Also discussed here: The $2 trillion stranded assets danger zone: How fossil fuel firms risk destroying investor returns (32 page pdf, Carbon Tracker, Nov. 2015)
Today we review a speech by the former Governor of the Ban of Canada (currently Governor for the Bank of England) given just before the Climate Conference in Paris and a report by Carbon Tracker which defined what oil, gas and coal resources must be left in the ground if the atmospheric CO2 has to be kept below 450 ppm which is equivalent to keeping the rise of global temperatures to less than 2 deg C. The best estimates are that between a fifth to one third of existing carbon reserves must be kept in the ground with most attention to coal then oil then natural gas. The Carbon Capture and Storage (CCS) “solution” (which is hyped by politicians, especially in Canada, adverse to restricting oil production) is not seen as having a significant role until 2050 or later- when action between now and 2050 is the critical period to reduce CO2 emissions, confirmed by the conclusions and agreement at Paris. Put in banking terms, the total value of stranded assets could be over $100 trillion. The other reality is that when the market discovers that there is no future for carbon fuels beyond the short term, the prices and intrinsic value of equities in these markets will be “re-priced”- which is what gets the attention of people like Carney.
Key Quotes:
“According to the London-based group, the only way to limit global temperature increases to 2 C is to leave vast fossil fuel reserves in the ground – a scenario that could have cascading implications for not just the global energy sector but the investors and governments banking on future profits from those assets.”
“Carney challenged his audience to ponder the “tragedy of the horizon.” The long-term economic reality, he said, is that only about a fifth to a third of proven fossil fuel reserves can be burned if temperatures are to stay within two degrees of pre-industrial levels.”
“If that estimate is even approximately correct, it would render the vast majority of reserves ‘stranded’ – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics.”
“It is clear that oil represents around two-thirds of the financial risk but a fifth of the carbon risk, whilst coal carries around half of the carbon risk, but only a tenth of the financial risk. Gas is low in terms of the carbon risk, but still carries around a quarter of the financial risk”
“The IEA’s 450 scenario indicates around 24 GtCO² being captured by CCS (carbon capture and storage] by 2035, which we have allowed for in our demand projections. This is equivalent to extending the complete IEA 450 scenario carbon budget by 4% to 2035. CCS may yet have a significant contribution to make – but not until post-2050.”
“oil, gas and coal sectors have proposed $1.9 trillion in capital investments to access known reserves through 2035. If tapped, the emissions would exhaust the remaining carbon “budget” for the century – i.e., the total amount of fossil fuel that could be burned before the temperature noses above that 2 C threshold. But those investments are directed to extracting only about a fifth of all identified fossil fuel reserves.” “
“We estimate that the total value of stranded assets could be over $100 trillion based on current market prices,”
““Of course Poloz [current Governor of Bank of Canada] should be honest with Canadians about the fact that emissions may be priced soon globally, and when that happens many assets in Canada, in particular those invested in the extraction of oil from bituminous sand, will be stranded, And I’m not sure he should be discussing it, but he should be aware that asset valuations can shift suddenly as perceptions change”
“markets will re-price these assets once investors know whether those future oil fields in Alaska or other hotspots will ever be able to produce.”
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