Common use of Fuels Clause in Contracts

Fuels. For fossil fuel reliant energy and resource companies, the signals from the Paris COP are clear: governments - both at a national and sub-national level - have committed to a reduction in emissions over the long term; they have committed to building policy infrastructure to give effect to that transition in the form of carbon markets; and there is growing interest in carbon neutrality from investors and consumer bases. Given that the primary source of emissions is industrial and energy sources which are in the main reliant on fossil fuels, unless measures are implemented to negate emissions from such activities, the future use of fossils fuels and the development of fossils fuels reserves will be curtailed. There is also continuing and increasing reevaluation of investments into fossil fuels by the investment community, driven by the growing divestment movement. This investor led movement and the trajectory of government policy has led to increasing concern that many older high emitting fossil fuel assets are becoming stranded. The point was very clearly made at the COP by the Bank of England Governor who stated that under a 2°C carbon goal the "vast majority of reserves" of oil, gas and coal would become stranded. Indeed, measures such as the proposed OECD limitation on export financing for new coal assets would deal a significant blow to the coal sector. The Paris Agreement has simply reinforced this trend with post COP share price movements downwards and upwards for fossil fuel and clean energy stocks respectively.7 It will therefore be important for energy and resource companies to consider how to diversify towards less emissions intensive asset classes. Additionally, while the Paris COP signaled a reduction in reliance on fossil fuels, it is worth noting that the Agreement does not call for zero emissions to be produced altogether. Rather, as soon as possible after 2050 it calls for countries to have net-zero emissions, meaning that any emissions produced by a country should be offset by sinks. Therefore, these companies should ensure that investments are made into offsetting activities (through REDD+, ITMOs or other activities such as CCS) to ensure that any ongoing emissions can be justified by governments hosting emissions intensive assets. These companies ought to monitor NDC development in countries where they have operations and the development of the trading mechanisms under the Paris Agreement.