Fossil fuels ‘risk being wasted assets’

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Sunset industry? Most fossil fuel reserves may prove wasted assets Image: Arne Hückelheim

Sunset industry? Most fossil fuel reserves may prove wasted assets
Image: Arne Hückelheim

By Alex Kirby

Investors should beware of backing companies involved in the exploitation of fossil fuels, analysts say – because climate change means there is a strong risk they will be wasted assets which will have to be left in the ground.

LONDON, 19 April – The first problem is this: most climate scientists agree that we cannot afford to burn the huge reserves of fossil fuel we have if we want any chance of preventing global average temperatures rising by more than 2°C.

The second problem: last year the world spent $674 billion finding and developing more fossil fuel.

If this continues unabated for ten more years, a report by an influential group of economists and scientists says, there will be a third problem: economies will have wasted more than $6 trillion of capital in pursuit of assets which are literally unburnable (and legally so too, if there are internationally agreed limits on fossil fuel emissions by 2023).

The research is published in a report, Unburnable Carbon: Avoiding wasted capital and stranded assets, produced by the Carbon Tracker Initiative and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.

The report says 60-80% of coal, oil and gas reserves of publicly listed companies could be classified as unburnable if the world is to cut emissions with an 80% probability of not exceeding global warming of 2°C.

This is a widely accepted limit aimed at avoiding dangerous climate change, though many scientists and some policy-makers now believe there is little chance of staying below it.

The research says the 200 listed companies analysed in the study own 762 billion tonnes of carbon dioxide (CO2) through their reserves of coal, oil and gas. This supports share value of $4 trillion and services of $1.5 trillion in outstanding corporate debt.

“Smart investors can already see that most fossil fuel reserves are essentially unburnable”

To cut greenhouse emissions so as to have an 80% chance of achieving the 2°C target, the fossil fuel reserves of these companies would probably be able to emit no more than about 125–275 billion tonnes of CO2 – around a quarter of the reserves they own.

Some policy-makers pin their hopes on carbon capture and storage (CCS), a technology still to be proven to work commercially. But the report says most of the companies’ reserves will remain unburnable unless there is a dramatic development of CCS.

It concludes that even a less ambitious goal, like a 3°C rise in average global temperature or more, which would pose significantly greater risks for the world and its economy, would still imply significant constraints on the use of fossil fuel reserves between now and 2050.

Yet companies in the oil, gas and coal sectors are seeking to develop further resources which could double the level of potential CO2 emissions to 1,541 billion tonnes.

The authors say current extractives sector business models are based on assumptions that there are no emissions limits, a strategy incompatible with a carbon-constrained economy.

The study says financial regulators should require companies to disclose the potential CO2 emissions that are embedded in fossil fuel reserves.

Finance ministers should initiate an international process to incorporate climate change into the assessment and management of systemic risk in capital markets.

And investors should challenge the strategies of companies which are using shareholder funds to develop high-cost fossil fuel projects.

“Start deflating the carbon bubble before it pops… Jump, before you are pushed.”

The authors say the report raises serious questions about the ability of the financial system to act on industry-wide long term risk, since currently the only measure of risk is performance against industry benchmarks.

Professor Lord Stern, author of the Stern Review Report on the Economics of Climate Change and chair of the Grantham Research Institute, said: “Smart investors can already see that most fossil fuel reserves are essentially unburnable… They can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision.

“But I hope this report will mean that regulators also take note, because much of the embedded risk from these potentially toxic carbon assets is not openly recognized through current reporting requirements.”

Jeremy Leggett of Carbon Tracker said: “The pooled message to regulators is clear. Do your job. Start requiring recognition of stranded carbon-asset risk in capital-markets processes. Start deflating the carbon bubble before it pops.

“The message to all the players across the financial chain… is also obvious. If the regulators won’t do their job, do it for them. Jump, before you are pushed.”

ShareAction (formerly Fair Pensions) has launched an online tool for pension savers to urge their funds to address the dangers of a global carbon bubble. – Climate News Network