A climate fix would ruin investors

Opinion: humanity is making risky climate bets and ExxonMobil may be proved right

ExxonMobil says it does not envisage a low-carbon scenario of the kind many climate researchers advocate. The company believes the costs this would entail, and “the damaging impact to accessible, reliable and affordable energy resulting from the policy changes . . . are beyond those that societies, especially the world’s poorest and most vulnerable, would be willing to bear”. Photograph: Andrey Rudakov/Bloomberg

ExxonMobil says it does not envisage a low-carbon scenario of the kind many climate researchers advocate. The company believes the costs this would entail, and “the damaging impact to accessible, reliable and affordable energy resulting from the policy changes . . . are beyond those that societies, especially the world’s poorest and most vulnerable, would be willing to bear”. Photograph: Andrey Rudakov/Bloomberg

Wed, Jun 18, 2014, 01:00

How much of the world’s fossil fuel reserves will eventually be burnt? This is not just a question for those concerned with climate policy. It is also a question for investors even if they believe (absurdly, in my view) that the science of climate change is a hoax. What, they must ask themselves, would it mean for my investments in fossil fuel exploration and production if policymakers acted on their expressed belief in the science of climate change? Where would that leave investments in companies that own reserves today and are investing in exploration and additional production for tomorrow? Might all this spending prove a disastrous waste of resources that would be better deployed elsewhere?

Unburnable Carbon 2013 , a report produced by London-based non-governmental organisation Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, raises precisely this question. The conclusion is quite simple: burning known reserves of fossil fuels is incompatible with meeting the climate targets governments have set themselves. This being so, prudent investors should apply a discount to both the value of those reserves and returns on new investments in this sector. It is possible that much of this additional spending would prove fruitless. At worst, these assets might be “stranded” forever.

In 2010 governments agreed that emissions should be kept at a level intended to prevent an increase in global average temperatures of more than 2C above pre-industrial levels.

Using standard models, the report concludes that total emissions of carbon dioxide between 2013 and 2050 needed to deliver that outcome, at 80 per cent probability, would be 900 gigatonnes (billion tonnes), and 1,075 gigatonnes, even at 50 per cent probability.

Emissions

Then, between 2050 and 2100, emissions could be a further 75 gigatonnes, to stay below the 2C ceiling at 80 per cent probability, and 475 gigatonnes, to stay below it at 50 per cent probability. Carbon capture and storage would help, but not that much. Removing an annual flow of 8 gigatonnes of carbon dioxide in 2050 would require close to 3,800 such plants. Even so, unabated emissions must fall sharply.

According to the World Energy Outlook 2012, existing reserves of fossil fuels would, if burnt without capture of the carbon dioxide emissions, release 2,860 gigatonnes – roughly three times the global carbon budget. Burning this stock, without any further additions to it, would push the global average temperature up by well over 3C.

So what might this mean for the companies listed on the stock exchanges of the world? These hold reserves equivalent to 762 gigatonnes of emissions – about a quarter of the total, the rest being owned by non-listed entities, principally national oil companies. Listed companies are also seeking to develop potential reserves, to bring their total to over 1,500 gigatonnes. On its own the latter sum would exceed the limits on emissions until 2050 needed to keep the average temperature increase below 3C at a mere 50 per cent probability: thus there would be a 50 per cent chance that the rise would be greater. But listed companies would not be on their own: national companies would produce, too.

We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.