Stranded Assets, Carbon Bubble

 

Fossil Fuels, Stranded Assets, and the Carbon Bubble

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Introduction

"Stranded asset" is a financial term that describes an asset that has become obsolete, or non-performant, but must be recorded on the balance sheet as a loss of profit. Potentially stranded fossil fuel assets are largely why responsible climate risk management is being opposed today by fossil fuel companies and libertarian right-wing forces.

The main point is that if we are to avoid the worst impacts of fossil-fuel-induced global warming and climate change, a substantial fraction of fossil fuels (coal, oil, gas) - assets to the fossil fuel companies - must remain unburned in the ground, "stranded". In the event that politicians start to act with serious risk management against increasingly devastating climate impacts, the fossil fuel assets then stranded will produce a large loss of wealth for fossil fuel companies. Fossil fuel stock prices will plummet by approximately the fraction of stranded assets to total assets.

Pictorially, the currently overvalued fossil fuel stock prices constitute a "Carbon Bubble". The markets today are in a carbon bubble, because they ignore future stranded fossil fuel assets. Once the financial impact of stranded assets are factored in, the carbon bubble will collapse with large financial consequences for fossil fuel companies and their owners. The period of time during which the collapse will occur is an outstanding issue.

To attempt to prevent any of this, fossil fuel companies along with libertarian right-wing media have adopted an aggressive offensive strategy against responsible climate risk management, consisting of three parts.

First they copy tactics of the tobacco industry and create doubt by attacking climate science with fallacious legal-style pseudo-scientific arguments. Laundering financial support through right-wing think tanks, they support a small number of loud climate science deniers along with right-wing libertarian media that trumpet this climate disinformation.

Second, they minimize or ignore climate impact risk.

Third, they overstate costs of climate mitigation and adaptation.

For more information on climate deniers / contrarians / faux-skeptics, click HERE.

For more information on climate finance, click HERE.

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Unburnable carbon: Wasted capital and stranded assets

From CarbonTracker

The carbon budget deficit

Between 60-80% of coal, oil and gas reserves of publicly listed companies are ‘unburnable’ if the world is to have a chance of not exceeding global warming of 2°C

  • The total coal, oil and gas reserves listed on the world’s stock exchanges equals 762GtCO2 – approximately a quarter of the world’s total reserves;
  • If you apply the same proportion to the global carbon budgets to have an 80% chance of limiting global warming to 2°C, their allocation of the carbon budget is between 125GtCO2 and 225GtCO2, illustrating the scale of ‘unburnable carbon’.

Here is a map showing where coal, oil, and gas reserves are located:

Wasted capital

Company valuation and credit ratings methodologies do not typically inform investors about their exposure to these stranded assets, despite these reserves supporting share value of $4trillion in 2012 and servicing $1.27 trillion in outstanding corporate debt over the same period. 

 

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Bloomberg Carbon Risk Valuation Tool

"In the last two years, the issue of ‘stranded assets’ has started to loom larger and larger, particularly in relation to the idea that climate change policy could induce the stranding of some conventional assets. Here we introduce a first-cut tool that helps illustrate the potential impact  of stranding on a company’s earnings and share price..." Click HERE for more information. The white paper is HERE.

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Carbon-Intensive Investors Risk $6 Trillion ‘Bubble’

"Investors in carbon-intensive business could see $6 trillion wasted as policies limiting global warming stop them from exploiting their coal, oil and gas reserves, according to a report.

The top 200 oil, gas and mining companies spent $674 billion last year finding and developing fossil fuel resources, according to research by the Carbon Tracker Initiative and a climate-change research unit at the London School of Economics. If this rate continues for the next decade some $6 trillion risks being wasted on “unburnable” or stranded assets, according to the report, released today."

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Carbon bubble will plunge the world into another financial crisis

"Trillions of dollars at risk as stock markets inflate value of fossil fuels that may have to remain buried forever, experts warn"

The world could be heading for a major economic crisis as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, according to leading economists.

"The financial crisis has shown what happens when risks accumulate unnoticed," said Lord (Nicholas) Stern, a professor at the London School of Economics. He said the risk was "very big indeed" and that almost all investors and regulators were failing to address it.

The so-called "carbon bubble" is the result of an over-valuation of oil, coal and gas reserves held by fossil fuel companies. According to a report published on Friday, at least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate change. If the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses. But the stock markets are betting on countries' inaction on climate change.

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Gore and Blood lay out Carbon Bubble Risks

Al Gore and David Blood wrote an op-ed "The Coming Carbon Asset Bubble" in the Wall Street Journal (HERE). The op-ed emphasizes three main forces that will tend to deflate the carbon bubble:

1. Regulation of greenhouse gas emissions at any level

2. Market forces toward renewable energies away from fossil fuel energy

3. Sociopolitical pressures including divestment, leading to a loss of a fossil-fuel "license to operate" for carbon-intensive businesses.

In the past WSJ editorials/op-eds have emphasized climate denier pseudo-science (at a 93% level). Publishing this piece departs from their usual refusal to present responsible climate risk management.

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Fear of stranded assets motivates fossil fuel companies to oppose responsible climate risk management and prop up climate science deniers

ExxonSecrets documents how climate deniers are funded through fossil fuel money laundered through right-wing think tanks:

Exxon is by no means the only fossil fuel source of climate science denier funding; the Koch brothers are also heavily involved. For more information on funding see HERE.

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Recently Updated
SEC Climate Change Risk Disclosure for Businesses Last Updated on 2013-05-19 00:00:00 On January 27, 2010, the SEC voted to publish Commission Guidance Regarding Disclosure Related to Climate Change, which clarifies how publicly traded corporations should apply existing SEC disclosure rules to certain mandatory financial filings with the SEC regarding the risk that climate change developments may have on their businesses. The SEC is the US Securities and Exchange Commission. Below is an overview report by the Congressional Research Service on the SEC Climate Change Guidelines:  SEC Climate Change Disclosure Overview CRS More »