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March 13, 2013
Report Says Carbon Bubble Poses Risk to Financial Stability
    by Robert Kropp

Originally published in 2011, Carbon Tracker's report Unburnable Carbon wins a Farsight Award from UK-based Long Finance for its assessment of the financial implications of fossil fuel reserves.


The jury is still out on whether the increasing number of extreme weather events will force global regulators and corporations to finally acknowledge the necessity of dealing forcefully with climate change. Annual global emissions continue to set records while major corporations in the fossil fuel industries continue to enjoy success in the world's stock markets. And while the voices of climate denial in the US Congress seem muted compared to their histrionics of just a few years ago, there is still no binding international agreement to address what is perhaps the greatest challenge humankind has had to face.

But now, popularized in large part by an article in Rolling Stone authored by Bill McKibben of 350.org, another issue with compelling implications for investors has taken center stage in the climate change debate. Stranded assets refers to the fossil fuel reserves that will have to stay in the ground if global temperature increases are to be limited to two degree Celsius. The concept forms the basis of the growing divestment movement on college campuses, where students are pressuring their colleges and universities to divest their holdings in fossil fuel companies.

Stranded assets predates McKibben's Rolling Stone article. A 2009 paper published in Nature outlined the emissions targets that would be necessary for limiting global temperature increases to two degree Celsius. And a 2011 paper by Carbon Tracker, which won a Farsight Award from the UK-based Long Finance this month, lays out with more precision the implications for investors of stranded assets.

The paper, entitled Unburnable Carbon, reports that to limit global temperature increases to two degree Celsius, no more than 565 GtCO2 of fossil fuels can be burned by 2050. The amount represents just 20% of all fossil fuel reserves accounted for at present; therefore, "governments and global markets are currently treating as assets, reserves equivalent to nearly 5 times the carbon budget for the next 40 years," the report states.

"There are more fossil fuels listed on the world's capital markets than we can afford to burn if we are to prevent dangerous climate change," the report continues.

The report recommends that companies in the fossil fuel industries expand upon their current reporting practices to disclose potential CO2 emissions from their fossil fuel reserves. It further recommends that "systemic risks posed by the carbon asset bubble are addressed" by regulators. "The recent financial crisis has shown that capital markets were not-self-regulating and required unprecedented intervention," the report warns.

For investors, the current "era of gross capital misallocation" must come to an end, the report states. Short-term investing—or "investing in assets that attempt to generate benchmark beating returns"—and passive tracking of benchmarks hinder the accurate assessment of climate-related risks and opportunities.

Citing "a surprisingly limited amount of information available through mainstream financial data providers on the levels of fossil fuel reserves," the report states, "There is a strong requirement for more forward-looking information. The current limitations of voluntary reporting also demonstrate the need for investors to push for revised disclosure requirement by listing authorities."

In the US, two first-time shareowner resolutions attempt to engage coal companies in addressing the financial impacts of stranded assets. As You Sow and the Unitarian Universalist Association (UUA) have filed resolutions requesting that CONSOL Energy and Alpha Natural Resources report on impact of coal reserves that "may become unusable, unmarketable, or otherwise not economically viable as a result of greenhouse gas restrictions."

 

 
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