Reviewing Our Budget

In the lead up to the IPCC 5th Assessment Report next week, let’s review the Unburnable Carbon report and remind ourselves how much carbon we have left to burn.

WHO: James Leaton, Nicola Ranger, Bob Ward, Luke Sussams, and Meg Brown, Carbon Tracker Initiative

WHAT: Measuring the amount of capital, assets and infrastructure that is currently overvalued and will be stranded or wasted when we act on climate change.

WHEN: 2013

WHERE: On the Carbon Tracker website

TITLE: Unburnable Carbon 2013: Wasted capital and stranded assets (open access)

As I’m sure all of you RtS readers are aware (and excited about!); the IPCC are releasing the first part of their 5th Assessment Report on Friday September 27th and then slowly drip feeding us chapter by chapter over the next year.

This is exciting for climate nerds like me because the last IPCC report came out in 2007, so it was looking at the state of climate science in a very different world – before the 2008 financial crash, before the weather started getting seriously weird and going haywire, before 98% of Greenland melted one summer, the Arctic Death Spiral, the failure of the 2009 Copenhagen talks…. yeah, a lot has happened since 2007.

So, in preparation for when this international ‘State of the Climate’ report comes out, I thought it would be good to look at the Carbon Tracker’s Unburnbable Carbon report from this year to remind ourselves of the budget of carbon we have left that we can spew into the atmosphere and still have a chance of not totally cooking the climate.

The Carbon Tracker report looks at two different budgets – if we want to have an 80% chance of not going beyond a certain amount of global warming, and if we want to have a 50% chance of not going beyond a certain amount of global warming. Given that we haven’t done much to lower global carbon emissions yet, I think we’ll push to a 50/50 chance of cooking our habitat (humans are great at procrastinating after all), but feel free to be optimistic and look at the 80% option.

Carbon budget from now until 2050 (from paper)

Carbon budget from now until 2050 (from paper)

If we start from the assumption that humanity will act to save ourselves and keep global warming at 2oC or less with a 50/50 chance, we have 1,075 Gigatonnes (Gt) of CO2 left to burn over the next 37 years.

Now, you might ask – what about carbon capture and storage? Everyone says that technology is going to be big! The Carbon Tracker people ran those numbers. The 2015 estimate for carbon capture and storage projects (CCS) is 2.25million tonnes of CO2 being sequestered over 16 projects. The idealised scenario for CCS is that it will be able to sequester around 8Gt of CO2 each year, which Carbon Tracker worked out would be 3,800 projects operating by 2050 and would only reduce the above carbon budgets by 125Gt. It definitely isn’t a ‘get out of jail free and burn the fossil fuels’ card.

Speaking of burning all the fossil fuels – how much do we have left? The World Energy Outlook, which gets released by the International Energy Agency each year estimated in 2012 (the 2013 report will be released in November this year) that there were total assets equivalent to 2,860Gt CO2 in the world. This is enough carbon to cook the atmosphere beyond 3oC and probably into the next mass extinction.

The report rightly points out that if we assume we want to save a livable climate and keep within the above carbon budgets, then between 65-80% of all the listed reserves for fossil fuel companies cannot be burned. It’s simple math: 2,860 is more than double the budget for keeping under 2oC with a 50/50 chance of blowing past the temperature.

But enough about trying not to cook the atmosphere – how about the important things – like what does it mean for financial markets?

Carbon Tracker looked at the capital expenditure by publicly listed fossil fuel companies to work out how much money is being spent trying to find new reserves of fossil fuels that will add to the list we can’t burn and are therefore being over-valued, because the market valuation assumes they will be burned and a profit will be made from burning it.

In 2012, the 200 listed fossil fuel companies spent $674billion on capital expenditure. $593billion of that was spent looking for more oil and gas, while $81billion of that was spent looking for more coal. If these kinds of spending continue (if the companies don’t admit that there is going to be an end to carbon pollution) over the next decade $6.74trillion dollars could be wasted looking for fossil fuels that have to stay in the ground.

As the authors say: ‘this has profound implications for asset owners with significant holdings in fossil fuel stocks’ because what investors are being sold is the lie that these reserves can be profitably sold and burned.

There’s also a lot of risk associated with this. Over the last two years, the amount of carbon being traded on the New York Stock Exchange has increased by 37% and in London it’s increased by 7%. This means that similar to the sub-prime loan crisis that precipitated the 2008 financial crash, all investors are exposed to carbon risk through the over-valuation of fossil fuel companies.

Map of oil, gas and coal reserves listed on world stock exchanges (from paper)

Map of oil, gas and coal reserves listed on world stock exchanges (from paper)

There’s a risk of carbon not being properly managed as a risk within stock portfolios which could create a carbon bubble that will burst as carbon starts being constrained, and there’s also the risk of stranded assets, where the fossil fuel companies sink all the capital expenditure into their projects only to find they can’t burn the carbon and there was no point in building the mine/gas well/oil platform in the first place.

The report states: ‘investors need to challenge the continued pursuit of potentially unprofitable projects before costs are sunk’. This makes sense also because oil and gas are becoming harder to get at (tarsands, tight oil, gas fracking, Arctic drilling), so the cost is going up and the profit margins are getting squeezed, unless the price of oil keeps climbing. This means that fossil fuels are going to increasingly become challenged by lower cost lower carbon options, because mining for sunshine is really not that hard.

So if we agree that we’ll stop burning carbon before we’ve cooked the atmosphere and therefore that means that 80% of the world’s fossil fuel reserves need to stay in the ground, what does it mean for the fossil fuel companies themselves?

Well, they may have some debt problems on the horizon. The report points out that even without a global climate change agreement the coal industry in the USA is looking increasingly shaky, just from new air quality regulations. They point out that if the business models unravel that quickly, these companies may have problems refinancing their debt when they mature in the near future (which is also a risk for investors). They point out that any company with tar sands exposure will also have stranded asset risk because the business model relies on high oil prices to be profitable.

Basically they show that traditional business models are no longer viable in energy markets that will be moving towards decarbonisation and that different information is going to be needed for investors to manage the risk of carbon in their portfolio.

In the final section of the report, Carbon Tracker gives a list of recommendations for investors, policy makers, finance ministers, financial regulators, analysts and ratings agencies for how we can avoid this financial carbon bubble. The recommendations include better regulation, shareholder engagement and resolutions, fossil fuel divestment, and better risk definition.

The full list of Carbon Tracker recommendations (click to embiggen) (from paper)

The full list of Carbon Tracker recommendations (click to embiggen) (from paper)

For what it’s worth, my recommendations would be to remove fossil fuel subsidies, stop looking for new reserves of carbon that we can’t burn and price carbon pollution. And as usual, stop burning carbon.

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One thought on “Reviewing Our Budget

  1. Pingback: Reviewing Our Budget | Amy Huva

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