Suppose you weren’t worried that we humans are destroying our water supply and eroding our ability to feed ourselves by burning coal and gas and oil and hence changing climate. Suppose you thought that was all liberal hooey. What might worry you about fossil fuels instead? How about a six trillion dollar bet, including a big slug of your own money, on people not doing what they have said they are going to do, and that some have already sworn to do in law?
Six trillion dollars is what oil, gas, and coal companies will invest over the next ten years on turning fossil fuel deposits into reserves, assuming last year’s level of investment stays the same. Reserves are by definition bodies of oil, gas or coal that can be drilled or mined economically. Regulators allow companies, currently, to book them as assets, and on the assumption that they are at zero risk of being stranded - left below ground, "value"unrealized - over the full life of their exploitation. Yet a report published today shows they are at very real risk of being stranded, and in large quantity.
Governments agreed in 2010 to keep global warming below two degrees. The Carbon Tracker Initiative, a group of concerned financial analysts based in London, has teamed up with the Grantham Institute, a climate research centre, to calculate how much carbon it would take to reach that two degree threshold, and what it means for the capital markets. By this calculation, fully 60 to 80% of oil, gas and coal reserves listed on stock exchanges are unburnable.
The six trillion dollar bet is that this calculation remains entirely theoretical, and that fossil-fuel companies will be allowed to keep pumping up the carbon bubble by investing more cash to turn resources into reserves, and continue booking them at full value, assuming zero risk of devaluation. It's a bet that effectively says to government: “nah, we don’t believe a word you say. We think you’ll do nothing about climate change for decades."
Yet the British government, for one, has signed its targets into law, and the Copenhagen Accord brokered by the Obama administration in 2009 specifically sets 2 degrees as its goal. And all governments at the most recent annual climate negotiations have agreed to set legally binding targets at the 2015 climate summit in Paris.
Both companies and ordinary citizens ought to be very worried by this disconnect between capital markets and climate policymaking. This is because so much of the value of stock exchanges involves pension money, and so much of peoples’ prosperity hinges on the value of their pensions. HSBC recently calculated that shares in coal companies could be devalued by 40-60% in a world acting on the climate threat.
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Yet vast pension assets are invested in coal. The ratings agency Standard and Poor’s recently concluded that the business models of tar sands companies could be invalidated in a world acting to constrain carbon. Yet vast pension assets are invested in tar sands.
The six trillion dollar bet also involves two mandatory side bets. The first is that the news on climate change doesn’t get worse than it already is, so putting governments under even more pressure to act on carbon than they already are.
Sadly, we and many like us think it will, especially as natural amplifiers to global warming, like melting permafrost, kick in. For this reason we think that the Carbon Tracker Grantham figures are conservative: if they are wrong, they are much more likely to be wrong on the down side.
The second side bet is that the new civil resistance to fossil fuels won’t add significantly to the pressure on governments to act. We think it will, for reasons you can see on the 350.org website, and in the rising tide of peaceful direct action on streets, in campuses, on solar rooftops, and elsewhere across society.
The pooled message to regulators, from Carbon Tracker analysts and 350.org activists alike, 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, from ratings agencies through accountants, to actuaries, investment advisors and all the rest, is also obvious. If the regulators won’t do their job, do it for them. Jump, before you are pushed.