THE CARBON BUBBLE: Carbon Tracker’s Work in 2013

In preparation for the BCSEA Webinar on Feb 11th

In 2013, the London-based organization Carbon Tracker, founded by Mark Campanale, continued to reveal the risks associated with fossil fuel assets and demonstrate the need for transparent indicators of climate risks.

In preparation for the BCSEA Webinar on Tuesday Feb 11th, here is an edited version of their 2013 report:

Our global analysis, Wasted Capital and Stranded Assets, revealed that approximately two-thirds of global fossil fuel reserves are unburnable if we are to keep to the internationally agreed 2°C target, confirmed in the IPCC’s Working Group 1 report. Of this ‘unburnable’ stock we concluded that it is the coal reserves that are most at risk of becoming stranded because they are the most CO2-intense of the three carbon assets. Our report went on to show that despite our already excessive stock of global reserves, the top 200 listed companies are spending $674 billion to find more coal, oil and gas reserves.

After outlining the global carbon budget context, Carbon Tracker undertook regional analyses of Brazil and Australia. This revealed that while Australian coal exports represent 11% of the global market, their listed reserves account for 25% of a global coal budget, and they have potential coal resources coming online that are as much as 75% of the budget to 2050. The scale of likely unburnable carbon on the Australian stock exchange is evident.

These analyses have gone a long way to generate support from investors who are calling for companies to be transparent about the scale of their coal, oil and gas reserves, and to explain how this is compatible with a world that is seeking to limit global warming to a safe level.                                                                       

Major information flows from analysts and ratings agencies 

Carbon Tracker’s research was influential in determining the topics and content published by investment bank analysts and ratings agencies in 2013.
In March, we teamed up with the major credit ratings agency Standard & Poor’s to look at what a carbon-constrained future could mean for oil companies’ creditworthiness. Our research found that the price and demand adjustments to a lower-emissions future result in risk of downgrades, particularly for pure oil-sands operators.

With regard to investment bank analysis, the unburnable carbon thesis has been mentioned by a number of institutions. Citi group released a report Unburnable Carbon – A Catalyst for Debate in which they say they ‘expect to see more discussion of unburnable carbon by investors’, and that ‘unburnable carbon is clearly a risk.’ HSBC also looked at the effects of a lower oil price in a carbon budget scenario, citing Carbon Tracker’s work. Assuming a $US50 oil price, due to deliberate carbon constraint, they concluded that up to 60% of the market capitalization of oil and gas majors could be at risk in such a carbon constrained future.

More broadly, analysts have been questioning future coal demand more seriously than ever before. Goldman Sachs declared that ‘the window to invest profitably in new mining capacity is closing,’ while Deutsche Bank sasy that coal companies should not invest everything on the assumption that China’s coal demand will be insatiable as it ‘will not be the strong driver it has been in the past 3 years.’ Citi go as far to predict that ‘thermal coal demand for power generation in China will be peak by 2020.’ This change of tack of future coal forecasts has come amid concerns regarding water scarcity, air pollution, carbon emissions and climate change warnings, all of which are key components of the unburnable carbon thesis. 

Reporting standards, corporate disclosure and investor accountability  

2013 started with the Actuarial Profession undertaking a study that looked at the potential ramifications of a future with limited resources on future economic growth and the methods used by actuaries. Applying Carbon Tracker’s unburnable carbon analysis, they suggested that ‘if society decides to limit carbon emissions, the confidence of those in the abundance of reserves as a basis for optimism with regards to wealth creation…are called into severe questioning.’

Carbon Tracker brought the unburnable carbon thesis to the accountancy profession in 2013. The Accounting for emissions hidden in reserves report was produced with the Association of Chartered Certified Accountants and revealed that current financial reporting standards, stock market listing requirements, industry reporting frameworks and non-financial guidelines do not adequately alert investors to the risks of reserves associated with climate change. Warren Ellen, President of the International Federation of Accountants said the report showed that ‘companies need to [start] measuring uncalculated stores of GHG emissions within their fossil fuel reserves and account for them accordingly.’

Mark Campanale, Carbon Tracker’s founding director, is a member of the UNEP FI/WRI’s Advisory Committee on the Greenhouse Gas Protocol Financial Sector Guidance. This new initiative will help financial institutions measure emissions from lending and investing. Carbon Tracker is making progress for the GHG Protocol to include guidance on the reporting of fossil fuel reserves – a key indicator that will help investors understand and monitor their carbon exposure. In a similar vein, CTI submitted a request to the Financial Accounting Standards Board to recognize the need for the disclosure of the carbon content held in corporate fossil fuel reserves. A similar submission was made to the Sustainability Accounting Standards Board.

Capital is being reallocated away from fossil fuels 

Over the course of 2013 we saw the coal sectors in both the US and Australia suffer stranded assets and cancelled projects. The Sierra Club in the US claimed over 150 coal plant closures since 2010. But perhaps the highlight of 2013 in terms of capital being reallocated away from fossil fuels was seen across Scandinavia. The giant Norwegian insurer Storebrand excluded 19 ‘financially worthless’ coal and oil-sands businesses from its investment strategies, citing Carbon Tracker research. They followed the decision with an announcement that they will evaluate their utility holdings for potential stranded assets.

There also appears to be movement happening within Norwegian governance and Norway’s state pension fund. Carbon Tracker chairman Jeremy Leggett spoke of our work to ex-ministers and others at the end of November, and three days afterwards the Labour party announced that they would support the Norwegian pension fund’s complete withdrawal from coal, and that they would also look at oil and gas. If the smaller parties provide support, the majority would be enough to get the fund out of coal; definitely one to watch for in early 2014.

Just next door in Sweden, the same message about the long-term risks of exposure to fossil fuel assets is being heard loud and clear. The beginning of September saw the Swedish Center Party call for all national pension funds to sell off their holdings in fossil fuel corporations to ‘climate proof’ and protect the value of their investments. Furthermore, the AP4 pension fund announced in October that it plans to invest in a tailored emerging markets fund comprising companies that have both low-carbon emissions and low fossil-fuel reserves.

Some of the largest bilateral funding agencies and development funds announced in 2013 that they will limit funding for coal projects to ‘rare and exceptional circumstances.’ They include the World Bank, European Investment Bank, US Export Import Bank and the European Bank for Reconstruction and Development (EBRD), who also received a visit from Carbon Tracker: we presented unburnable carbon to a senior team of EBRD policymakers and energy staff at their HQ in London.

At the company level, Carbon Tracker teamed up with CERES to launch the ‘Carbon Asset Risk Initiative’ in October. This Initiative marked the first-ever coordinated effort by investors to challenge fossil fuel companies to assess the threats highlighted in Carbon Tracker’s Wasted Capital and Stranded Assets report. In total, a group of 70 investors managing more than $3 trillion of collective assets sent letters to the world’s top 45 top oil and gas, coal and electric power companies, challenging them on potential demand and price risks, and asking if their business plans might be more resilient if their capital was invested elsewhere. 

More specifically, BHP Billiton and Rio Tinto have made big announcements to cut capital to coal in a bid to drive costs down. BHP said that they will make no investments in new coal developments in Australia and that capital expenditure would peak in 2013. Rio Tinto put $1billion of Australian coal assets up for sale. Similar trends were seen in the US. This all means that down the line coal production will be lower, when the coal from all that missing capital would have come online.

Business leaders call for action on the risk of capital markets failing to deliver an energy transition

Earlier last year advocacy groups in the US filed the first ever ‘carbon bubble’ shareholder resolutions to CONSOL energy and Alpha Natural Resources. The carbon bubble hypothesis was described as ‘the elephant in the room for shareholder resolutions in 2013.’ While the resolutions have not yet resulted in a firm commitment by the companies, support of 20% of voting shares at CONSOL at the first attempt, equating to $1.2 billion, shows the concern being felt by business and investors. It is very positive to see shareholders exercising their rights to challenge the decisions their investments ultimately fund.

Carbon Tracker was well represented at the recent World Economic Forum in Davos with our Chairman, new CEO and Founding Director attending. In the run-up to the event we were busy rallying support from across business and financial institutions. CEOs from investment managers, asset owners, accountants/auditors, investment banks and ratings agencies were all invited to an exclusive roundtable on stranded asset risk. Carbon Tracker will be following up with attendees to generate a call for action from the highest-level business leaders.

Our new CEO, Anthony Hobley, has a history of starting and growing successful initiatives that harness businesses to drive a low-carbon future, and Carbon Tracker intends to utilize his expertise to the fullest. Anthony launched the Business for a Clean Economy Initiative in Australia which has over 400 signatories from a broad range of business and industry sectors. Anthony’s experience and contacts from the legal sector will open up a number of opportunities to utilize legal challenges and introduce our narratives to the industry.

Financial institutions and the financial system are stress-tested against climate change scenarios

Carbon Tracker’s research has begun to turn the focus onto financial institutions. The carbon bubble thesis was used as the flagship example of climate change risks in an analysis of asset owners by the Asset Owners Disclosure Project. Their Global Climate Index found that only 6% of 460 funds globally are managing environmental risks adequately to survive a ‘carbon crash,’ possibly exposing themselves to the ‘carbon bubble’. The report’s author concluded that ‘many haven’t acknowledged their dangerous and foolhardy addiction to investments riddled with climate risk.’

Bloomberg has enabled its 300,000+ users, predominantly financial analysts and brokers who have access to their terminals, to get an idea of the potential impact changing coal, oil or gas prices on the valuation of the world’s fossil fuel companies. The tool does so by compiling information about each company’s financial performance, the quantity and type of their retrievable reserves and how much it will cost to extract those reserves. The tool will help extend the notion of unburnable carbon and stranded assets to a wider financial audience and encourage that audience to stress-test their portfolios against climate change scenarios.

Carbon Tracker has also been helping pressure groups to leverage pressure on the financial system. After integrating a tool into the Wasted Capital and Stranded Assets report, enabling civil society members to ask their pension funds what they are doing about the carbon bubble, Carbon Tracker has been supporting Share Action with their Green Light campaign – mobilising pension beneficiaries to push their funds to manage climate-risk, and promoting best practice amongst investment institutions. Similarly, Push Your Parents is trying to use the environmental concerns of young people to enlighten the investment choices of their parents.