Unburnable Carbon

marker Tim EllisAccording to a 2009 study in leading science journal Nature, in order to have an 80 per cent chance of not exceeding the dangerous climate change threshold of 2˚C, 80 per cent of all known fossil fuel reserves would have to be re-classified as ‘unburnable’.  This includes state owned reserves and those owned by listed companies like BP and Shell.

However the dramatic twist to this conclusion came several years later, when NGO Carbon Tracker revealed that already more fossil fuels were listed on the world’s stock exchanges than could ever be burned. Carbon Tracker says this means that if domestic and international climate change targets are to be met, then investments in fossil fuel companies are grossly overvalued. In effect, the financial system does not recognise the risk that climate change and energy policy might place on fossil fuel investments.

Remco Fischer from United Nations Environment Programme Finance Initiative said in September 2012: ‘We see how investors don’t seem to even take notice of the deep emission reduction commitments by 2050. These pledges are simply not taken seriously and I don’t blame the investors’.

Carbon Tracker has heroically championed the issue of unburnable carbon within the financial sector for a number of years. According to their latest report published in April 2013, their work is now being used by banks such as HSBC and Citigroup as well as credit rating agency Standard & Poor’s. In addition, the International Energy Agency discussed ‘unburnable carbon’ in their 2012 World Energy Outlook and leading economist Lord Stern now lends his name to their work.

Oil, gas and coal companies partially rely on their proven fossil fuel reserves to sustain their share prices. The greater the proven reserves a firm has, the higher the value of its shares. This means that fossil fuel firms are locked into an unsustainable business model that means they are chasing new reserves to replace those that have been depleted from production – even if climate change policy implies that they can never be used.

Carbon Tracker’s latest study reported that in the past 12 months alone, the world’s 200 top fossil fuel firms spent more than $674 billion on exploring and developing even more reserves. In fact, Carbon Tracker found that, on average, fossil firms were spending five times as much on exploration and development than shareholder dividends.

Investors, such as pension funds, provide the finance needed to get fossil fuels to markets by buying shares. And those investors expect high returns. But chasing high returns also comes at a high cost.

As BP and Shell are amongst the top five performers of quarterly dividend paying stocks on the London Stock Exchange they are an attractive investment. Many other fossil fuel extractive firms are also high up in the top 100. But, if UK and international climate change targets were adhered to, a large proportion of those listed fossil fuel assets could never be burned. What would be the impact in investors?

In January 2004, a company spokesperson from Royal Dutch Shell told journalists and investors that the company had reviewed its proven oil and gas reserved and concluded they had 20 per cent less than what had been reported. Almost immediately, investors saw around £3 billion wiped off the value of their investments. This example refers to just one oil company and the value was reduced by 20 per cent rather than the 80 per cent Carbon Tracker say is necessary. Yet it provides a picture of the scale of the impact of this over-valuation of unburnable carbon.

A readjustment across all fossil fuel extractive firms on the scale that Carbon Tracker proposes would affect anyone with a pension, mortgage or savings account. Given this, the continued flow of investment into exploration and bringing new fossil fuel reserves into production becomes a concern for every sector of the economy and the population as a whole.

Is carbon capture and storage (CCS) – the idea of reducing the carbon released into the atmosphere by capturing it and storing underground – the magic bullet? Carbon Tracker says no. Even with an optimistic investment scenario for CCS the carbon budget would only be extended by 12-14 per cent between now and 2050.

Carbon Tracker makes a number of recommendations to finance ministers, regulators, analysts, credit rating agencies and investors. But what can individuals do?

  • Ask your pension or mutual fund how they invest your money: Investors right down to the level of the individual can participate in a cultural shift to move money out of unburnable carbon
  • Any financial product that invests in FTSE 100 companies means a significant percentage being invested in extractive firms. Funds also invest in bonds which may have been issued by fossil fuel companies. Any investor holding such bonds is lending operating capital to those firms.
  • If you discover your money has been invested into fossil fuel companies, you can divest and move your money.
  • Put pressure on pension fund trustees to offer carbon-free pension schemes: Without a wide range of products, even those who actively seek to invest sustainably are restricted by the lack of products.

This article was first published in Sublime Magazine.

 

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