How much of the world’s fossil fuel reserves will eventually be burnt? This is not just a question for those concerned with climate policy. It is also a question for investors even if they believe (absurdly, in my view) that the science of climate change is a hoax. What, they must ask themselves, would it mean for my investments in fossil fuel exploration and production if policy makers acted on their expressed belief in the science of climate change? Where would that leave investments in companies that own reserves today and are investing in exploration and additional production for tomorrow? Might all this spending prove a disastrous waste of resources that would be better deployed elsewhere?
Unburnable Carbon 2013, a report produced by London-based non-governmental organisation Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, raises precisely this question. The conclusion is quite simple: burning known reserves of fossil fuels is incompatible with meeting the climate targets governments have set themselves. This being so, prudent investors should apply a discount to both the value of those reserves and returns on new investments in this sector. It is possible that much of this additional spending would prove fruitless. At worst, these assets might be “stranded” forever.
In 2010, governments agreed that emissions should be kept at a level intended to prevent an increase in global average temperatures of more than 2C above pre-industrial levels. Using standard models, the report concludes that total emissions of carbon dioxide between 2013 and 2050 needed to deliver that outcome, at 80 per cent probability, would be 900 gigatonnes (billion tonnes) and 1,075 gigatonnes, even at 50 per cent probability. Then, between 2050 and 2100, emissions could be a further 75 gigatonnes, to stay below the 2C ceiling at 80 per cent probability, and 475 gigatonnes, to stay below it at 50 per cent probability. Carbon capture and storage would help, but not that much. Removing an annual flow of 8 gigatonnes of carbon dioxide in 2050 would require close to 3,800 such plants. Even so, unabated emissions must fall sharply. (See charts.)