Fossil fuels 'may prove worthless'

Feb. 15, 2013

A leading UK university explores ways to protect against high-carbon investments – like fossil fuel reserves – that risk becoming worthless by climate change policies.

By Alex Kirby

Climate News Network

LONDON – The University of Oxford has begun a program of research to identify high-carbon sectors and assets that could be devalued or written off if the world takes resolute action to limit emissions of greenhouse gases.

It seeks to help investors to avoid sinking money in potentially useless assets that might ultimately lose their entire value, turning into what are known as "stranded assets."

Assets become stranded if they are replaced by greener alternatives or new technologies, or are subject to new regulations or resource constraints.

In 2012 the International Energy Agency said the world was on course for average temperature rises of at least 4° Celsius, double the limit agreed by world governments. So, it said, a significant part of the world's known fossil fuel stores would have to stay in the ground to fulfill international climate commitments and reduce dangerous impacts.

Never be burned

The Potsdam Institute for Climate Impact Research has calculated that to reduce the chance of exceeding 2°C warming to 20 percent, the global carbon budget for through 2050 is 886 gigatonnes of carbon dioxide. Discounting emissions from the first decade of this century leaves a budget of 565 gigatonnes for the remaining 40 years.

However, the known fossil fuel reserves declared by energy and mining companies is equivalent to 2,795 gigatonnes of CO2. If the world wants to keep climate change to below 2°C, 80 percent of those reserves can never be burned: They are in fact valueless.

Five times the carbon budget

According to the Carbon Tracker Initiative, governments and global markets are treating as assets fossil fuel reserves equivalent to nearly five times the carbon budget for the next 40 years. "The investment consequences of using only 20 percent of these reserves have not yet been assessed,'' the initiative warns.

Asset stranding is little understood, but the implications are potentially significant. It could have a direct effect on millions of small savers too, as many universities and pension funds have big investments in hydrocarbon companies.

New economic landscape

The researchers, from Oxford's Smith School of Enterprise and the Environment, aim to identify assets and sectors most at risk and potential responses to the challenges.

The former MP John Gummer, chairs the Committee on Climate Change, an independent group advising the UK government. Speaking at the school, he stressed the need for businesses and policy makers to adapt to the new economic landscape.

"Investors continue to deploy hundreds of billions of pounds into polluting and unsustainable sectors," he said. "In many cases these investments will not be worth what investors think."

"Climate change, scarcer resources and new disruptive technologies will reduce value and strand assets," he added. "If investors better understand the risks of investing in these assets, they will be attracted to greener alternatives and see them as better business propositions and safer places for their funds."

Gordon Clark, director of the Smith School, said: "We are looking at how changes in regulation, pricing, technology, society and climate could be a risk to a range of polluting assets."

New tools

The four-year research program's first project is to focus on the international supply chain for the agricultural sector, examining methods of transport and production. Later projects will probably include transport, power generation, real estate and a range of commodities.

The researchers aim to create new tools to understand and manage the risks of asset stranding. They will also analyze investor portfolios to learn about risk exposures and will compile case studies of best practice.

The program is being supported by Aviva Investors, Bunge Ltd, Climate Change Capital Ltd and HSBC Holdings plc, with non-financial partners including the Carbon Tracker Initiative, Trucost and WWF-UK.

Alex Kirby is a founding journalist of Climate News Network and a former BBC environment correspondent. 

Climate News Network is a journalism news service led by four veteran British environmental reporters and broadcasters. It delivers news and commentary about climate change for free to media outlets worldwide. 

The Daily Climate is an independent, foundation-funded news service covering climate change. Contact editor Douglas Fischer at dfischer [at] dailyclimate.org

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