Carbon asset bubbles set to burst?
There is a rapidly approaching moment of truth for the world’s stock markets.
According to Unburnable Carbon, their $4trillion evaluation of the oil, coal and gas energy reserves of the world’s top 200 energy companies can never be safely realised.
Yet $674 billion was spent in 2012 to find and develop new but potentially stranded carbon assets. In the UK, the Chancellor’s commitment to new multi-billion subsidies for oil and gas extraction plays it part in a new sub-prime crisis.
But if anything, trade on the London, New York and Moscow Stock Exchanges is getting more carbon intensive. According to Unburnable Carbon from the Carbon Tracker Initiative and the LSE’s Grantham Institute, the carbon content of total coal, oil and gas reserves listed by companies on the world’s stock exchanges is about 762 gigatonnes of CO2 (a gigatonne being a billion tonnes).
To get a sense of the link between carbon emissions and the economy,for example:
- 2 tonnes of carbon dioxide (CO2) are emitted to make 1 tonne of steel.
- 1 tonne of CO2 is emitted for every Megawatt hour (MwH) of electricity from a coal-fired power station.
Carbon dioxide (CO2), a greenhouse gas accumulating in the atmosphere, is driving global warming. Hurricane Sandy told most Americans that the climate was changing. Conditions in Britain this spring is our message from the planet.
But there is a massive difference between reserves – the carbon locked up in proven reserves of oil, coal and gas – and safe assets – what can be “safely” burned if we are to have a halfway decent chance of meeting the internationally agreed target of limiting global warming increase to 2 degrees centigrade.
Unburnable carbon estimates that about 2,860 gigatonnes of carbon emissions are embedded in the world’s fossil fuel reserves. But only about one-fifth of these reserves, or 600 billion tonnes, is safely available in our carbon “budget” for the period 2011 to 2050. Reserves owned by listed companies, if burnt so that the CO2 is released to air, would on their own break the carbon budget.
Yet because listed companies own about a quarter of all listed reserves, up to 80% of the coal, oil and gas reserves they own must be considered ‘unburnable’ if the world is to have a 50-50 chance of not exceeding global warming of 2°C.
A year ago, the Governor of the Bank of England was warned that the massive reserves of fossil fuel assets listed on the London Stock Exchange are what they called “sub-prime” assets and posed a systemic risk to economic stability. The diversion of capital investment away from carbon-intensive sources – from oil exploitation to motor vehicle manufacture using conventional petrol engines – is not occurring rapidly enough
Unburnable Carbon makes two key recommendations for government:
- All extractive companies must provide financial regulators with the CO2 emissions potential of their oil, coal and gas reserves.
- Incorporate climate change into investment risk assessments.
These new measures can readily be added to the new requirements on greenhouse gas reporting as part of the disclosure requirements for large listed companies. As Caroline Lucas MP argued in Parliament last December, whether an oil company reduces its business travel and carbon footprint provides no real idea to investors of the scale of their unburnable assets.