We Need to Rescue Capital From Carbon Asset Risk
By Joe Robertson
For a long time, fossil fuels have been a smart investment. There is unparalleled infrastructural, political and tax policy support for those investments, and so there is a lot of money to be made. But all markets have nuance, and plenty of people lose money gambling on fossil fuel interests. That has always been true. Now, we face a new kind of crisis in pricing certainty: fossil fuel companies have invested far too much in future production that will not have as high a market value as they would like.
The Fifth Assessment Report of the Intergovernmental Panel on Climate Change reveals that we have a global lifetime carbon fuel budget of 1 trillion metric tons of carbon dioxide emitted into the atmosphere since the beginning of the industrial revolution. Any burning of fossil fuels beyond that will bring on unmanageable destabilization of global climate patterns. The cost to government, society and enterprise of dealing with that level of change to the worldwide underpinnings of all our economic activity will be too great to bear.
Already, governments at all levels, commercial financiers and major reinsurance companies are looking to find ways to stop paying for the heavy costs of continuing to burn carbon-emitting fuels. As support moves from outmoded energy production methods to newer, more efficient technologies, the value of carbon-based fuel stocks will decline.
We have already emitted 531 billion metric tons, more than half the total nature will permit us. Proven recoverable reserves of fossil fuels would put another 763 billion metric tons of carbon dioxide into the atmosphere. In the best case, we could emit another 469 billion metric tons, far less than proven reserves. But the 1 trillion metric-ton budget does not account for other climate-forcing pollutants (other greenhouse gases); factoring them in lowers the carbon budget to 800 billion metric tons. So, anywhere from 294 billion metric tons to 494 billion metric tons (between 38.5 percent and 64.7 percent) of all proven recoverable fossil fuel reserves are already known to be unburnable and unbankable.
Major institutional investors who are too heavily invested in fossil fuel enterprises face severe and escalating carbon asset risk — the possibility that securities and commodities futures they hold might suddenly lose value, due to the declining payoff potential of fossil fuels themselves. In October, the CERES group requested that 40 leading fossil fuel companies explain their plan for disengaging responsibly from business activities focused entirely on fossil fuel extraction, refinement and distribution. As institutional investors with significant legal obligations to pension-holders and other entities, they seek to reduce the amount of long-term carbon asset risk in their portfolios.
Carbon assets have matured to the point where they are no longer the most efficient method available in the marketplace to achieve all that we ask of them. Every other mode of energy production has higher job creation potential, and every other mode of energy production has lower externalized costs (costs not paid by a given industry, but imposed on society by that industry’s activities).
As we learn more about the hidden costs of burning fossil fuels, taxpayers will be less inclined to support policies that cover those costs or expand them. That is already happening; there are conservative groups that now openly oppose any subsidies for oil and gas. Conservative pro-business groups that support newcomers to the energy sector, such as wind and solar power, are beginning to stand up to fossil fuel interests, because the new alternatives can liberate farmers, small businesses, families and local communities from crippling cost fluctuations inherent in the market for carbon-based energy.
Support for socializing the costs of fossil fuel use is waning. As the value of fossil fuels steadily declines, efforts to prop up irrational pricing and inflated stock values will have an even more distortionary effect on the economy than they do now. The heavily subsidized “carbon bubble” economy will be stretched thinner, and the choice for major investors will be to either get out before the value of their holdings crashes or hold on in hopes a market for inflated values can be sustained long enough to get the last big payout.
Smart investors will move into more stable, more efficient technologies with better potential for reliable future enterprise and expansion. As a nation, we can let an overload of risky carbon-based assets force another chaotic economic correction — or we can plan a smart transition. If we put a steadily rising price on carbon-emitting fuels and return all the revenues to households, we can provide the incentive fossil fuel investors need to liberate their capital from stranded assets and help build the smarter energy marketplace of the future.
Joseph Robertson is a volunteer for Citizens Climate Lobby, founder and president of Geoversiv Envisioning and a member of Villanova University’s Environmental Sustainability Committee.