Financially Manage the Carbon Bubble Before Its Bursts

It is well known by now that climate change will have an adverse financial impact on countries, communities and businesses. What is not so, is that mitigating it will also create serious impacts on global finances. In the report “Unburnable Carbon” by London thinktank Carbon Tracker, a “carbon bubble” could burst with meaningful climate action, putting at risk millions of dollars in hundreds of companies. Read more

Global warming: Climate change needs action but it has a cost

By Pilita Clark in Financial Times (4 November 2012):

Money could go up in smoke

The plodding pace of global talks on curbing climate change is familiar to anyone with an interest in the issue.

Governments have spent nearly two decades trying to stem the carbon dioxide emissions scientists say are responsible for global warming, and yet they keep increasing.

But what if this changed? What if countries agreed to take more urgent action to cut back the carbon emissions produced by burning fossil fuels such as coal, oil and gas?

Or what if nations sped up the individual efforts many have taken in recent years, such as China’s goal of reducing the carbon intensity of its energy supply or California’s emissions trading scheme?

Few have bothered to spend much time on this question – which is hardly surprising given the pace of global action.

But one thinktank in London, Carbon Tracker, has studied the potential financial effects of serious climate action, which has more of an impact than some expected.

The report, “Unburnable Carbon”, came out last year and concluded the world’s financial markets were carrying a “carbon bubble”, meaning investors are putting millions of dollars into hundreds of companies that could be in trouble if meaningful climate action were ever taken.

Its argument is based on estimates that to have an 80 per cent chance of limiting global warming to 2C – the level scientists say should be met to avoid potentially dangerous climate change – only 565 gigatons of carbon dioxide should be emitted between now and 2050.

The world’s proven coal, gas and oil reserves already amount to nearly five times that amount, and the reserves held by the top 100 listed coal companies, along with the top 100 oil and gas companies, come to 745gt – still far more than the 565gt “budget” for the next 40 years.

The 2C target is not entirely fanciful: it was included in the outcome of the 2010 global climate talks in Mexico, though how it is to be achieved is unclear given countries are now aiming at finalising a climate deal by 2015 that would not take effect until 2020.

Still, if action is taken after 2020, at least one large bank says the impact could be significant.

“This has potentially profound implications for the natural resources sector, notably producers of coal, the most carbon intensive fossil fuel,” analysts at HSBC wrote in a June 2012 research note that examined the issues raised in the carbon bubble report.

If constraints on carbon emissions were imposed after 2020, they could reduce coal asset valuations by as much as 44 per cent, HSBC said, and the impact would hit some companies harder, depending on how much they depended on coal for their revenues, and by extension, stock exchanges on which more of those companies were listed, such as London, where the mining sector makes up about 12 per cent of the FTSE 100 index.

HSBC is not the only financial body to have taken an interest in the Unburnable Carbon report.

Pension funds in the UK, Australia and South Africa have also been looking at it, says its lead author, James Leaton, a consultant on sustainability issues.

One Australian pension fund manager, Local Government Super (LGS), has used its arguments to back a green shares option that excludes coal mining, an important industry there.

The report also led Carbon Tracker’s chairman, Jeremy Leggett, and other financial sector figures with an interest in climate, to meet Andy Haldane, the Bank of England’s executive director for financial stability, this year to discuss the idea that the carbon bubble could pose a risk to stability in the UK.

It is far from clear the Bank will act on such warnings. A spokesman declined to comment when asked if any action had been contemplated since the Carbon Tracker meeting.

That is no surprise says Milton Catelin, chief executive of the World Coal Association, who argues that until there is evidence of a binding global agreement to limit carbon emissions, investors should not be concerned.

“It’s a big ‘if’, isn’t it,” he says. “If there is concerted action on climate change, there may be repercussions.

“But you could just as easily say if there is concerted action on global poverty, companies that have shares in coal might actually be more valuable.

“So, I don’t know why you would assume action on climate change is more likely than action on poverty.”

Mr Leaton disagrees. “We’re not hanging it all on a global climate deal,” he says, explaining countries were taking actions of their own – such as the US Environmental Protection Agency’s recent efforts to curb coal plant pollution – and technological advances in renewable energy also posed a risk to fossil fuel use.

“There is a range of measures that add up to making fossil fuel less competitive,” he says.

But surely investors would be aware of such changes and have plenty of time to react?

Not necessarily, says Nick Robins the head of HSBC’s climate change centre of excellence, who co-authored the bank’s coal report.

This is a long term problem and markets have a very short-term focus, he says, “so the market is likely to be surprised”.

“There’s an impression people can trade out of these sorts of problems in time but one of the things we saw in the financial crisis in 2007 is that this is not always possible.”


Leave a Reply