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Wasted Capital and Stranded Assets Unburnable Carbon 2013: Wasted capital and stranded assets In collaboration with 2 | 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 Nicola Ranger, Bob Ward, Luke Sussams, and Meg policy agenda. We are applying our thinking Climate Change and the Brown. We would like to thank Mark Campanale, on carbon budgets and stranded assets across Nick Robins, Alice Chapple, Jemma Green, Chris geographies and assets classes to inform investor Environment, LSE 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 Contact: If you are an investor interested in the exposure policy-relevant research, teaching and training in James Leaton of your portfolio to fossil fuel reserves, please climate change and the environment. It is funded by Research Director contact us directly or through our Bloomberg page. the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute [email protected] for Climate Change at Imperial College London. www.carbontracker.org twitter: @carbonbubble Contact: Bob Ward Policy & Communications Director [email protected] 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 our first report on unburnable carbon, we quantified 1. Global CO2 budgets 9 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 valuation and credit ratings 27 would have to do in order to deflate the growing report will fuel more. carbon bubble, not least the regulators. 5. Implications for investors 32 In this second report we dig deeper. In so doing we Jeremy Leggett and Mark Campanale 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 | This CO2 budget is higher as it assumes greater Listed companies face a carbon budget deficit Executive Summary reductions in non-CO emissions, such as methane, 2 If listed fossil fuel companies have a pro-rata which have a higher global warming potential. In other allocation of the global carbon budget, this would Using all fossil fuels will breach the global words, applying larger CO budgets depends on 2 amount to around 125 - 275GtCO , or 20 - 40% carbon dioxide budget further action to reduce non-CO emissions in areas 2 2 of the 762GtCO currently booked as reserves. The such as waste and agriculture. 2 In 2010, governments confirmed in the Cancun 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 The carbon embedded on the New York market is carbon dioxide (CO2) to 2050. This outcome assumes our use of fossil fuel reserves between now and 2050. dominated by oil. The level of embedded carbon has that non-CO2 greenhouse gas emissions (e.g. increased by 37% since 2011. London is more coal methane and nitrous oxide) remain high. Carbon capture and storage (CCS) doesn’t focused, increasing its total CO exposure by 7% over change the conclusions 2 This budget, however, is only a fraction of the carbon 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 2,860GtCO . A precautionary 2 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 75GtCO to have an 80% probability allocated up to $674bn in the last year for finding Environment at the London School of Economics 2 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.
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