The Carbon Bubble: Why is it threatening to our Pensions?

By Anni Piiroinen, Politics and Theater Student

The concept of a carbon bubble was created in 2011 by think-tank Carbon Tracker in their report ‘Unburnable Carbon’. It is based on the mismatch between a) the amount of CO2 represented by fossil fuels found so far, and b) the amount of CO2 that we are able to emit if we aim to limit global warming to 2°C. In the Cancun agreements of 2010, during the UN climate talks, governments pledged to the limit of 2°C, in order to avoid the most severe impacts of climate change. According to the Potsdam Climate Institute, staying under 2°C requires capping global carbon emissions in 2000-2050 at 886 GtCO2 (gigatonnes of carbon equivalent). A third of this ‘carbon budget’ had already been used by 2011, leaving us with 565 GtCO2 to last until 2050. However, the total potential emissions of current fossil fuel reserves were calculated to be 2795 Gt CO2, almost five times more than the carbon budget allows us to burn before 2050.  This mismatch is represented by Carbon Tracker in the figure below.

Carbon bubbleSource: Carbon Tracker Initiative, ‘Unburnable Carbon’.

Carbon Tracker estimates that the top 100 listed coal companies and the top 100 listed oil and gas companies hold fossil fuel reserves with potential emissions of 745 GtCO2, exceeding the carbon budget of 565 GtCO2 by 180 GtCO2. If we assume that only one fifth of total fossil fuel reserves can be exploited to stay below the limit of 2°C, then by extension only one fifth, or 149 GtCO2, of the listed 745 GtCO2 can actually be used. This means that if measures are taken to limit emissions to 2°C, as governments have pledged, a large portion, up to 80%, of fossil fuel assets risk becoming stranded. This endangers investors’ ability to get expected, stable returns for their investments. The financial markets do not take emission limits into consideration, meaning that the pricing of fossil fuel assets is based on the assumption that all reserves will be exploited, and thus they are overvalued. This is the carbon bubble. It resembles financial bubbles of the past and presents significant risks for investors, whose investments may permanently lose their value. Carbon Tracker Initiative explicitly warns pension funds of the risk this poses for the pensions of their members.

The portion of assets that are threatened to be stranded is even higher if we consider the continuing search for new fossil fuel reserves. Fossil fuel companies spend a lot of money to find and exploit more reserves. This money is called capital expenditure, or CAPEX. The Unburnable Carbon 2013 report by Carbon Initiative calculated the CAPEX of the preceding year by the 200 energy companies (top 100 listed coal companies and tops 100 listed oil and gas companies) to be US$674 billion. In other words, companies are continuing to sink shareholder investments into finding and developing new reserves that are likely to become stranded assets and not provide returns for their investments. This money is thus wasted on reserves that will probably not be exploited, while it also prevents it from being paid to shareholders. In fact, fossil fuel companies are spending five times more money on finding and developing new reserves than they are paying their shareholders.

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