lows, I think it seems the market's reacting.

I don't think anybody doubted they would sign something in Paris, and that is baked in, but the actual content wasn't known until after market close on friday.

Professional traders will have diversified away from fossil stocks due to the uncertainty, but on monday they will either jump back in, or stay even further away, depending on their take on the agreement.

Yes, crude oil is at record lows.

Apparently not.

$12.45 in 2115 dollars in 1998 is the low.

http://inflationdata.com/Inflation/Inflation_Rate/Historical...

The stock market isn't magic, its traders will arrive at some sort of consensus position reflected in prices, through reading the global media like the rest of us, about how serious the intentions are around the deal, but that doesn't mean they know how the governments of, say, Brazil, the UK, Saudi Arabia, Poland, Indonesia, Spain, Ireland, or India are going to react to it over the next few years. A reality of concerted action could just as well emerge over five years as policies come into place. Following the money, i.e. stock prices of oil companies, will be an accurate way of judging how successful an agreement like this is in altering the global investment markets, but only after time. On Monday, you're not going to get much more than the immediate impression.

in local politics I hear about plans to buy out large polluters (here we have coal-powered electricity generation).

they're usually variations on:

1. a big pile of (typically public) money is given to the most polluting companies

2. in return those companies exit the industry

i don't think such policies are a great idea, but they might be an example of action that would (i) be actually progressive re: greenhouse emissions, and (ii) might make the share price of such a company go up, supposing the pay out were large enough.

this little thought experiment aside, the heuristic of following the change in the market is probably a reasonable one.

It is probably the most fair approach since why should the owners of fossil fuel assets pay most of the cost when the benefits flows to everyone. It would also remove the cause behind all the FUD being spread by the fossil fuel industry.

The way to do this on the cheap is to buy the rights to shut down the assets at some point in the future. Buying an option to shut down all fossil fuel production 30 years in the future is relatively cheap. Take for example Exxon. It has $252 billion is physical assets [1] and its cost of capital is 9.11% [2] The present value of these assets if we were to scrap the lot in 30 years time is only $18.4 billion (252 / 1.0911^30). We could pay them something above this level today and it would be financially rational for them to sell us the option.

1. https://finance.yahoo.com/q/bs?s=XOM+Balance+Sheet&annual

2. http://www.gurufocus.com/term/wacc/XOM/Weighted%2BAverage%2B...

Interesting. There's perhaps still the open question of exactly who should pay the owners of fossil fuel assets.

A few academics over here (in Australia) recently proposed that the most polluting energy generators be forced to exit the market, and that they would be paid compensation by their competitors, as their competitors stood to profit from the reduction in competition.

That was a pretty interesting argument. In the long run, I believe the public still ends up paying for everything (due to increased energy prices), but perhaps it would be a more politically acceptable way to wind down some of the more polluting companies.

Personally I think this kind of approach is far more complicated, and far less efficient than an appropriately priced carbon tax, but we don't have one of those.

The people who should pay are the people who are going to benefit - future generations including the people who are not even born yet. Luckily we have a magic mechanism for doing this - the long term zero coupon bond [1]. We just issue zero coupon bonds and use the money to buy up fossil fuel assets and build replacements. The cost gets shifted onto the people in the future who will benefit from not living in a world 5˚C hotter.

I actually gave a talk about this years ago - I will try and find my slides and put them up somewhere

Edit. I posted the slides to my blog [2].

1. https://en.wikipedia.org/wiki/Zero-coupon_bond

2. http://www.tillett.info/2015/12/13/preventing-global-climate...

Oil/coal companies could tank for any of a number of reasons.

Note in particular that the oil price reached a new low on Friday, after declining for a week following the no-action OPEC meeting on Dec. 4.

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