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Former central bank governor Mark Carney leads the United Nations-convened Net-Zero Banking Alliance, which is the UN special envoy on climate action and finance.POOL/Getty Images

Canada’s six largest banks last week became the latest global financial institutions to join former central bank governor Mark Carney’s efforts to steer lending away from fossil fuels toward renewable energy investments.

By joining the United Nations-convened Net-Zero Banking Alliance, led by Mr. Carney, the UN special envoy on climate action and finance, the big six banks formally committed to shifting their lending away from projects and activities that generate greenhouse gas emissions “to align with pathways to net zero by mid-century, or sooner.”

While RBC, TD, CIBC, BMO, Scotiabank and National Bank did not explicitly commit to divesting from the oil and gas sector, their move to join the NZBA ahead of next month’s COP26 climate conference in Glasgow puts them in step with their peers in the developed world in pledging reduced investment in fossil fuels in the face of pressure from shareholders and environmental activists.

Indeed, since the International Energy Agency (IEA) warned in May that new fossil fuel developments must cease in order to reach global net zero by 2050, the list of banks and pension funds reducing or eliminating oil investments has grown rapidly. It now includes Caisse de dépôt et placement du Québec, which last month announced plans to sell off its shares of oil sands leader Suncor Energy Inc. and a handful of foreign oil companies.

Depending on your perspective, the oil and gas divestment trend in the West is either an urgent necessity, as the race to limit global warming to 1.5 C by 2050 enters its make-or-break phase, or a misguided attempt at virtue signalling that will empower a small number of undemocratic petrostates just as energy demand soars in the developing world in the coming decades.

Until quite recently, the urgent necessity narrative appeared to be winning out over the misguided virtue signalling thesis. But a sudden energy crunch has underscored just how destabilizing a reduction in Western fossil fuel supply could become.

Energy shortages in Europe and China that have sent prices for oil, natural gas and coal through the roof – and protesters into the streets – risk becoming more common if renewables are unable to pick up the slack. Indeed, state-owned oil companies in Saudi Arabia, Kuwait, the United Arab Emirates and other undemocratic countries appear to be counting on it. As free-world oil declines, the non-free world is poised to profit.

“The world’s hugely encouraging clean energy momentum is running up against the stubborn incumbency of fossil fuels in our energy systems,” IEA executive director Fatih Birol said last week as the Paris-based agency released its 2021 World Energy Outlook.

The IEA’s May report signalled its transformation from neutral observer to spiritual guide for the net-zero movement in the wake of growing criticism that its previous forecasts for long-term oil demand served to delay the transition to clean energy by encouraging investment in fossil fuels. But the agency even admitted last week that the world is nowhere near on track to reach net zero by 2050.

“If all today’s climate pledges are met, the world would still be consuming 75 million barrels of oil per day by 2050 – down from about 100 million today,” the agency said last week, adding that demand would fall to 25 million barrels a day if countries followed its “pathway to net zero” by quadrupling investments in renewables and halting new fossil fuel developments.

The U.S. Energy Information Administration’s latest International Energy Outlook offers a dramatically different perspective on future fossil fuel demand. It projects that, “if current policy and technology trends continue,” global energy demand will increase 50 per cent by 2050 as populations increase and living standards rise in the developing world. Under the EIA’s Oct. 6 outlook, “both OPEC and non-OPEC oil production grow over the projection period, but OPEC production grows at almost three times the rate of non-OPEC production between 2020 and 2050.”

U.S. President Joe Biden’s recent call for OPEC members to increase oil output, amid falling U.S. crude production, illustrates the dilemma Western leaders face as they pledge to reduce domestic emissions while alleviating price pain at the pump. Mr. Biden, who cancelled a presidential permit for the Keystone XL pipeline on his first day in office, has been criticized for turning to OPEC to solve his problems instead of facilitating more domestic oil production.

The EIA expects U.S. oil production to average about 11 million barrels a day in 2021, down from almost 13 million in 2019. U.S. consumption is projected to rise by more than 1.5 million barrels per day this year, to 19.7 million, and another 900,000 barrels a day in 2022.

“There is a looming risk of more turbulence for global energy markets,” the IEA’s Mr. Birol said, warning that a “major boost in clean energy investment” is quickly needed to offset declines in fossil fuel investments in the West.

Initiatives such as Mr. Carney’s NZBA promise to make it much more difficult to finance oil and gas production in democratic countries such as Canada. They could also help make people such as Mr. Carney very popular in OPEC circles.

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