Stranding our fossil assets or stranding the planet

By Helena Wright, Research Postgraduate, Centre for Environmental Policy

Earlier this month Carbon Tracker came to Imperial College London to discuss their report on ‘Unburnable Carbon’.  The report outlines research which shows between 60-80% of coal, oil and gas reserves of publicly listed companies are ‘unburnable’ if the world is to have a chance of keeping global warming below the globally-agreed limit of 2°C.  The event was followed by a lively debate.

The research, led by the Grantham Research Institute at LSE and the Carbon Tracker Initiative, outlines the thesis that a ‘carbon bubble’ exists in the stock market, as companies with largely ‘unburnable’ fossil fuel reserves are being overvalued.

In fact, the OECD Secretary-General Angel Gurria recently said:

“The looming choice may be either stranding those [high carbon] assets or stranding the planet.”

Digging a hole: ever deeper extraction, ever higher risks

The report found that despite these systemic risks, companies spent $674 billion last year to find and ‘prove’ new fossil fuel reserves.  Capital expenditure has been increasing, while production has been decreasing, with reserves ever harder-to-reach.

Companies like Exxon and Shell have been spending record sums trying to prove reserves, that ultimately risk being stranded in future. The research by Carbon Tracker suggests this is a faulty business model, and in fact risks inflating the ‘carbon bubble’.

If these high levels of capital expenditure continue, we will see over $6 trillion allocated to developing fossil fuel supplies over the next decade – a huge sum of wasted capital.  Luke Sassams outlined evidence that some companies are now starting to pick up on this and rein in their CAPEX spending.

Investors and regulators are now picking up on the issue.  A Parliamentary Report on the ‘carbon bubble’ was released last week, and Chair of the House of Commons EAC, Joan Walley MP, said: “The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy”.

Carbon Entanglement: Getting out of the bubble

One issue that has been highlighted is the fact that some OECD governments receive rents and revenue streams from fossil fuels.  There is also a policy and credibility issue.  If businesses do not believe governments are serious about tackling climate change, they may carry on investing in fossil fuels and perpetuate the entanglement.

It seems that investors are currently backing a dying horse. But continued expenditure on finding new fossil fuel reserves might also be testament to the failures of recent climate policy.

Some have argued the ‘carbon bubble’ thesis relies on the assumption that governments will act on climate change. But arguably, there is not a question of ‘whether’ this government regulation will happen, but merely a matter of ‘when’.   There is a systemic financial risk to fossil assets, whether the necessary government regulation happens pre-emptively, or as a result of severe climatic disruption.

In the discussion that followed, the audience discussed whether the ‘carbon bubble’ will actually burst, and several participants suggested it was likely to burst unless it is deflated in a measured way. An audience member asked: “Don’t the investors have the information already?” and various participants felt they do not, demonstrating the need for enhanced disclosure on carbon risk.

Finally, the discussion turned to institutional investors who are investing in fossil fuels.  Some commentators recognise the irony.  How can a pension fund claim to be helping pensioners, while potentially risking the lives of their grandchildren?  It has also been found that several universities invest in fossil fuels, including Imperial College, sparking a recent petition. The risks of climate change highlighted in the recently released IPCC AR5 report, are driving calls for all types of investors to recognise the risks of high carbon investment.

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