Environment, Science

Unburnable carbon: fossil fuels could cause stock market crash

A report released by Carbon Tracker and the London School of Economics (LSE), Unburnable Carbon, has found that greenhouse gas reduction targets mean that the “majority” of the world’s fossil fuel reserves are unburnable, rendering them financially worthless. The carbon stored in available fossil fuels is enough to push us far over the limit necessary to avoid dangerous climate change.

Coal

The report warns that the economic risks of this are considerable. Trillions of dollars are currently invested in companies that extract coal, oil and natural gas. What is more, these companies continue to invest in uncovering yet more reserves. The high value of these fuels is such that they are seen as a safe bet and will lead to guaranteed returns.

In the future, greenhouse gas reduction targets will place strict limits on the amount of carbon dioxide that economies can produce. In turn, this restricts the amount of fossil fuels that can be burnt. Unburnable Carbon puts some numbers on this link: 80% of currently available fossil fuels will have to remain in the ground.

This raises a problem for extraction companies and their investors. There is nothing intrinsically valuable about fossil fuels. Their value is entirely dependent on the confidence that they can be burnt by a fuel-hungry economy. In a low-carbon future, the resources that underpin the current wealth of extraction companies will be valueless. There is a growing realisation, of which Unburnable Carbon is a part, that a wholesale devaluation of fossil fuels could lead to a massive stock market crash. The 2008 banking crash demonstrated what can happen when markets ignore accumulating risk, and we are still living with the consequences. Coal, oil and gas are the sub-prime assets of future decades, massively overvalued by an economy that, ultimately, cannot use them.

However, the report’s authors do not say that this is inevitable. They believe that investors need to challenge companies that insist on spending money on finding new reserves; that we need to take a more long-term approach to investment; and that companies should disclose the amount of carbon stored in their reserves. Most importantly, Unburnable Carbon says that we need to start changing our strategy now.

07/05/2013

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Peter Sheehan Still faffing around after three years at Concrete, Peter is back for a second year as deputy editor. Presumably that means that last year wasn’t a complete disaster, but you never can tell… Peter has pledged to spend this year delegating as much work as possible to his colleagues, thus leaving him free to further his long-standing efforts to become Concrete’s one-man answer to Peter Mandelson and Malcolm Tucker.


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