Several international agreements have concluded that we need to cap global warming at 2 degrees Celsius above preindustrial levels. But here’s the thing: You wouldn’t know that from looking at the world’s stock markets. Major oil, gas, and coal companies are championing reserves that, if burned, would take us well beyond that threshold. And yet investors seem unconcerned. They are acting, not unreasonably, as if governments will never follow through on what they said at Cancún and Copenhagen.
Or at least that’s one explanation you can have after reading Unburnable Carbon 2013, a major report exploring the mismatch between government promises and what investors are saying about the future. The other explanation, one favored by the report, is that there’s a huge bubble in fossil fuels, one that’s bound to pop once the “carbon-constrained world” really becomes constrained. But, frankly, that doesn’t seem likely. The planet seems more likely to explode before the “bubble” does.
The report is from Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment, at the London School of Economics. It finds that 60% to 80% of reserves of the top 200 publicly listed oil, gas, and coal companies is “unburnable,” if you look at the headroom provided by international agreements. “The markets appear unable to factor the long-term shift to a low-carbon economy into valuations and capital allocation,” it says.
Total reserves of fossil fuels equate to 3,153 gigatons of CO2, but the 2 degree limit would only allow 622 to 977 billion tons. It says carbon capture and storage–pumping emitted pollution underground–could offset 138 gigatons by 2050, allowing more burning, but only in an “idealized scenario.” The 200 companies spent a colossal $674 billion prospecting for reserves last year. And the report says that markets in New York and London have become “carbon-intensive” in the last few years.
The report says investors could get their fingers burned, if governments do finally regulate carbon emissions, and the companies find their assets “stranded”:
An implicit assumption is that the fossil fuels owned by listed companies will go on to be developed and sold and the capital released used to replace reserves with new discoveries. In the context of a declining carbon budget, these valuation models provide an inadequate guide for investors and need to be recalibrated.
Except you could argue that investor behavior is quite reasonable. The report shows we’re likely to break right through agreed carbon limits. But it provides little evidence that governments are going to do much about it.