Unburnable Carbon – Are the World’s Financial Markets carrying a Carbon Bubble?


The Carbon Tracker initiative is the first project of Investor Watch, a non-profit organization established by its directors to align the capital markets with efforts to tackle climate change. Carbon Tracker works with top financial institutions to perform market analysis of carbon assets in an age when we must rapidly de-carbonize. By showing institutional investors the risks they are exposed to, Carbon Tracker provides the market incentive that will accelerate the migration to a society based upon renewable energy.

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

Every pension fund manager needs to ask themselves have we incorporated climate change and carbon risk into our investment strategy? If the answer is no, they need to start to now.

- Howard Pearce, head of pension fund management at the Environment Agency, a 2 billion pound fund

If the unburnable carbon scenario does occur, it is difficult to see how the value of fossil fuel reserves can be maintained, so we see few options for risk mitigation.

- Citibank warning to investors of Australia's vast coal industry that little could be done to avoid the future loss of value in the face of action on climate change.

Adjusting the price and demand assumptions to reflect lower emissions levels results in risk of downgrades for pure oilsands operators. This scenario puts pressure on cashflows which may result in dividends being cut or projects being cancelled. But more fundamentally it questions the business model going forward of investing more capital in tarsands.

- Standards and Poor's Rating Services

It behoves us as investors and as a society to know the true cost of something so that intelligent and constructive policy and investment decisions can be made. Too often the true costs are treated as unquantifiable or even ignored.

- Steven Oman, senior vice-president at Moody's Rating Services

It is shocking to see the report’s numbers, as they are worse than people realise. The risk is massive, but a lot of asset managers think they have a lot of time. I think they are wrong. Fund managers need to move now. If they wait till 2015, it will be too late for them to take action.

- Jens Peers, who manages €4bn (£3bn) for Mirova, part of €300bn asset managers Natixis

Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision. The report Unburnable carbon 2013: Wasted capital and stranded assets (2) raises serious questions as to the ability of the financial system to act on industry-wide long term risk, since currently the only measure of risk is performance against industry benchmarks.

- Professor Lord Stern

The scale of ‘listed’ unburnable carbon revealed in this report is astonishing. This report makes it clear that ‘business as usual’ is not a viable option for the fossil fuel industry in the long term. [The market] is assuming it will get early warning, but my worry is that things often happen suddenly in the oil and gas sector.

- Paul Spedding, oil and gas analyst HSBC

The probability of them running into trouble is too high for me to take that risk as an investor. If we mean to burn all the coal and any appreciable percentage of the tar sands, or other unconventional oil and gas then we’re cooked. There are terrible consequences that we will lay at the door of our grandchildren.

- Jeremy Grantham, fund manager GMO funds, a $106bn fund


Unburnable Carbon 2013: Wasted capital and stranded assets

The World Resource InstituteGrantham Research Institute and Carbon Tracker initiative have collaborated to produce and release the 2013 report: Unburnable carbon 2013: Wasted capital and stranded assets (2).

It is now common knowledge that continuing the current rate at which we are burning fossil fuel reserves has disastrous social and economic effects and is a key driver of global climate change. As we fast approach these limits, there is no longer debate about climate change and governments will begin to act with policy changes, regulation and laws of increasing severity to prevent passing the 2 degree C mark.

The big question that Carbon Tracker want investors and fund managers to be thinking about is: who will be holding these carbon assets should the carbon bubble bursts?

Professor Nicholas Stern of the London School of Economics, co-author of the report says that  “The financial crisis has shown what happens when risks accumulate unnoticed,” and that the carbon bubble risk is “very big indeed”, a risk of trillions of dollars that investors and regulators are failing to address.  At the 2009 Copehagen climate summit, the world reached a consensus of keeping global warming to under 2 Deg C relelative to pre-industrial times. To avoid this temperature,  studies (see below) now show that as much as 2/3 of all the currently known reserves must remain in the ground. If the Copenhagen agreements hold, these reserves will be in effect unburnable and worthless – leading to massive market losses.

The findings of the Carbon Tracker studies are backed by major financial institutions including:

  • HSBC,
  • Citibank,
  • Standard and Poor’s,
  • the International Energy Agency,
  • The Bank of England has also recognised that a collapse in the value of oil, gas and coal assets as nations tackle global warming is a potential systemic risk to the economy, with London being particularly at risk owing to its huge listings of coal (see below)

Are the markets paying attention?  The report shows that in 2012, well after Carbon Tracker’s report of the carbon bubble has reached the attention of investors and fossil fuel managers,  instead of reducing efforts to develop fossil fuels, the top 200 companies spent $674bn in 2012 to find and exploit even more new resources. This amount is equivalent to 1% of global GDP, which could end up as “stranded” or valueless assets. Stern’s landmark 2006 report on the economic impact of climate change – commissioned by the then chancellor, Gordon Brown – concluded that spending 1% of GDP would pay for a transition to a clean and sustainable economy.

So instead of heeding sound financial advice, the stock markets are instead taking another gamble and betting on countries’ inaction on climate change. James Lewton is a former employee of PriceWaterhouse Cooper and he says that this recklessness is characteristic of the destructive and greed-based short-termism attitudes pervasive in the invesment community;  investors all want to maximize their profit and have the mentality that they are smart enough to get out of the market in time before the crash.

HSBC warned that 40-60% of the market capitalisation of oil and gas companies was at risk from the carbon bubble, with the top 200 fossil fuel companies alone having a current value of $4tn, along with $1.5tn debt.

Interactive Tool



Click on the the Graphic above to go to the Carbon Tracker Interactive Tool

Figure 1: Capital flow in our current carbon intensive economy (Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

Figure 2: P1 (reserves on stock market) vs P2 (future)

Carbon Tracker has calculated P1 reserves, oil, gas and coal reserves already on existing stock markets. These reserves yield 762 Gigatons of CO2e. In addition, Carbon Tracker has calculated the P2 reserves, those that companies are seeking to develop.  This calculation shows that these reserves have roughly twice the carbon emission potential as known reserves: 1541 Gigatons of CO2e.

This demonstrates that the potential size of the unburnable carbon – the proportion of reserves owned by companies that will have to remain in the ground undeveloped – is even larger than previously thought. The fact that these figures exist also shows the intentions of the extractives sector to develop these potential assets if there are no emissions limits in place. Needless to say, to convert the amount of potential P2 energy to actual P1 reserves will require investments of large sums of capital, and this would expose investors to considerable risk.

Figure 3:    a) Current known reserves on stock markets     b) Future assets to be developed


Figure 4: Listed reserves vs carbon budget (Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

 The figure above shows  the Gigatons of CO2e associated with current assets (held by asset owners such as state organizations or companies) vs potential assets.  The small vertical row of bubbles shows how many gigatons of CO2e can be burned to reach 1) on the left, the more dangerous 50% chance of staying under the temperature condition before 2050 and 2) the less dangerous 80% chance of staying under the temperature before 2050.

Obviously, for the health of the planet, we would want to have the greatest chance possible of avoiding climate change impacts so we should opt for the 80% chance condition. Looking at this, we see that to stay under 2 Deg C rise relative to preindustrial time (the Pink Dot) means that in 2013, we can only emit 225 Gigatons CO2e before 2050. Comparing this to the known and held carbon assets which, if burned would produce 762 Gigatons CO2e, there is a carbon asset bubble of known reserves 762/225 = 3.38 x larger than can be safely burned. This means the holders of these assets, cumulatively will lose 60% of their value if we decide to save the planet for future generations.

Figure 5: Pre 2050 and Post 2050 carbon emissions probability budgets (Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

In the figure above, the red represents 2013-2049 while the gray represents 2050 to 2100. We can see that even after 2050, from 2050 to 2100 carbon emissions must continue to remain low – there is no free lunch for the fossil fuel industry.

Figure 6: Different risks for two major stock markets (Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

Figure 7: Options for investors (Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

Figure 8: Recommendations (Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

Figure 9: Conclusions(Source: Unburnable carbon 2013: Wasted capital and stranded assets (2))

(Source:  Unburnable carbon 2013: Wasted capital and stranded assets (2) )

The Original Carbon Bubble Study

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.

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.

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


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 10: 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 11: 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 12: 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 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