Two-thirds of known fossil fuel reserves would have to stay in the ground to retain the possibility of limiting warming to no more than 2 degrees.

- International Energy Agency, International Energy Agency’s World Energy Outlook 2012

The total CO2 potential of the earth’s proven reserves comes to 2795 GtCO2. 65% of this is from coal, with oil providing 22 % and gas 13%. This means that governments are currently indicating their countries contain reserves equivalent to nearly 5 times the carbon budget for the next 40 years. Consequently only one-fifth of the reserves could be burnt unabated by 2050 if we are to reduce the likelihood of exceeding 2°C warming to 20%.

- The Carbon Tracker Initiative

We processed a trillion records to create this video. For those not in congress, that’s 1,000,000,000,000. A thousand billions, or a million millions. Activity from each exchange is color coded according to the legend at top right. X – scale shows time of day in Eastern Time (Regular session trading: 9:30 to 16:00). Y- scale shows a measurement of HFT quote spamming.
Basically, each time you see a colored line, it’s showing where a high frequency trading (HFT) algorithm quote spammed (stuffed) the market. An illegal activity. An activity the regulator believes doesn’t exist. Be sure to report any colored lines that show up. In 1999, at the height of the internet bull market, the maximum number of quotes per second for all stocks was 1,000. Today, that number is 1.5 million (1,500,000) – a rate that occurs every trading day, regardless of activity or news. All due to High Frequency Trading: creating an edge for themselves at the expense of everyone else.

Watch High Frequency Traders (HFT) at the millisecond level jam thousands of quotes in the stock of Johnson and Johnson (JNJ) through our financial networks on May 2, 2013. Video shows 1/2 second of time. If any of the connections are not running perfectly, High Frequency Traders can profit from the price discrepancies that result. There is no economic justification for this abusive behavior.
Each box represents one exchange. The SIP (CQS in this case) is the box at 6 o’clock. It shows the National Best Bid/Offer. Watch how much it changes in a fraction of a second. The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the bottom of the screen is Eastern Time HH:MM:SS:mmm (mmm = millisecond). We slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second. Note how every exchange must process every quote from the others — for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear. It is easy for HFTs to cause delays in one or more of the connections between each exchange.

Our economic system is no longer serving humanity, but only the smallest sliver of those people who have taken it over and game the system for their own self-enrichment. High speed trading is an example of this. The 2nd video above is a slowed-down version of a half-second of trading in Johnson & Johnson, on May 2, 2013. The video slows down the trades so that the milliseconds can be seen by human eyes. These guys are not stealing dollars, they’re stealing pennies,” says Nanex founder Eric Hunsader, who presented the video at a recent Wired conference. “It’s like paper cuts instead of first-degree murder.”

By seeing beyond the control of any regulators that might want to make sure all of these trades are legitimate. This flood of trading confuses even other machines, creating mismatches in orders that high-speed traders can exploit, millisecond by millisecond. This video offers the first clear look at what those robots are doing every day, all day, now that they control more than half of all market volume.

Hunsader says that more than 1,200 orders and 215 actual trades occur in this half second. The colored boxes in the video represent exchanges, and the dots that go flying represent individual orders. This happens 100,000 times a day by Hunsaders estimates.

The Economic Disconnect

In the past, economic systems operated in artificial isolation from our ecology. As our ecological awareness increases, however we are beginning to realize just how inextricably bound they are. In fact, the words economy and ecology have the same greek root eco, which means home. Economy can be traced back to the Greek words οἰκονόμος (i.e. “one who manages a household”, a composite word derived from οἴκος (“house”) and νέμω (“manage; distribute”)) and οἰκονομία (“household management”); ecology was coined by German zoologist Ernst Haeckel (1834-1919) as Okologie, from Gk. οἴκος (“house”), dwelling place, habitation” + -logia “study of”.

As our ecosystems continue going down a path of rapid degradation, it is becoming increasingly clear how our entire economy is fundamentally dependent on ecological services. The dramatic reduction in ecological services due to anthropogenic stress is beginning to show up as major risk on financial markets and prudent financial institutions are beginning to take notice. In the end, businesses will only seriously respond when their bottom line is threatened. Greed is still the most effective motivator to mobilize the business community.


The Carbon Bubble

The Carbon Tracker initiative is the first project of Investor Watch, a non-profit company established by its directors to align the capital markets with efforts to tackle climate change.

Carbon Tracker released a study entitled Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?  This study exposes in measurable terms the reasons why the fossil fuel industry is intensely lobbying against climate change and why there is such strong climate change denialism. The future of the fossil fuel industries is threatened if they are forced to keep their carbon reserves in the ground.

The International Energy Agency’s World Energy Outlook 2012 came to a similiar conclusion and climate change activist’s Do the Math tour has begun having success convincing universities to divest investments in fossil fuel companies and their shares.

Given this hard math, we need to view the fossil-fuel industry in a new light. It has become a rogue industry, reckless like no other force on Earth. It is Public Enemy Number One to the survival of our planetary civilization. “Lots of companies do rotten things in the course of their business – pay terrible wages, make people work in sweatshops – and we pressure them to change those practices,” says veteran anti-corporate leader Naomi Klein, who is at work on a book about the climate crisis. “But these numbers make clear that with the fossil-fuel industry, wrecking the planet is their business model. It’s what they do.” – Bill McKibben, Global warmings terrifying new math
Environmentalist Bill Mckibben wrote about 3 critical numbers we need to be aware of in his July 2012 Rolling Stones article: Global Warmings Terrifying New Math:

  1. 2 degrees rise in average global temperature (compared to pre-industrial levels)
  2. 565 Gigatons
  3. 2, 795 Gigatons
The second number is how much emissions we can safely burn before 2050 and the third number is the emissions from all carbon reserves, produced by the study Unburnable Carbon. Unfortunately, we are going to have to keep most of it in the ground to keep under safe global warming limits. This will have huge implications on the economy because the market has already invested heavily in the exploitation of future reserves. We are on a collision course because the world is fighting to keep 80% of these reserves in the ground while the fossil fuel industry is fighting to exploit it all.

Politicians have recently adopted 2 degree C rise above pre-industrial levels as the danger threshold. Most scientists feel that it should be 1 degree C but this is impossible to achieve because in July 2012, the planet is already at 0.8 degree C and even if we were to stop all CO2 emissions in July 2012, most scientists project that the amount of CO2 already in the atmosphere would push temperatures to 1.6 degree C by 2050.

Research by the Potsdam Institute calculates that to reduce the chance of exceeding 2°C warming to 20%, the global carbon budget for 2000-2050 is 886 GtCO2. Minus emissions from the first decade of this century, this
leaves a budget of 565 GtCO2 for the remaining 40 years to 2050.

The Carbon Tracker initiative set out to explore the potential risk that markets may face if fossil fuel companies have been capitalized for exploitation of these future reserves. This initiative was led by James Leaton, an environmentalist who served as an adviser at the accounting giant PricewaterhouseCoopers . Leaton and his associates went through proprietary databases to figure out how much oil, gas and coal the world’s major energy companies hold in reserve. The numbers aren’t perfect and do not account for recent surge in unconventional energy sources like shale gas, nor do they accurately reflect coal reserves, which are subject to less stringent reporting requirements than oil and gas. For the biggest carbon-based fuel companies, however, the figures are quite exact. The number describes the amount of carbon already contained in the proven coal and oil and gas reserves of the fossil-fuel companies.


Figure 1: C

Figure 1: Carbon Tracker Comparison of the global 2°C carbon budget with total fossil fuel reserves CO2 emissions potential

This shows us that the total estimated reserves exceed the amount we can burn in the next 40 years by a factor of 5.

Figure 2: Carbon dioxide emissions potential of listed fossil fuel reserves

This shows us that using just the reserves listed on the world’s stock markets in the next 40 years would be enough to take us beyond 2°C of global warming.  According to the latest IEA projections of energy-related fossil fuel CO2 emissions, unburnable carbon will be reached in just 16 years if energy consumption continues at current unfettered rates. This is based on global annual energy emissions increasing from 30.12 GtCO2 in 2011 to 37.58 GtCO2 in 2027, totalling 570.11 GtCO2 over the period.

Figure 3: Stock markets at Risk

The Carbon Tracker report makes a conservative estimate which reduces the contribution from mining companies, and estimates 20 – 30% of the market capitalisation is linked to fossil fuel extraction in on the Australian, London, MICEX, Toronto and Sao Paulo exchanges. Paris, Shanghai, Hong Kong and Johannesburg are currently less exposed with less than 10% market capitalisation linked to fossil fuel extraction.

Market Risk

Carbon Tracker estimated that there are 2,795 Gigatons of CO2 emissions potential in all known carbon reserves broken down as:

  • coal 65%
  • oil 22%
  • gas 13%

To put it simply, this number represents the fossil fuel we’re currently planning to burn. The key point is that this new number – 2,795 – is 5x higher than the safe limit of 565 gigatons.  This means that governments and global markets are currently treating as assets, reserves equivalent to nearly 5 times the carbon budget for the next 40 years. The investment consequences of using only 20% of these reserves have not yet been assessed. Investors are  is a Carbon investment bubble of epic proportions.

The IEA’s 2012 World Energy Outlook adds support to the Carbon Tracker’s claim  by concluding that only ONE THIRD of global fossil fuel reserves can be burnt between 2012 and 2050 to give a 50% chance of achieving the 2 degree target.



The following types of organisation are involved in the investment process which continues to make capital available to finance further exploration and development of reserves and resources which may be unburnable carbon:

  • Asset owners
  • Investment advisors
  • Asset managers
  • Trading analysts
  • Corporate finance advisors
  • Fossil fuel extraction companies

The current system of market oversight and regulatory supervision is not adequate to send the required signals to shift capital towards a low carbon economy at the speed or scale required. The current short-term approach of the investment industry leaves asset owners exposed to a portfolio of assets whose value is likely to be seriously impaired. – Carbon Tracker – Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble? 

Growing Financial / Investment Community Response to the Risk of a Carbon Bubble

  • According to the most likely projections by climate scientists, “at least one-half of fossil fuel assets will have to be left in the ground,” said Nick Robins, head of the HSBC climate change centre of excellence in London. “We’re still pricing [companies in the extractives sector] as if they are all going to be exploited.” “This is a particular concern for the UK as our stock market is overweight fossil fuels,” he said, creating the risk of stranded assets. The comments were made at a recent ACCA / NSFMevent reported by Environmental Finance.
  • “We now have around 7 trillion subprime carbon assets in the global economy and their value, like the subprime mortgages, is based on an assumption that is highly questionable.” – Al Gore
  • “Valuations of the oil and gas sector still assume that they will be able to take all proven and probable reserves out of the ground and burn them. Based on credible data we cannot be allowed to do that,” – Aviva Investors

Sovereign Credit Risk

Another growing risk that threatens nations of  equally great concern is the exposure of Sovereign Credit risk to ecological variability. Global Footprint Network and the UN Environment Programme Finance Initiative (UNEP FI), in collaboration with Bloomberg  introduced the economic implications of resource constraints to leading institutions of the financial world. The group launched the E-RISC (Environmental Risk Integration in Sovereign Credit) report.

Up until this report, the role of ecological services on national economies have been largely absent from financial analyses. With the many stresses civilization has placed on the environment, it is no longer feasible to isolate the economy from the underlying ecology it operates within.  The E-RISC report fills this gap by exploring to what extent resource and ecological risks can impact a nation’s economy and how these factors affect a nation’s ability to pay its debts.

Figure 4: E-RISC Methodology (Source: Global Footprint Network E-RISC report)

The E-RISC project analyzed the natural resource risk of five countries – Brazil, Japan, France, Turkey and India over short, medium and long-term risk horizons, providing a simple framework to compare and rank countries. Despite having similar ratings from the three major credit rating agencies, the five nations have very different environmental risk profiles. For example, nations that are heavily dependent on natural resource imports may find that continued supply becomes unreliable or costly. For example, a 10 percent variation in commodity prices can lead to changes in a country’s trade balance equivalent to 0.5 percent of GDP. Further, a 10 per cent reduction in the productive capacity of soils and freshwater areas alone could lead to a reduction in trade balance equivalent to over 4 per cent of GDP.

Figure 5: E-RISC results – GDP impact of 10% degradation of productive capacity on 5 countries with the same credit rating (Source: Global Footprint Network E-RISC report)


Figure 5: Biocapacity and Ecological Footprint (Source: Global Footprint Network E-RISC report)



Figure 6: E-RISC  overall results (Source: Global Footprint Network E-RISC report)


Financial data institution Bloomberg announced that it will now be offering Global Footprint Network’s country-level natural resource risk data (National Footprint Accounts) on all its terminals. This means that Bloomberg’s 300,000 global subscribers will have access to data that will help them integrate natural resource risk into sovereign debt, economic growth and company valuation models. The availability of Footprint data on the Bloomberg terminals is significant, as it marks a further step towards integrating—rather than externalizing—the ecological assets on which economies rely upon. Global Footprint Network will be the only provider to cover comprehensive natural resource risk data on the Bloomberg terminal.

Markets at Risk: London

Carbon Tracker has released a report showing that a large number of coal mining companies listing in London exposes the financial market to a significant systemic risk. Investors tracking the FTSE AllShare Index are facing increasing efforts across the world to regulate the carbon dioxide (CO2) emissions from coal-fired power generation.

Carbon Tracker estimates that coal reserves equivalent to 44.56 GtCO2 are held by companies listed on the London Stock Exchange. Since international market transactions are complex and cross many national boundaries, the implications of increasing CO2 emissions regulations have global ramifications. 

Example 1: Mongolian state-owned mining companies Erdenes Tavan Tolgoi considering raising money on the London Stock Exchange

This state-owned natural resources company has been in talks to raise £3billion by offering  30% of its equity overseas based on supplying China and India with coal. The four investment banks currently selected to lead and arrange the share offering are:

  1. Deutsche Bank,
  2. BNP Paribas,
  3. Goldman Sachs
  4. Macquarie Group

The Tavan Tolgoi mine is estimated to have at least 5 billion tonnes of coal reserves. The Erdenes Tavan Tolgoi is expected to retain a stake in the mine with  a consortium of US, Chinese and Russian companies developing the project in return for a share.

Example 2: Australia

30% of coal listed in the UK is located in Australia, where the government has recently agreed to deliver a carbon tax and emissions trading scheme. thereby exposing “UK” investors to climate change regulatory risk in Australia. Australia and Indonesia in turn export about 75% of their coal production. So, in fact, around half of the coal owned by UK-listed companies is supplying developing economies in China, Russia, India and South Africa.

 Figure 7: Coal Companies listed on the London Stock Exchange

Markets at Risk: South Africa

Carbon Tracker has recently investigated the South African government and their report shows that the government is definitely not Doing the Math. Current coal reserves earmarked for the South African market, equivalent to 19.2GtCO2e, exceeds the South African Government’s ‘required by science’ carbon budget (in line with 2°C global warming) of 16.4GtCO2e for all sectors from 2010 to 2050. The report points to a simple conclusion: somebody in the South African government needs to learn some basic addition. In addition to these known coal reserves, this report also considers the scale of unproven coal resources in South Africa. Assuming just one third of these deposits become proven reserves, this adds a further 19GtCO2e to South Africa’s domestic coal consumption.

The South African Government is set to announce its carbon budgets by October 2013. There are 4 budget scenarios but as the chart below demonstrate,  coal reserves earmarked for domestic use exceed even the highest carbon budget for coal-related sectors. Therefore allocating capital to developing further resources in South Africa is not aligned to keeping to a carbon budget and constitutes a market risk for investors.


Figure 8: South Africa’s Coal reserves vs Carbon Budget

Coal companies listed on the Johannesburg Stock Exchange total to 38.9GtCO2e. As the map below illustrates, only around half of these reserves are located in South Africa, demonstrating the significant international risks of the JSE. Similarly, South Africa exports around 30% of its coal.


Figure 9: Coal companies listed on Johannesburg Stock Exchange and global distribution of reserves