In a recent blog highlighting the findings in my 2014 Annual Greenhouse Gas Progress Report, I stressed that the science of climate change is unequivocal: humans are changing the global climate through deforestation and the burning of fossil fuels. Since the rise of the industrial revolution in the mid-1800s, the concentration of carbon dioxide (CO2) in the atmosphere has increased by over 40 per cent – from 280 parts per million (ppm) to 401 ppm today. This blanket of greenhouse gases traps radiant heat, which has already resulted in a nearly 1°C rise in atmospheric temperatures since pre-industrial times. While 1°C may not seem like a big deal, it is: the global average temperature difference between today and the last ice age 12,000 years ago was only 4°C.
The Need for a Planetary Carbon Diet
In 2009 the global community adopted a goal [.pdf] to limit global warming to 2°C compared to pre-industrial temperatures to avoid “dangerous … interference with the climate system”. We are already about half-way to this threshold. Consequently, the Intergovernmental Panel on Climate Change (IPCC) released calculations regarding a global carbon budget [.pdf] – a carbon diet if you will – that must be adhered to going forward. To have a reasonable chance of staying within a 2°C increase, the IPCC cautions that the global economy only has about 1,000 Gigatonnes (billion tonnes or Gt) of CO2 remaining for future use (see diagram). At the current worldwide rate of CO2 release (36 Gt CO2 /yr), this global budget will be exhausted in about 28 years; sooner if emerging economies like India and China don’t stem their rising carbon appetites.
The Fossil Fuel Industry Wants to Feed Us More
The situation becomes even bleaker when one realizes the considerable disparity between the budget – what can be emitted while staying within the 2°C threshold – and what the global fossil fuel companies publicize are their proven reserves of fossil fuels. The 2012 World Energy Outlook published by the authoritative and independent International Energy Agency (IEA) estimated that the remaining global reserves of all fossil fuels in the ground (coal, oil and natural gas) would emit 2,900 Gt CO2 if burned. If the IPCC’s 1,000 Gt CO2 scenario is the diet that the global economy must stick with to avoid ecological catastrophe, then about two-thirds of these fossil reserves must stay in the ground – they are unburnable carbon.
The Economics of Unburnable Carbon
Unburnable carbon raises the spectre of portfolio write-downs and stranded assets for fossil fuel-intensive industries, and raises an important financial risk for the industry‘s investors. Within Canada the S&P/TSX Composite Index is one of the most carbon-intensive stock indices in the world.In 2013, the TSX had over 400 companies listed in the oil and gas sector, representing a market capitalization (i.e., the total value or worth of the 400-plus companies) around $400 to $500 billion.
I stressed in my report that the fossil fuel industry and its investors need to re-examine business risk through this new unburnable carbon lens. Several authoritative international organizations, including the IEA, Carbon Tracker, the United Nations [.pdf] and HSBC [.pdf] are warning investors to focus this lens quickly and act accordingly to avoid another kind of catastrophe – an economic one.