Unburnable Carbon 2013: Wasted capital and stranded assets
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Unburnable Carbon 2013:
Wasted capital and stranded assets
In collaboration with2 |
About Carbon Tracker About the Grantham Acknowledgements
Carbon Tracker is a non-profit organisation working Research Institute on The contributors to this report were James Leaton,
to align the capital markets with the climate change
policy agenda. We are applying our thinking Climate Change and the Nicola Ranger, Bob Ward, Luke Sussams, and Meg
Brown. We would like to thank Mark Campanale,
on carbon budgets and stranded assets across
geographies and assets classes to inform investor Environment, LSE Nick Robins, Alice Chapple, Jemma Green, Chris
Duffy, Alex Hartridge, and Jeremy Leggett for
thinking and the regulation of capital markets. We reviewing the report, PIK Potsdam for assistance
The Grantham Research Institute on Climate Change
are funded by a number of US and UK charitable in using live.magicc.org, Jackie Cook at Cook ESG
and the Environment was established in 2008 at the
foundations. Research for data compilation and David Casey
London School of Economics and Political Science.
at DHA Communications for design.
If you wish to explore our data visually; share the The Institute brings together international expertise
finding with others; or ask your pension fund how on economics, as well as finance, geography, the Copyright © 2013 (Carbon Tracker & The Grantham
they are managing this risk, visit the online tool environment, international development and political Research Institute, LSE)
at www.carbontracker.org/wastedcapital economy to establish a world-leading centre for
policy-relevant research, teaching and training in Contact:
If you are an investor interested in the exposure
climate change and the environment. It is funded by James Leaton
of your portfolio to fossil fuel reserves, please
the Grantham Foundation for the Protection of the Research Director
contact us directly or through our Bloomberg page.
Environment, which also funds the Grantham Institute jleaton@carbontracker.org
for Climate Change at Imperial College London. www.carbontracker.org
twitter: @carbonbubble
Contact:
Bob Ward
Policy & Communications Director
R.E.Ward@lse.ac.uk
www.lse.ac.uk/grantham/
twitter: @GRI_LSE
Disclaimer
Carbon Tracker and the Grantham Research Institute, LSE, are not investment advisers, and make no representation regarding the advisability of investing in any particular company
or investment fund or other vehicle. A decision to invest in any such investment fund or other entity should not be made in reliance on any of the statements set forth in this
publication. While the organisations have obtained information believed to be reliable, they shall not be liable for any claims or losses of any nature in connection with information
contained in this document, including but not limited to, lost profits or punitive or consequential damages.Unburnable Carbon 2013: Wasted capital and stranded assets | 3
Contents Letter to readers
Our first report, in 2011, showed that based on current In view of all this, and mindful of the stakes in the
Executive Summary 4 understanding of an allowable carbon budget to keep carbon bubble issue, we hope that our second
below two degrees of global warming, there is more global report will prove useful to as wide as possible
Foreword 7 fossil fuel listed on the world’s capital markets than a constituency. We recognize that we are dealing
can be burned. Two degrees is a widely accepted with a risk mitigation exercise that begs involvement
Introduction 8 danger threshold for global warming, and many well beyond capital-markets research analysts and
governments have already started taking action. In economists. Given the stakes for pension value, for
1. Global CO2 budgets 9 our first report on unburnable carbon, we quantified example, should the carbon bubble go on inflating,
for the first time how bad the overshoot is, company the general public should certainly be concerned.
2. Global listed coal, oil and gas by company, and stock exchange by stock exchange. Accordingly, we welcome wide echoing of the
reserves and resources 14 We showed that nowhere across the financial chain unburnable carbon message by campaigners since
do players in the capital markets recognise, much our first report, notably in Bill McKibben’s much
3. Evolving the regulation less quantify, the possibility that governments will do quoted August 2012 article in Rolling Stone Magazine,
of markets for climate risk 23 what they say they intend to do on emissions, or some ‘Global Warming’s Terrifying New Math’, and the ‘350.
fraction of it. We noted how dysfunctional this is, and org’ campaign based on it. We commend that public
4. Implications for equity sketched what the players across the financial chain engagement. We hope our deeper analysis in this
would have to do in order to deflate the growing report will fuel more.
valuation and credit ratings 27 carbon bubble, not least the regulators.
Jeremy Leggett and Mark Campanale
5. Implications for investors 32 In this second report we dig deeper. In so doing we
are particularly pleased to partner with the Grantham Chairman and Founding Director
6. The road ahead: conclusions Institute and Lord Stern, a leading authority on the Carbon Tracker
and recommendations 36 economics of climate change.
Carbon Tracker’s work is now used by banks such as
References 38 HSBC and Citigroup and the rating agency Standard
& Poor’s to help focus their thinking on what a carbon
budget might mean for valuation scenarios of public
companies. The IEA is conducting a special study
on the climate-energy nexus which will consider the
carbon bubble. Together with our allies, we have
brought it to the attention of the Bank of England’s
Financial Stability Committee. We await their reaction
to this analysis with great interest.4 |
Executive Summary This CO2 budget is higher as it assumes greater
reductions in non-CO2 emissions, such as methane,
Listed companies face a carbon budget deficit
If listed fossil fuel companies have a pro-rata
which have a higher global warming potential. In other
Using all fossil fuels will breach the global allocation of the global carbon budget, this would
words, applying larger CO2 budgets depends on
carbon dioxide budget amount to around 125 - 275GtCO2, or 20 - 40%
further action to reduce non-CO2 emissions in areas
of the 762GtCO2 currently booked as reserves. The
In 2010, governments confirmed in the Cancun such as waste and agriculture.
scale of this carbon budget deficit poses a major
Agreement that emissions should be reduced to avoid The research also examines what alternative risk for investors. They need to understand that 60 -
a rise in global average temperature of more than temperature targets could mean for the amount of 80% of coal, oil and gas reserves of listed firms
2°C above pre-industrial levels, with the possibility fossil fuels that can be burnt. The analysis concludes are unburnable.
of revising this down to 1.5°C. The modelling used that even a less ambitious climate goal, like a 3°C rise
in previous analyses by Carbon Tracker and the IEA in average global temperature or more, which would The London and New York stock markets
showed that the carbon budget for a 2°C scenario impose significantly larger impacts on our society and are getting more carbon-intensive
would be around 565 – 886 billion tonnes (Gt) of economy, would still imply significant constraints on
carbon dioxide (CO2) to 2050. This outcome assumes The carbon embedded on the New York market is
our use of fossil fuel reserves between now and 2050.
that non-CO2 greenhouse gas emissions (e.g. dominated by oil. The level of embedded carbon has
methane and nitrous oxide) remain high. increased by 37% since 2011. London is more coal
Carbon capture and storage (CCS) doesn’t
focused, increasing its total CO2 exposure by 7% over
This budget, however, is only a fraction of the carbon change the conclusions
the same period. But other markets have higher levels
embedded in the world’s indicated fossil fuel reserves, CCS technology offers the potential for extending the of embedded carbon compared with their overall size,
which amount to 2,860GtCO2. A precautionary budgets for the combustion of fossil fuels. Applying notably Sao Paulo, Hong Kong and Johannesburg.
approach means only 20% of total fossil fuel reserves the IEA’s idealised scenario - which assumes a certain Markets in the south and east are raising capital
can be burnt to 2050. As a result the global economy level of investment that is not yet secured - extends primarily for coal development.
already faces the prospect of assets becoming the budgets to 2050 only by 125GtCO2.
stranded, with the problem only likely to get worse Capital spent on finding and developing more
if current investment trends continue - in effect, The budget is constrained beyond 2050 reserves is largely wasted
a carbon bubble.
Achieving a 2°C scenario means only a small amount To minimise the risks for investors and savers, capital
Stress-testing the carbon budgets of fossil fuels can be burnt unabated after 2050. In needs to be redirected away from high-carbon
the absence of negative emissions technologies, the options. However, this report estimates that the
Carbon Tracker, in collaboration with the Grantham carbon budget for the second half of the century top 200 oil and gas and mining companies have
Research Institute for Climate Change and the would only be 75GtCO2 to have an 80% probability allocated up to $674bn in the last year for finding
Environment at the London School of Economics of hitting the 2°C target. This is equivalent to just over and developing more reserves and new ways of
and Political Science, has conducted new analysis to two years of emissions at current levels. As a result, extracting them. The bulk of this expenditure was
stress-test the carbon budgets. This analysis estimates the idea that there could be a fossil fuel renaissance derived from retained earnings – pointing to the duty
that the available budget is 900GtCO2 for an 80% post-2050 is without foundation. of shareholders to exercise stewardship over these
probability to stay below 2°C and 1075GtCO2 for a
funds so that they are deployed on financially gainful
50% probability, confirming that the majority of fossil
opportunities consistent with climate security.
fuel remains are unburnable.Unburnable Carbon 2013: Wasted capital and stranded assets | 5
New business models are required Valuation and ratings aren’t routinely pricing Do the maths better
At the current rate of capital expenditure, the next stranded assets Institutional investors need better and more
decade will see over $6trn will be allocated to The 200 fossil fuel companies analysed here have future oriented investment appraisal to determine
developing fossil fuels. With a limited and declining a market value of $4trn and debt of $1.5trn. Asset a fair assessment of their investment risks and
carbon budget, much of this risks being wasted on owners and investment analysts have begun opportunities. Reserves replacement ratios could
unburnable assets. Listed companies have interests to investigate the implications of unburnable become reserves redundancy ratios going forward.
in undeveloped fossil fuel resources which would carbon. Analysis from HSBC suggests that equity Performance metrics that have served in the past
double the market burden of embedded carbon valuations could be reduced by 40 - 60% in a low to value companies and incentivise management are
to 1541GtCO2. The current balance between funds emissions scenario. In parallel, the bonds of fossil being turned on their head. Financial intermediaries
being returned to shareholders, capital invested in fuel companies could also be vulnerable to ratings from analysts to actuaries need to stress-test the value
low-carbon opportunities and capital used to develop downgrades, as recently illustrated by Standard & at risk against a range of future emissions scenarios
more reserves, needs to change. The conventional Poor’s. Such downgrades would result in companies to give asset owners a more forward-looking risk
business model of recycling fossil fuel revenues into paying higher rates to borrow capital, or if the rating analysis. This requires asset owners to demand
replacing reserves is no longer valid. drops below investment grade they could struggle valuation models from their investment advisers
to refinance their debt. which address a range of potential outcomes,
Risk needs redefining rather than just business as usual.
Currently the investment process tends to define Financial models that only rely on past
performance are an inadequate guide Regulators and investors need to review
risk as deviation from the performance of market
benchmarks such as indices. As a result, investors for investors their approach to systemic risks
and their advisers fear underperformance of their However, neither equity nor credit markets are The systemic risks threatening the stability of financial
portfolio (relative to a financial benchmark) far higher systematically pricing in this risk in their financial markets related to unburnable carbon are growing
than the risk of absolute loss of value for fossil fuel models. An implicit assumption is that the fossil more entrenched since 2011, not less. The markets
sectors. More attention needs to be focused on the fuels owned by listed companies will go on to be appear unable to factor in the long-term shift to a low-
fundamental value at risk in the low-carbon transition. developed and sold and the capital released used carbon economy into valuations and capital allocation.
to replace reserves with new discoveries. In the In a context where market participants are driven by
context of a declining carbon budget, these valuation short-term metrics, there is a need for regulators to
models provide an inadequate guide for investors review their approach to the systemic risks posed
and need to be recalibrated. by climate change. Improved transparency and
risk management are essential to the maintenance
of orderly markets, avoiding wasted capital and
catastrophic climate impacts.6 |
Finance ministers:
Initiate an international
process to incorporate climate Investment advisers: Actuaries: Individuals:
change into the assessment and Redefine risk to reflect the value Review the asset- Engage with your pension
management of systemic risk in at risk from potential stranded liability models used and mutual funds about how
capital markets, working with bodies assets in clients’ portfolios based to value pensions they are addressing climate risk, and
such as the International Organization on the probability of future to factor in the ensure they have a strategy to manage
of Securities Commissions (IOSCO). scenarios, rather than the risk probabilities of the potential for wasted capital and
The G20 could be the appropriate of deviating from the investment different emissions stranded assets.
forum to drive this process. benchmark. scenarios.
Engage with the managers of your
pension and mutual funds so that
they adopt a carbon budget
approach to climate risk and
capital allocation.
Financial regulators:
Require companies to disclose the
potential emissions of CO2 embedded in RECOMMENDATIONS
fossil fuel reserves. This report makes
Review the embedded CO2 in reserves recommendations for action
and report to international regulators and by governments, financial Investors:
legislative bodies on their assessment of intermediaries, institutional Express demand to regulators, analysts,
potential systemic risks. investors and citizens: ratings agencies, advisers and actuaries for them
to stress-test their respective contributions to the
Require companies to explain in
financial system against climate and emissions risks,
regulatory filings how their business
particularly valuation and risk assumptions.
model is compatible with achieving
emissions reductions given the Challenge the strategies of companies which are using
associated reductions in price and shareholder funds to develop high cost fossil fuel
demand that could result. projects; review the cash deployment of companies
Analysts: whose strategy is to continue investing in exploring for
Develop alternative indicators and developing more fossil fuels and seek its return;
which stress-test valuations reduce holdings in carbon-intensive companies and use
against the potential that future Ratings agencies:
re-balanced, carbon-adjusted indices as performance
performance will not replicate Rise to the challenge of
benchmarks; redistribute funds to alternative
the past. integrating systematic
opportunities aligned with climate stability.
assessment of climate
Produce alternative research risk into sector
which prices in the impact methodologies to
and probabilities of different provide forward
emissions scenarios. looking analysis.Unburnable Carbon 2013: Wasted capital and stranded assets | 7
Foreword by Lord Stern Smart investors can already see that most fossil fuel
reserves are essentially unburnable because of the
If these valuation risks are made more transparent,
companies that currently specialise in fossil fuels
need to reduce emissions in line with the global will be able to develop new business models that
This report shows very clearly the gross inconsistency
agreement. They can see that investing in companies take into account the fact that demand for their
between current valuations of fossil fuel assets and
that rely solely or heavily on constantly replenishing products will decline steeply over the next decades,
the path governments have committed to take in
reserves of fossil fuels is becoming a very risky and to consider their options for diversifying in order
order to manage the huge risks of climate change.
decision. to maintain their value. Investors will also be able to
If we burn all current reserves of fossil fuels, we will consider whether it is better to stay with high-carbon
emit enough CO2 to create a prehistoric climate, assets, or instead seek new opportunities in those
with Earth’s temperature elevated to levels not
But I hope this report will mean businesses that are best positioned gain in a low
experienced for millions of years. Such a world would that regulators also take note, carbon economy.
be radically different from today, with changes in the
intensity and frequency of extreme events, such as
because much of the embedded This report provides investors and regulators with
the evidence they need that serious risks are growing
floods and droughts, higher sea levels re-drawing the risk from these potentially toxic for high-carbon assets. It should help them to better
coastlines of the world, and desertification re-defining
where people can live. These impacts could lead to carbon assets is not openly manage these risks in a timely and effective way.
mass migrations, with the potential for widespread recognised through current Professor Lord Stern of Brentford, Chair, Grantham
conflict, threatening economic growth and stability. Research Institute on Climate Change and the
reporting requirements. Environment, London School of Economics and
Governments have started to recognise the scale
Political Science
of the risks posed by unmanaged climate change The financial crisis has shown what happens when
and have already agreed to reduce annual global risks accumulate unnoticed. So it is important that
emissions to avoid global warming of more than 2°C. companies and regulators work together to openly
In late 2015, governments are expected to gather declare and quantify these valuation risks associated
in Paris at the annual United Nations climate change with carbon, allowing investors and shareholders
summit to sign a treaty that will commit everyone to consider how best to manage them.
to action that will achieve this aim.
Carbon capture and storage technology could, in
theory, allow fossil fuels to be burned in a way that
is consistent with the aim of reducing emissions.
However, this report shows that even a scenario for
its deployment that is currently considered optimistic
would only make a marginal difference to the amount
of fossil fuels that can be consumed by 2050.8 |
Introduction
The diagram below shows the financial flows that form a cycle reliant on the
continued emissions from the combustion of fossil fuels. This report explores
this relationship further to demonstrate some of the feedback effects of keeping
emissions within an appropriate carbon budget. It sets out how the current financial
system needs to adapt to ensure it can reflect the growing risk of wasted capital
and stranded assets.
REST
£
TE
IN
EMISSIONS
TDA
BI
LOGO
LOGO
E
DEBT
£ EQUITY COMPANIES
CAPEX
DEVELOP
RESERVES
S
DIVID E N DUnburnable Carbon 2013: Wasted capital and stranded assets | 9
1. Global CO2 budget from the scientific evidence that the risks of very
severe impacts, such as large and irreversible rises
Determining probabilities
in global sea levels, reach unacceptable levels at There are ranges of uncertainty relating to a number
1.1 What are CO2 budgets? higher temperatures. Governments are now planning of factors that determine the carbon budget for
to agree a new international treaty in 2015 to tackle a particular temperature threshold, including:
Global warming is driven by increases in atmospheric climate change, which may include targets for global • Climate sensitivity (ie a property of the climate
levels of greenhouse gases (GHGs), primarily carbon annual emissions in order to limit the rise in average system that determines how much global
dioxide (CO2) from the burning of fossil fuels. To a first temperature. temperature rises in response to a doubling of CO2
approximation, the cumulative annual emissions over levels in the atmosphere);
any particular period will determine the change in This chapter looks at the following questions: • Carbon cycle feedbacks (the extent to which
concentration, and therefore the amount of warming. emissions of CO2 from burning fossil fuels are
1. What carbon budgets could be set?
This means that for any particular rise in temperature, absorbed by the oceans and land or remain in the
there is a budget for emissions of greenhouse gases, Each temperature target implies a different carbon atmosphere);
including CO2, which cannot be exceeded in order budget. Here we explore the carbon budgets for • Aerosol levels (burning fossil fuels also releases
to avoid temperature rising above a target threshold. temperature rises of 1.5, 2.0, 2.5 and 3.0°C. For each sulphur dioxide and other particles which cause
The higher the budget, the lower the likelihood of temperature rise we provide budgets which give a cooling effect that diminishes the warming effect
restricting warming to a particular level. a 50% probability and an 80% probability of limiting of greenhouse gases);
global warming to that level. • Sources of CO2 other than the burning of fossil fuels,
This analysis focuses on budgets for CO2 only –
2. What period do the carbon budgets cover? (particularly changes in land use and forests).
hereafter referred to as carbon budgets. (This is
different to the UK Government’s carbon budget, Most policy discussions focus on the reduction The assumptions that are made about these factors
which includes all greenhouse gases.) Each carbon in annual emissions that are required by 2050. are outlined here and described in more detail in an
budget is associated with a probability of not However, emissions after 2050 also matter for global accompanying technical paper.
exceeding a particular temperature threshold. This temperatures. Here we consider CO2 budgets for 2000
reflects the degree of uncertainty that is inevitable to 2049 and for 2050 to 2100.
when projecting such complex systems decades
into the future. 3. How much difference could carbon capture
and storage make?
The international climate policy agenda Carbon capture and storage (CCS) is a technology
Governments have recognised the need to manage which prevents CO2 from the burning of fossil fuels
the future risks of climate change by reducing from entering the atmosphere. Therefore, CCS has
emissions of greenhouse gases, primarily CO2. In the potential to increase the amount of fossil fuels that
2010, governments agreed at a United Nations can be burned without exceeding the carbon budget
climate change conference that emissions should be for a particular temperature threshold. We examine
reduced to avoid a rise in global average temperature the extent to which an idealistic scenario for the
of more than 2°C above pre-industrial levels, with development and deployment of CCS affects
the possibility of revising this down to 1.5°C. The carbon budgets.
target of 2°C has been set because it is recognised10 |
Alternative assumptions 1.2 Analysis of carbon budgets
As with all analysis – whether financial or environmental – there is a need for
some fundamental assumptions around the parameters which set the framework. Carbon budgets for different temperature thresholds
In finance, different analysts will use different discount rates or future commodity
prices. Similarly the factors which determine carbon budgets can be adjusted to The following are the fossil fuel carbon budgets from 2013 to 2049, taking
reflect the latest thinking. Each version is still valid and users can apply the analysis into account annual emissions so far this century:
they feel is the most likely to occur.
Fossil fuel carbon budget
Maximum temperature rise (°C)
The modelling conducted for this study has produced larger budgets than 2013-2049 (GtCO2)
indicated by the modelling of the 2009 Meinshausen et al study referenced Probability of not exceeding
in previous Carbon Tracker work and by the International Energy Agency (IEA). 50% 80%
temperature threshold
That approach produced a range of 565 – 886GtCO2 to give 80% - 50% probabilities
of limiting warming to a two degree scenario (2DS). This study uses the same 1.5 525 -
models but applies some alternative assumptions around some of the factors 2.0 1075 900
identified above. In particular: 2.5 1275 1125
• A higher level of aerosols in the atmosphere which offset some of the warming 3.0 1425 1275
effect of GHGs;
• Greater reductions in non-CO2 GHGs (which have higher global warming From these results, there is already less than an 80% chance of limiting global
potential) - this allows for higher emissions of CO2 but results in the same overall warming to 1.5°C. These carbon budgets are taken from models which run
warming effect. beyond 2050, and therefore have implications for this later period.
If it proves more feasible to apply non-CO2 mitigation measures, (for example,
capturing and reusing methane from landfill or low-carbon agriculture techniques), Post-2050 carbon budgets
this could increase the budget available for CO2 emissions. Using these alternative Although the primary focus here is on carbon budgets from fossil fuels and other
assumptions provides a useful reference point to validate the overall conclusions sources for the period between 2013 and 2049, the budget beyond 2049 is also
of previous work that the majority of fossil fuels cannot be burnt unmitigated important for this analysis. The following are the total CO2 budgets (including non-
if we are to restrict global warming to the 2DS. fossil fuel elements) for each temperature threshold for the period from 2050 to 2100.
Total Carbon budget
Maximum temperature rise (°C)
2050–2100 (GtCO2)
Probability of not exceeding
50% 80%
temperature threshold
1.5 25 -
2.0 475 75
2.5 1175 650
3.0 1875 1200Unburnable Carbon 2013: Wasted capital and stranded assets | 11
For those with interests in fossil fuels, this clarifies that the budget does not get very little emissions beyond 2050. For some emissions pathways, land use and
reset in 2050 as the cumulative effect of industrial emissions is still present. This forestry may contribute net negative emissions of CO2 between 2050 and 2100,
confirms the fact that these reserves cannot just be burnt later if we are to limit so the figures here may not be the upper limit of the carbon budget for fossil fuels.
global warming this century. Indeed, for the 1.5°C and 2°C targets, there can be
50% probability budgets pre- and post-2050 80% probability budgets pre- and post-2050
4000 4000
3500 3500
3000 3000
2500 2500
GtCO2
GtCO2
2000 2000
1500 1500
1000 1000
500 500
0 0
1.5 2 2.5 3 1.5 2 2.5 3
Peak temperature to 2100 (oC) Peak temperature to 2100 (oC)
Fossil fuel use carbon budget 2013 - 2049 Fossil fuel use carbon budget 2050 - 2100 Fossil fuel use carbon budget 2013 - 2049 Fossil fuel use carbon budget 2050 - 2100
(GtCO2) (50% probability) (GtCO2) (50% probability) (GtCO2) (80% probability) (GtCO2) (80% probability)12 |
1.3 The potential for CCS to Given that the average annual rate of storage in Each carbon budget indicated for the probability
2015 is projected by the Global Carbon Capture of a particular warming outcome would only be
extend the carbon budget and Storage Institute (2012) to be about 2.25 million extended by 125GtCO2 to 2050 with an optimistic
tonnes for 16 CCS projects, a total of nearly 3800 CCS level of CCS in place.
CCS technology has been fitted to a number projects would need to be operating by 2050 under
of demonstration plants around the world, with the the idealised scenario.
Global Carbon Capture and Storage Institute (GCCSI)
(2012) reporting there are eight large-scale projects
Annual emissions from fossil fuels (GtCO2)
currently operating, together storing about 23 million
tonnes of CO2 each year. A further eight projects are
currently under construction, which the GCCSI 35
estimates would increase the annual storage of CO2
to about 36 million tonnes by 2015 (ie about 2.25
million tonnes per year stored on average by 30
each project).
The International Energy Agency (2012) described 25
2013 - 2049
technology options and policy pathways that,
ile) according to its models, ‘ensure an 80% chance of
limiting long-term temperature increase to 2°C’. This 20
included an idealised scenario in which CCS prevents
125GtCO2 from the burning of fossil fuels from
entering the atmosphere between 2015 and 2050. 15
In the idealised scenario, the amount of CO2
prevented annually from entering the atmosphere 10
by carbon capture and storage technology increases
from 0.3GtCO2 in 2020 to 8GtCO2 in 2050. The graph
0
compares emissions removed by carbon capture and 5
storage in the idealised scenario with an emissions
pathway that offers about an 80% chance of not
exceeding a warming of more than 2°C. 0
2013 - 2049 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
tile)
Year
Unabated emissions from fossil fuels
Emissions removed by capture and storage (idealised scenario)Unburnable Carbon 2013: Wasted capital and stranded assets | 13
Carbon capture and storage is still far from being • Even if investment in CCS is stepped up in line with
a commercial technology that is widely deployed. the IEA’s idealised scenario, it has limited potential Methodology
Although it theoretically offers a way for an unlimited to extend carbon budgets by the time it can be • A number of emissions pathways from previous
amount of fossil fuels to be burned without exhausting applied at scale. 2DS budgets are only increased studies are used, (Bowen and Ranger 2009;
budgets, the relatively limited deployment of CCS that by 12-14% if full investment is realised. Ranger et al. 2010), as well as some new ones
is expected before 2050, even in an idealised scenario, • Even with allocating more budget to CO2 emissions developed for this study.
means that it is unlikely to significantly increase the rather than other GHGs, and an idealised level • The climate outcome for each pathway used
amount of fossil fuels that can be burned. For these of CCS in place, the majority of fossil fuel reserves in this study was validated using the MAGICC6
scenarios even with full investment in CCS, it extends cannot be burnt if we want a decent chance of climate model (at http://live.MAGICC.org;
the carbon budget for the 2DS by only 12-14% limiting global warming to 2°C. Meinshausen et al, 2011).
(50-80% probability). • The concept of a carbon budget gives a new • The climate settings of Meinshausen et al
baseline against which reserves can be matched, (2009) in MAGICC6 are used for analysing the
to see what proportion of fossil fuels owned by emissions pathways.
For these scenarios even with full public companies can be developed and burnt • The assumptions are represented as probability
investment in CCS, it extends the unmitigated. This has implications for the way distributions, which means that the models
investment banks and investors value these produce a range of estimated temperature rises
carbon budget for the 2DS by companies, the way companies disclose the viability for each pathway for annual global emissions.
only 12-14% of their reserves and their future decisions to explore • The outputs are focused on the 50% and
and develop more fossil fuels. 80% probabilities of delivering a particular
It is also important to note that CCS technology temperature.
is only really being explored for natural gas and coal, Recommendation • None of the pathways in this study involve net
and is not currently considered suitable for use with • The implications of CO2 budgets are profound negative annual emissions of greenhouse gases
oil in transport. and international climate policymakers have a role up to 2100.
to play in translating the implications into financial • It is assumed 7.3% of total CO2 emissions are
Conclusions and economic decision-making. generated by land use, land-use change and
• Carbon budgets are a very useful tool to understand forestry for carbon budgets up to 2050.
the level of unabated fossil fuel emissions that • Emissions for 2000-2012 for fossil fuels are
can occur over the next few decades to meet estimated to be about 400GtCO2.
temperature rise thresholds. • Carbon budgets are obtained from best fit lines
• Governments may agree a budget for CO2 and other to plots of model emission pathways, and the
greenhouse gases as part of a new international budgets are rounded to the nearest 25GtCO2.
climate change treaty in 2015.
• If more action is taken to reduce non-CO2 emissions,
this gives a more generous fossil fuel CO2 emissions
budget of 900GtCO2 to give an 80% chance of
achieving a 2DS.14 |
2. Global listed coal, oil 2.1 Reserves owned by listed If all of these resources are developed to fruition it
would double the level of potential CO2 emissions
companies
and gas reserves and listed on the world’s stock exchanges from 762 to
1541GtCO2. This will require capital in order to
State ownership: Reserves vs Production
resources According to the World Energy Outlook 2012,
develop the potential reserves further so that they
move from the resources / P2 categories to the
the total reserves including state owned assets reserves / P1 categories. It is worth noting that the
This chapter focuses on the following questions:
are equivalent to 2860GtCO2. This is already enough proportion of coal to total fossil fuels also increases
1. What level of reserves are already owned from 36% to 42% when comparing the current reserves
to take us beyond 3°C of warming.
by listed companies; and what further to potential reserves (see the table below). Therefore,
reserves are they looking to develop Governments own a higher proportion of oil and the average investor portfolio exposed to listed
into production? gas reserves (up to 90%) compared to coal reserves companies is set to become more carbon intensive
(around two thirds). However it is worth noting in coming years not less, if this is where capital is
2. How do the reserves levels compare
that national oil companies do not have the same spent. However, not all of the undeveloped reserves
with the carbon budgets?
proportion of current production – estimated have to be brought on stream. Indeed, in a market
3. How much capital expenditure at around 60% of oil and less than 50% of gas. of weakening demand and falling prices, this would
is going towards finding and developing reduce the viability of reserves.
This means that listed companies play an even bigger
more reserves?
role than reserves figures might suggest. They play
4. How are the reserves distributed a key role in unlocking state owned assets with the
across the world’s stock exchanges? technology and capital they can bring.
5. Which market indices are the most In order to assess the exposure of institutional Coal Reserves / P1 Oil and Gas
carbon intensive? investors the focus is on the reserves held by
companies listed on the world’s stock exchanges. GAS COAL OIL TOTAL
In addition to looking at those that have a high 101 273 388 762
certainty, (P1 oil and gas reserves and coal reserves)
we have gone one step further than the original
Unburnable Carbon analysis and analysed the
potential reserves (P2 oil and gas reserves and coal
resources) which companies are seeking to develop. Coal Reserves / P2 Oil and Gas
This demonstrates that the potential size of the GAS COAL OIL TOTAL
unburnable carbon – the proportion of reserves owned
186 640 715 1541
by companies that will have to remain in the ground
undeveloped - is even larger than previously thought.
It also shows the intentions of the extractives sector
if there are no emissions limits in place.Unburnable Carbon 2013: Wasted capital and stranded assets | 15
2.2 Comparing listed reserves to Listed companies’ share of the budget This confirms that the planned activities of just the
listed extractives companies are enough to go beyond
carbon budgets Given that listed companies own around a quarter
having a 50% of achieving a 3DS, without adding in
of total reserves (which are equivalent to 2860GtCO2),
state-owned assets. The additional emissions required
Listed coal, oil and gas assets that are already their proportional share of the carbon budgets
to take us beyond a 2DS to a 2.5DS and then a 3DS
developed are nearly equivalent to the 80% 2°C is nowhere near that required to utilise all their
are relatively small increases.
budget to 2050 of 900GtCO2. As we know, the majority reserves. This shows that there is a very limited
of reserves are held by state owned entities. If listed budget remaining for listed reserves if we want to
companies develop all of the assets they have an have a high likelihood of limiting temperatures to the If listed companies are allocated
interest in, these potential reserves would exceed the lower range as outlined at the international climate
budget to 2050 to give only a 50% chance of achieving negotiations. This means that an estimated 65-80% a pro-rata share of the budget
the 2DS of 1075GtCO2. of listed companies’ current reserves cannot be burnt – 25% - this leaves them with
unmitigated.
a major carbon budget deficit
compared to their reserves.
Comparison of listed reserves Comparison of listed reserves
to 50% probability pro-rata carbon budget to 80% probability pro-rata carbon budget
Peak warming (°C) Peak warming (°C)
50% probability 80% probability
1541 1541
3 356 3 319
2.5 319 762 2.5 281 762
2 269 2 225
1.5 131 1.5 -
Potential listed reserves Current listed reserves Potential listed reserves Current listed reserves16 |
2.3 How much capital is being asset owners with significant holdings in fossil fuel In particular this poses a challenge for companies
stocks. It is particularly acute for those companies with focused purely on carbon-intensive activities such
spent to develop more reserves large CAPEX plans that continue to sink shareholder as coal or oil sands.
funds into the development of additional new reserves
In order to develop current reserves more capital will that are incompatible with a low-carbon pathway.
have to be deployed. This section gives an indication If CAPEX continues at the same
of the level of capital expenditure (CAPEX) by these
companies to find and develop more reserves. The
Returning cash level over the next decade it
analysis shows that the CAPEX spend (adjusted In contrast, the same companies paid US$126billion would see up to $6.74trillion
proportionally to revenues from coal, oil and gas) over in dividends to their shareholders over the last 12
the last 12 months by these 200 companies totalled months, (US$105billion from oil and gas; US$21billion in wasted capital developing
US$674billion. The higher capital costs of the oil from coal). reserves that is likely to become
and gas sector mean that the majority - $593billion -
was related to this sector, with $81billion related
The companies involved in fossil fuel extraction are unburnable.
spending five times more on seeking new reserves
to coal operations. than they are returning capital to shareholders. Estimated annual CAPEX spending
Shareholders are already starting to question whether
CAPEX breakdown on developing more reserves
this ratio needs to change. The world has ample coal
Detailed breakdowns of the CAPEX budgets were reserves to exceed the carbon budgets required
not available across all companies. Mining company to limit global warming. Investors need to start
CAPEX was attributed to coal in proportion to the questioning why further investment in more
revenues from coal. The majority of the oil majors coal and oil is a useful application
CAPEX went on exploration, production and of funds by these companies where
n CAPEX per ye
a strategy of higher dividend payouts
4b ar
refining – ie getting more product to market. There
is some variation between companies in terms of and share buy-backs might be more
67
diversification into other energy types, eg wind, solar. appropriate. $
There is limited transparency over R&D budgets which
could be used for anything from developing new Alternative business model
technologies to extract unconventional hydrocarbons Unless fossil fuel-based companies
to improving battery technologies. can come up with an alternative
business model, then
Wasted capital? they can’t all sustain
If CAPEX continues at the same level over the next
decade it would see up to $6.74trillion in wasted
capital developing reserves that is likely to become
revenues and
growth. 1541
762
unburnable. This would drive an even greater
divergence between a 2DS and the position of the GtCO2 GtCO2
financial markets. This has profound implications for
Coal Reserves / P1 Oil and Gas Coal Resources / P2 Oil and GasUnburnable Carbon 2013: Wasted capital and stranded assets | 17
2.4 Distribution of coal, oil Africa and Australia both have significant coal deposits Investors therefore need to understand the risk from
but have very different demand profiles. South Africa’s alternative technology, emissions regulation, changes
and gas assets across stock energy sector is dominated by coal, including the in demand and price, energy efficiency, water scarcity,
exchanges conversion of coal to liquids to produce transport and any other factors which could change the market
fuel. This means the coal market is primarily domestic. for coal. For example the announcement by China that
The first map overleaf depicts current reported Australia on the other hand exports all around the it plans to peak coal use in the current five year plan at
reserves and shows that New York, Moscow and Pacific, and in an increasingly global market. By under 4bn tonnes per year could have major knock-on
London have high concentrations of fossil fuels on contrast, the United States (US) is considering export effects for the increasingly global coal market. Many
their exchanges. If the reserves on the Hong Kong, options due to its dwindling domestic market. producers’ current growth plans are predicated on
Shanghai and Shenzen exchanges are combined an unchecked demand from China for coal.
Investors need to understand the global value
then China is not far behind. The second map chains which can link the shares they hold through
indicates the level of potential reserves on each Stranded assets
a particular exchange to reserves which could be
exchange. This includes P2 oil and gas reserves mined in another country with a view to exporting Many factors – including policies and prices in the
and coal resources in addition to the reserves to another market. The analysis of coal listed countries where fossil fuels are extracted, marketed
shown on the first map. Perhaps unsurprisingly, in London indicated that one third of the reserves and combusted – will affect which particular fossil
88% of the CO2 potential listed on the Chinese were located in Australia. fuel assets turn out to be unburnable. This makes
exchanges relates to coal reserves. identifying potential stranded assets a more complex
This means the following global links for a company
task. However it is clear that taking a systemic view
Under development like Xstrata:
is informative – if the global market does not continue
• The headquarters is in Switzerland;
Other exchanges have a significant amount to grow at the same rate, then the strategies of most
• Its primary listing is in London;
of potential reserves under development which companies to continue growing production do not
• The majority of its reserves are in Australia and
will increase their exposure if brought into production. all add up.
South Africa;
Johannesburg, Tokyo, Australia, Indonesia, Bangkok • 85% of its production is exported;
East-west split
and Amsterdam would all see their levels more than • Major markets include Japan, China, India, Korea,
triple if the current prospects have more capital invested Taiwan. The maps show the clear split between eastern and
and are successfully developed into viable reserves. southern stock exchanges having a high proportion
Investors and regulators should start questioning the of coal, whereas western markets have large amounts
validity of new or secondary share issues by companies The announcement by China that of oil. There are plenty more coal resources waiting to
seeking to use the capital to develop further fossil it plans to peak coal use in the be developed by companies listed in the far east and
fuel assets. Australia. These could be the stranded assets of the
current five year plan at under future in a carbon-constrained scenario. The limited
Understanding the value chain 4billion tonnes per year could exposure of all markets to gas indicates the poor
positioning for a low carbon transition using this fuel.
However the implications for investors across these
exchanges can be very different depending on the
have major knock-on effects Moscow dominates the current listed gas reserves,
with Paris and New York showing potential for growth.
geography of the reserves that are listed on them,
and which markets they are reliant on for sales. South40
18 |
MAP SHOWING THE GTCO2 OF CURRENT COAL, OIL AND GAS RESERVES LISTED ON THE WORLD'S STOCK EXCHANGES.
KEY
TOTAL CO2 RESERVES
CO2 IN COAL (RESERVES) MOSCOW
144
CO2 IN GAS (P1)
LONDON
113 12
CO2 IN OIL (P1)
(Top 12 exchanges with highest exposure displayed only) 43
89
53 49
11
TORONTO TOKYO
33 13
5 2.5
.5
3
10
25
SHANGHAI
41
1
PARIS
20
NEW YORK 4 INDIA NATIONAL
33 40
215 12
16
2
10
36
HONG KONG
33 AUSTRALIA 60
146 JOHANNESBURG 26
SAO PAULO 13 1 1 10
30 2
1 13 49
3
23
2640
Unburnable Carbon 2013: Wasted capital and stranded assets | 19
MAP SHOWING THE GTCO2 OF POTENTIAL COAL, OIL AND GAS RESERVES LISTED ON THE WORLD'S STOCK EXCHANGES.
KEY MOSCOW
TOTAL CO2 POTENTIAL RESERVES 266
LONDON
CO2 IN COAL (POTENTIAL RESERVES)
286
16
CO2 IN GAS (P2)
CO2 IN OIL (P2)
(Top 12 exchanges with highest exposure displayed only) 79
100 171
165
TORONTO 21
TOKYO
69 39
2 6
21
42 SHANGHAI
31
6 63
1 2
PARIS
NEW YORK 37
366
7 INDIA NATIONAL
25
33 60
1 2
30
43
22 HONG KONG
AUSTRALIA 91
60 JOHANNESBURG 101
3
51
SAO PAULO 4
19
263 58
2
10 2 51 70
95
4620 |
VS
As the two major Western financial
centres it is worth contrasting the
NEW YORK different focus of these two
exchanges. New York has a clear LONDON
oil bias, whilst London is a centre
for coal.
CO2 increased 37% over 2 years 215.00 Total CO2 P1/reserves 113.32 CO2 increased 7% over 2 years
365.64 Total CO2 P2/resources 286.45
36.42 CO2 in Coal (reserves) 48.91
43.13 CO2 in Coal (resources) 165.86
32.70 CO2 in Gas (P1) 11.25
59.46 CO2 in Gas (P2) 20.50
145.88 CO2 in Oil (P1) 53.15
263.05 CO2 in Oil (P2) 100.10
$344.85 Debt (USD billion) $158.09
1487.48 Market cap (USD billion) 538.09
245.74 CAPEX last 12months (USD billion) 78.67
43.60 Dividends last FY (USD billion) 16.80Unburnable Carbon 2013: Wasted capital and stranded assets | 21
2.5 Comparison of index intensity
It is clear that some exchanges have a high absolute exposure to coal, oil and We applied the same analysis to the exposure of indices to potential reserves that
gas reserves. These are therefore a particular concern for investment risk. But companies are seeking to develop. The new entrants in the top ten are Australia,
in addition, some of the smaller exchanges have a high concentration of fossil South Africa and Jakarta. This shows how Australian and Indonesian firms are
fuel-based businesses in their indices. We analysed the primary indices associated looking to expand their reserves, which contradicts the direction needed to achieve
with the top 200 companies analysed. This revealed the following carbon intensive carbon budgets.
funds and benchmarks.
Current reserves intensity of index Potential reserves intensity of index
Indices Indices
(GtCO2 / US$ trillion mkt cap) (GtCO2 / US$ trillion mkt cap)
MICEX Index (Moscow) 213.39 MICEX Index (Moscow) 395.61
Athens Stock Exchange General Index 101.44 Athens Stock Exchange General Index 101.44
FTSE MIB INDEX (Italy) 40.89 FTSE 100 (London) 90.65
FTSE 100 (London) 35.86 FTSE MIB INDEX (Italy) 74.42
Budapest Stock Exchange Index 29.95 S&P/ASX 200 (Australia) 67.14
Bovespa Sao Paulo Stock Exchange FTSE/JSE Africa All Share Index 49.73
24.55
Index
Bovespa Sao Paulo Stock Exchange
47.89
Hong Kong Hang Seng Index 24.16 Index
Vienna Stock Exchange Traded Index 23.38 Jakarta Stock Exchange Composite
47.78
Index
BSE Sensex 30 Index (India) 21.21
Budapest Stock Exchange Index 47.32
S&P/TSX Composite Index (Canada) 19.59
BSE Sensex 30 Index (India) 43.09
The table summarises the top ten exchanges in terms of existing reserves relative
to the market capitalisation of the companies on that index. Athens, Italy, Vienna Carbon Tracker has been analysing some of the markets with significant and
and Budapest are small European exchanges with relatively large reserves in their growing reserves. In November 2012 we undertook an analysis of South African
index. The presence of Brazil, Hong Kong and India in the top ten shows that the listed coal reserves. This provided a picture of the domestic concentration of the
emerging markets are also catching up. issue of unburnable carbon. Current reserves are ample for the ‘required by science
budget’ indicated in the South African government’s carbon budget research. We
compared the portfolio of the Government Employee’s Pension Fund (GEPF) to the
Johannesburg index weighting. The required domestic focus of GEPF as the largest
investor in South Africa leaves them exposed to this as a systemic risk which they are
starting to address.22 |
Conclusions
• The amount of fossil fuel reserves owned by listed companies has continued Assumptions:
to rise to the equivalent of 762GtCO2. • Current reserves: greater than 90% probability of economic extraction
• The level of listed reserves could double to 1541GtCO2 if all of the prospective and geological certainty. Coal reserves and P1 oil and gas reserves based
reserves are developed. on best available data from RMG Intierra and Evaluate Energy.
• If listed companies are allocated their proportion of the carbon budget relative • Potential reserves: greater than 50% probability of economic extraction
to total reserves (a quarter), they are already around three times their share and geological certainty. Coal resources and P2 oil and gas reserves based
of the budget to give a reasonable chance of achieving the 2DS. on best available data from RMG Intierra and Evaluate Energy.
• Listed companies have more opportunities to develop coal, than they do oil • Six different CO2 factors used to reflect hydrocarbon categories: natural gas;
or gas; giving the markets exposure to the more carbon intensive fossil fuels. conventional oil; oil sands; lignite; sub-bitumous and bitumous coal.
• Oil, gas and coal mining companies spent $674billion of capital expenditure • Other unconventional energy sources such as shale gas are not reported
in the last year seeking to develop more reserves. separately. The IPCC has not indicated specific CO2 factors for these types
• Analysing absolute levels of exposure, London comes out as the coal capital of hydrocarbon. This is therefore considered a conservative estimate.
with New York being the oil financial centre, especially in terms of potential • Ownership: the CO2 potential of companies is reduced proportionately
future assets. Regulators in these markets need to take the lead. where a government maintains a significant interest (>10%).
• When looking at carbon intensity, some of the smaller exchanges have high • Listed subsidiaries/parents: where one listed company owns a percentage
levels of fossil fuels for their size: Brazil, Hong Kong, Johannesburg, India, of another listed company with reserves, the CO2 potential is split accordingly
Greece, Italy, Vienna and Budapest. to avoid double counting.
• Primary exchange: the CO2 is attributed to the primary exchange of the
listed equity.
• Dual listing: the CO2 potential of dual listed companies is split proportionate
to the market capitalisation on each exchange.
• CAPEX and dividends data summarises the most recent 12months figures
reported.
• Currency: all data was converted into US$.
• Diversified mining companies: where data was available, the figures were
reduced proportionate to the percentage of revenues from coal.Unburnable Carbon 2013: Wasted capital and stranded assets | 23
3. Evolving the regulation 3.1 Extractives sector EUROPEAN UNION
requirements The EU has proposed the transparency of payments
of markets for climate risk from extractive industries to host governments by
The focus of this analysis on reserves makes it most an amendment to the Transparency Directive.
The rapid dislocations in the banking systems and pertinent to the extractives sector. Measures have
subsequent knock-on effects on equity market been developed specifically for this sector which LONDON
valuations in 2008-2012 arose due to a lack of a clear demonstrate that the regulators are willing to act As a global centre for extractives companies to raise
overall understanding of risks rising within financial to protect the interests of shareholders and society capital, the London Stock Exchange has a need
markets. Some sectors – particularly the property in response to emerging issues. Data specific to this to maintain its reputations for high standards of
market, both from the speculative development of sector on reserves could help regulators and investors corporate governance. In order to provide extra
investment properties and bundling of sub-prime understand the level of systemic climate risk relative assurance to investors, new guidance was introduced
mortgages for re-sale – showed an inability for the to carbon budgets. Aspects of their businesses – for listed companies in 2009 requiring a ‘competent
investment banks and rating agencies to satisfactorily reserves and revenues – are already subject to greater persons review’ of the mineral reserves indicated
measure risk. Similarly, the banking system and scrutiny – emissions potential is a natural extension. by the company. This ensures that companies listed
regulators are not yet watching for the warning signals on the exchange cannot overstate their reserves,
we identified in this report – leaving a financial system The two simplest indicators of ‘risk’ for regulators
addressed in this report are inter-connected.They are: which would imply greater revenues going forward.
that is still not fit for purpose.
1. Collecting the data on embedded CO2 held
The rules that guide and govern the operation UNITED STATES
in the reserves of publically traded companies.
of financial markets need to evolve to address this In the US, Dodd-Frank went beyond the different parts
systemic risk. London and New York are the obvious 2. The level of capital expenditure by these
of the financial system to improve the transparency
places to start given their high exposure to the issue. companies in developing new resources as
of payments to governments by the extractives sector.
The European Union (EU) also provides overarching they maintain their reserves replacement ratios.
This shows how financial regulators can act to improve
regulation which could impact the London market. The first indicates what levels of reserves might get disclosure. The same approach needs to be applied
This section identifies some opportunities to address stranded and be subject to impairment; the second to extractive companies being transparent about the
climate risk through existing processes. indicates what valuable cash resources of asset CO2 emissions potential of the fossil fuel reserves in
Regulation can evolve through the leadership owners such as pension funds might be ‘lost’ from which they have an interest.
of individual markets as well as through adoption unproductive capital investment. Taken together,
by the global body - the International Organisation both are indicators to regulators as to the systemic PROPOSAL
of Securities Commissions (IOSCO). Financial regulators risk being built up in capital markets from the • Requiring all extractives companies to provide
have shown they are willing to act to improve challenge of a carbon-constrained world. financial regulators with the CO2 potential of their
transparency of risk for specific sectors in light of new coal, oil and gas reserves would be a first step to
developments or issues raised by investors. Climate improving transparency and facilitating monitoring
risk needs to be next on their list. of the risk.You can also read
