It seems that there is a growing doubt regarding the efficiency
and the results that will be achieved through the Carbon market.
Even worst, recent findings document that there is a
potential for a Carbon Bubble which will have tremendous negative effects to
carbon trading and subsequently to the efforts for Climate Change abatement.
Here are some of the latest developments, as they are
described in the Carbon Tracker report available at the relevant web-site.
The Carbon Tracker initiative is a new way of looking at the
carbon emissions problem. It is focused on the fossil fuel reserves held by
publically listed companies and the way they are valued and assessed by
markets. Currently financial markets have an unlimited capacity to treat fossil
fuel reserves as assets. As governments move to control carbon emissions, this
market failure is creating systemic risks for institutional investors, notably
the threat of fossil fuel assets becoming stranded as the shift to a low-carbon
economy accelerates.
According a research made by the Potsdam Institute, in order
to reduce the chance of exceeding 2°C warming to 20%, the global carbon budget
for 2000-2050 is 886 GtCO2. Minus emissions from the first decade of this
century, this leaves a budget of 565 GtCO2 for the remaining 40 years to 2050.
But the total carbon potential of the Earth’s known fossil
fuel reserves comes to 2795 GtCO2. 65% of this is from coal, with oil providing
22% and gas 13%.
This means that governments and global markets are currently
treating as assets, reserves equivalent to nearly 5 times the carbon budget for
the next 40 years. The investment consequences of using only 20% of these
reserves have not yet been assessed!
The fossil fuel reserves held by the top 100 listed coal
companies and the top 100 listed oil and gas companies represent potential
emissions of 745 GtCO2. This exceeds the remaining carbon budget of 565 GtCO2 by
180 GtCO2.This means that using just the listed proportion of reserves in the
next 40 years is enough to take us beyond 2°C of global warming. On top of this
further resources are held by state entities.
Given only 20% of the
total reserves can be used to stay below 2°C, if this is applied uniformly,
then only 149 of the 745 GtCO2 held by listed companies can be used unabated.
Investors are thus left exposed to the risk of unburnable carbon. If the 2°C
target is rigorously applied, then up to 80% of declared reserves owned by the
world’s largest listed coal, oil and gas companies and their investors would be
subject to impairment as these assets become stranded.
The top 100 coal and top 100 oil & gas companies have a
combined value of $7.42 trillion as at February 2011. The countries with the
largest greenhouse gas potential in reserves on their stock exchanges are
Russia, (253 Gt CO2), the United States, (156.5 Gt CO2) and the United Kingdom,
(105.5 Gt CO2). The stock exchanges of London, Sao Paulo, Moscow, Australia and
Toronto all have an estimated 20-30% of their market capitalization connected
to fossil fuels.
The UK has less than 0.2% of the world’s coal, oil and gas
reserves, and accounts for around 1.8% of global consumption of fossil fuels.
Yet the CO2 potential of the reserves listed in London alone account for 18.7%
of the remaining global carbon budget. The financial carbon footprint of the UK
is therefore 100 times its own reserves.
London currently has 105.5 GtCO2 of fossil fuel reserves
listed on its exchange which is ten times the UK’s carbon budget for 2011 to
2050, of around 10 GtCO2. Just one of the largest companies listed in London,
such as Shell, BP or Xstrata, has enough reserves to use up the UK’s carbon
budget to 2050. With approximately one third of the total value of the FTSE 100
being represented by resource and mining companies, London’s role as a global financial
centre is at stake if these assets become unburnable en route to a low carbon
economy.
The Carbon Tracker report mentions that “In the past decade
investors have suffered considerable value destruction following the mispricing
exhibited in the dot.com boom and the more recent credit crunch. The carbon
bubble could be equally serious for institutional investors – including pension
beneficiaries - and the value lost would be permanent”.
The authors believe (and I also share the same opinion) that
today’s financial architecture is not fit for purpose to manage the transition
to a low-carbon economy and serious reforms are required to key aspects of
financial regulation and practice firstly to acknowledge the carbon risks
inherent in fossil fuel assets and then take action to reduce these risks on
the timeline needed to avoid catastrophic climate change.
They also add that “The regulatory regimes covering the
capital markets need realigning to provide transparency for investors on the
assumptions behind valuing unburnable carbon. With the global economy following
the fortunes of the financial sector, it is essential to create capital markets
which are robust enough to deliver an economy which can prevent dangerous
climate change. Unless a more long-term approach is required by regulators, the
shift in investment required to deliver a low carbon future will not occur.”
