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 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 the extreme risk to investors in measurable terms and also sheds light on the reasons why the fossil fuel industry is intensely lobbying against climate change and such a strong climate change denialism movement. The entire future of the fossil fuel industries is threatened by regulations that would clamp down on fossil fuel as an energy source. The stock valuation of the fossil fuel giants are severely degraded if they are forced to keep their carbon reserves in the ground.

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 first number is the safe global temperature limit agreed upon by over 150 countries at the Copenhagen UN summit in 2009 – it is the absolute number that cannot be breached to avoid catastrophic climate change. The second number is the number corresponding to how much emissions we can safely burn before 2050 and the third number is the emissions from all the known carbon reserves owned by existing fossil fuel companies, a figure produced by the study Unburnable Carbon. What these three numbers show is that fossil fuel companies can only burn 565/2795 or about 20% of their unexploited reserves. Another way to say this is that fossil fuel companies are, to a large extent valuated on their future reserves and they can only exploit 20% of those reserves, they must keep most of it in the ground if they are serious about keeping under the 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. There is a huge carbon bubble and the people of the planet and the fossil fuel industry are on a collision course; 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 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