Fossil Fuel Investment Spells 'Carbon Bubble' for Financial Markets
New study finds financial markets 'vulnerable' after failure to account for 'catastrophic' effects of carbon reserves
The financial markets racing to invest in Canada's untapped oil and gas reserves have grossly ignored the alarm raised by leading scientists and environmental watchdog groups leaving economies dangerously vulnerable to a "carbon bubble," cautions a new study published by the Canadian Centre for Policy Alternatives (CCPA).
"There has been a general failure among pension funds to account for climate risk, and a tendency to view any screening for environmental purposes to be detrimental to financial performance," says Marc Lee, CCPA Economist and author of Canada's Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds. "Our analysis turns this on its head: by not accounting for climate risk, large amounts of invested capital are vulnerable to the carbon bubble."
CCPA makes the argument that those who have heavily invested in carbon reserves have not taken into account the long-term unsustainability of fossil fuels. Though the study specifically examines the effect of the "bubble" on the Canadian economy, the lesson can be transferred to any markets that are heavily invested in oil and gas reserves.
"Business-as-usual for the fossil fuel industry is incompatible with the need to keep the global temperature increase to 2°C or less," added Lee. "The recent experience of high-tech and housing bubbles should serve as a stern warning to investors and policy makers."
In response to the report, environmentalist and pioneer behind the fossil fuel divestment movement Bill McKibben tweeted, "Doing the carbon math for Canada...something has to change fast."
Despite the promises made by the Canadian oil and gas industries of endless energy reserves, the report estimates that at least 78% of Canada's proven oil, bitumen, gas, and coal reserves, and 89% of proven-plus-probable reserves are deemed "unburnable carbon" and cannot be safely combusted without causing "catastrophic climate change."
The implications of these frequently ignored but "unburnable" reserves will have consequences for both the fossil fuel industry and the financial markets, in particular pensions funds, who have invested substantially in practices that only spell disaster for the planet.
According to CCPA, by the end of 2011, the Toronto Stock Exchange had 405 listed oil and gas companies with a total market capitalization of over $379 billion.