How much carbon dioxide would be released if all the proven fossil fuel reserves owned by public companies was burnt?
Carbon Tracker's estimate: 745 gigatonnes CO2.
How much carbon dioxide can we afford to release in the next 40 years to limit the probability of exceeding 2 degrees of global warming?
The answer: 565 Gt CO2
And that's before you worry about the government and privately owned reserves -- the total CO2 potential of all global reserves is 2,795 GtCO2. As a result, we can only afford to burn 20 percent of all proven reserves, according to our new research.
This illustrates how disconnected the world's capital markets are from any objectives to tackle climate change. It shows that the short-term profit based approach of today's financial instruments do not recognize the signals of long-term regulatory action to limit climate change.
This raises questions about the fundamentals of how we value companies based on their assets to derive a stock price. Companies are raising capital from the markets now to explore for more reserves to bring onstream in a decade or more, despite the fact we already have more than enough for the next 40 years.
Do you remember a few years ago when everyone assumed housing prices could only go up? The markets currently assume that carbon emissions can only go up, but governments have acknowledged the opposite is true. We have also seen that the market did not act to save itself, it merely started betting that it would go down.
If the carbon bubble is allowed to keep growing, and threatens to burst, there will be no altruistic response -- investors will lose and the planet will lose.
Why haven't we spotted this before? Part of the answer is the short-term incentives toward quarterly returns offered to those who manage our money. There is also a focus on last year's emissions and the annual flow of carbon into the atmosphere. We need to change our mindset to a long-term, forward-looking perspective of where these flows come from and the huge stores of reserves that are being built up. Perhaps truly integrated reporting will start raise questions about future climate risk associated with the reserves being booked as assets? At present we are monitoring the trickle coming from the bottom of the dam, forgetting the huge mass behind it.
Addressing this situation is also about a change in mindset. Looking at an individual company doesn't flag up any systemic issues. You don't realize your exposure to something until it goes wrong. Did people know what their exposure was to Gulf of Mexico deepwater oil drilling prior to the Deepwater Horizon disaster? Following the market indices is supposed to bring diversification through the spread across sectors. Yet some markets are becoming very extractives-heavy, which brings not only commodity and governance risks, but also a systemic carbon risk. London, for example, has seen 70 percent of its initial public offerings from the natural resources sectors in the first half of this year.
The map shows the huge CO2 potential being stored on the capital markets. The largest global investors have exposure across the world, as the assets that are listed on any stock exchange could be geographically located anywhere in the world. There is a clear connection between the capital raised in the global financial centers in New York and London, and the exploitation of fossil fuel reserves in China, India, Brazil and other rapidly developing economies.
Financing the transition to a low carbon economy will need capital, but at present the short-term cycle has locked much energy finance into extracting more fossil fuels, even though we are already over our limit.
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Based on this oil reserves on
Based on this oil reserves on the stock exchange should not be trading as a 0 risk investment, as the reserves may never be able to be burned due to the carbon ceiling. The trend will continue, and in our lifetime we will see a major impact on the climate, peoples health, and our lifespans due to these pollutants.
Sadly this will continue
Sadly this will continue because so many will push for Kyoto. Kyoto was a nightmare, and will only make things worse. Instead, we need a new approach. A smarter one.
The best approach that I have seen is to have nations tax ALL goods based on how much CO2 comes from the nation in which the final assembly, AND the primary sub-component came from. In doing this, it rewards all nations that make cuts and costs those that have high emissions.
There are 2 major issues.
The first is how to measure it. The answer is to use a satellite (OCO2 or any other) that measures CO2 in and CO2 out. IOW, for this set of calculations, we do not care WHERE it comes from, only what the difference is.
The second is how to normalize it FAIRLY. Most push CO2 per capitia. That is an insane measurement. The reason is that it rewards nations that do not control their population; it means that other nations will be punished for keeping their population under control; It does not take into account ag or economic production; it does not take into account many things. Instead, a much better measure is CO2 per sq km of land. With this approach, a nation can decide HOW to handle things. It allows them to decide if they need to control populations, economic output, etc.
This approach has some major benefits. The largest is that all nations become involved in cleaning up their mess, Right away. The developed ones have to clean up the most, and interestingly, the undeveloped ones have already low emissions, so they will not be caught by it. So, who will be caught and is not considered fully developed? Those that are on fast growth. They will not be able to follow the Chinese model of growth and simple throw loads of pollution into the air.
However, another benefit is that as a nation has successes, they tend to get sloppy. China is the PERFECT example of this. They are emitting far more CO2 than America. The problem is that while America is going downwards, China is not only going upwards, but accelerating. With this approach, it will give more and more negative impact on them to discourage that kind of growth esp. with that acceleration. Brazil is another, as is India, etc. These are all nations that are trying to cheat by following China's model. With this approach, it will bring pressure to bear rather quickly on nations that seek to go this route.
As to the economy, by applying the tax as a percentage of the max, and then slowly raising the max, we will not damage the economy, but put slow pressures on ALL governments to do the right things.
Very important reality check
Very important reality check for investors ! We will post a link to this on www.ethicalmarkets.com where you can also find my take on all this " From Rigged Carbon Markets to Green Investing "