In its latest Unburnable Carbon update, UK financial think-tank Carbon Tracker has warned that around $600 billion in ‘unburnable’ oil and gas reserves is listed on global stock exchanges. If regulation to accelerate the net zero transition begins to bite, stranded asset risks could hit the markets, with most of the risk concentrated in London, New York, Moscow and Toronto.
Carbon Tracker introduced the concern about stranded assets in terms of the fossil fuel sector to the wider market over a decade ago, with its 2011 report Unburnable Carbon: are the world’s financial markets carrying a carbon bubble?
That report found that about 80% of declared reserves owned by listed companies were at risk of stranding if the world should stay below 2C temperature rise. That means there are assets on which value is being determined that could be worth less than expected or predicted, due to price increases or regulatory concerns associated with the energy transition.
Unburnable Carbon update shows increase in listed market fossil fuel reserves
Its recent update, Unburnable Carbon: Ten Years On, finds that over $1 trillion of oil and gas assets now risk becoming stranded as a result of policy action on climate and the rise in alternative energy sources ($400 billion is estimated to be in state hands).
The amount of fossil fuel reserves listed on public exchanges has also increased 40% by volume over the last decade. This is a mounting concern, especially given that global ambition has risen from a 2-degree to a 1.5-degree target.
About 90% of global GDP and more than 2/3 of the world’s governments have made pledges or commitments to achieve “net zero” emissions within the next few decades, and achieving that will require significant action on emissions management.
Another way the risk has been described is as a ‘carbon bubble’. Back in 2011 BP estimated that existing oil, gas and coal reserves would generate more than 2.8 trillion tonnes of CO2 versus the circa 1 trillion tonnes available under the carbon budget.
It should be noted that is 1.8 trillion tonnes more than allowed even to achieve the 2-degree target and does not allow for emissions from any other source, industrial or otherwise arising from tipping points.
That makes it worth pointing out that energy transition risks apply not just to producers, but across the full oil and gas value chain (e.g. refiners) as well as a wide range of different financial services providers.
Current markets host oil and gas reserves three times the carbon budget
Carbon Tracker analysed the fossil fuel holdings of companies listed on global stock exchanges and found that collectively they own three times more coal, oil and gas reserves than can be burned without breaching the 1.5°C global warming target enshrined in the 2015 Paris Agreement.
If the world does get serious about a net zero or low-carbon transition, many of these reserves will be rendered worthless, potentially exposing the companies and their investors to significant losses.
This tracks with analysis from the International Energy Agency (IEA) which warns that unabated combustion of today’s fossil fuel reserves would result in CO2 emissions three times the size of the current carbon budget – overall global emissions that can be made and still achieve the 2050 climate targets.
Its 2021 Net Zero Roadmap demands several actions, including no investment in new fossil fuel supply projects and no further final investment decisions for new unabated coal plants – criteria which clearly have not been met. That means that successful action is going to be more severe the longer the transition takes.
Changes in climate change policy or carbon price could see market shock
Any shock to market valuation could result in major market volatility – exactly what concerned central banks are worried about in terms of stress testing banks and domestic financial systems.
In climate terms, though, part of the concern is that most global oil reserves are still held and managed by state-owned oil companies, increasing the complexity of forward planning in many ways – sovereign states are going to want to exploit resources to maximise return.
Another concern is the increase in stranded asset risk over the last decade. Carbon Tracker found that the “embedded emissions” in fossil fuel reserves held by publicly listed companies – meaning the amount of CO2 they would release if extracted and burned – have increased by 40% in the last 10 years.
Most embedded emissions are listed on the stock exchanges of China, USA, India, Russia and Saudi Arabia where, with the exception of the USA, emissions are dominated by the partial listings of state-owned companies.
Research shows risk of up to $11 trillion in stranded assets over 15 years
Carbon Tracker is not alone; 2021 research that appeared in Nature Energy suggests that if current net zero targets are to be achieved, which are themselves below that needed to keep the temperature increase to the 1.5°C target, there is global potential for stranded assets of $7-11 trillion in the next 15 years alone.
Such a shift could constitute a seismic shock for the global economy. Its authors argue that “a new climate policy incentives configuration emerges in which fossil fuel importers are better off decarbonising, competitive fossil fuel exporters are better off flooding markets and uncompetitive fossil fuel producers – rather than benefitting from ‘free-riding’ – will suffer from their exposure to stranded assets and lack of investment in decarbonisation technologies.”
Energy crisis driving finance to fossil fuels
This is an even more problematic situation considering the current energy crisis, where finance has flocked to fossil fuel stocks because of the current return available – another indicator of the disconnect between purely short-term financial return and taking a longer-term view about the viability of the current economic system.
One of the key challenges in addressing energy transition is the current energy crisis – the increase in oil and gas prices may tempt oil and gas companies to make long-term investment decisions that could cost the climate, and potentially shareholders, dearly in the long run.
What the report makes clear is that the facilitation of new fossil fuel supplies is not compatible with achieving global or domestic climate goals. And that’s a problem for everyone.
