Unburnable Carbon

From the Foreward of the report, Unburnable Carbon 2013: Wasted capital and stranded assets:

This report shows very clearly the gross inconsistency between current valuations of fossil fuel assets and the path governments have committed to take in order to manage the huge risks of climate change. If we burn all current reserves of fossil fuels, we will emit enough CO2 to create a prehistoric climate, with Earth’s temperature elevated to levels not experienced for millions of years. Such a world would be radically different from today, with changes in the intensity and frequency of extreme events, such as floods and droughts, higher sea levels re-drawing the coastlines of the world, and desertification re-defining where people can live. These impacts could lead to mass migrations, with the potential for widespread conflict, threatening economic growth and stability. Governments have started to recognise the scale of the risks posed by unmanaged climate change and have already agreed to reduce annual global emissions to avoid global warming of more than 2°C. In late 2015, governments are expected to gather in Paris at the annual United Nations climate change summit to sign a treaty that will commit everyone to action that will achieve this aim. Carbon capture and storage technology could, in theory, allow fossil fuels to be burned in a way that is consistent with the aim of reducing emissions. However, this report shows that even a scenario for its deployment that is currently considered optimistic would only make a marginal difference to the amount of fossil fuels that can be consumed by 2050. Smart investors can already see that most fossil fuel reserves are essentially unburnable because of the need to reduce emissions in line with the global agreement. They 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 financial crisis has shown what happens when risks accumulate unnoticed. So it is important that companies and regulators work together to openly declare and quantify these valuation risks associated with carbon, allowing investors and shareholders to consider how best to manage them. If these valuation risks are made more transparent, companies that currently specialise in fossil fuels will be able to develop new business models that take into account the fact that demand for their products will decline steeply over the next decades, and to consider their options for diversifying in order to maintain their value. Investors will also be able to consider whether it is better to stay with high-carbon assets, or instead seek new opportunities in those businesses that are best positioned gain in a low carbon economy. This report provides investors and regulators with the evidence they need that serious risks are growing for high-carbon assets. It should help them to better manage these risks in a timely and effective way.

Professor Lord Stern of Brentford, Chair, Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science

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