Just this month (March 2014), three reports were released all arguing that the financial system is at risk of a massive over-capitalisation in fossil fuel reserves. The reports, released by the UK government’s Environmental Audit Committee (EAC), the Australia Institute/350.org and the EU Parliament Greens-European Free Alliance Group, say this has created an overvaluation of the companies who hold these resources. This is known as the ‘carbon bubble’. All three reports said short term risk was exposing the world’s financial system to unsupportable risk.
Canada’s Carbon Liabilities
Mark Lee, Canadian Centre for Policy Alternatives
This study looks at the implications of unburnable carbon for the Canadian fossil fuel industry and in particular for financial markets and pension funds. The authors argue that Canada is experiencing a “carbon bubble” that must be strategically deflated in the move to a clean energy economy.
Report by UK government’s Environmental Audit Committee (EAC)
This study found that stock markets could be inflating a ‘carbon bubble’ by over-valuing companies with fossil fuel assets that will have to be left unburned in order to limit climate change. It also points out that there is a large green finance gap. Investments are currently running at less than half of the £200 billion needed in energy infrastructure alone by 2020 to deliver national and international emissions reduction targets.
Climate Proofing Your Investments
The Australia Institute and 350.org
This study found that that portfolios containing coal, oil and gas companies risk lower returns in the long run while portfolios avoiding these companies can provide competitive returns. The report looks at the financial risk of “unburnable carbon” to shareholders of coal, oil and gas companies. According to the report, balance sheet valuations of reserves held by coal, oil and gas companies are based on the assumption they can extract over three times more carbon than is compatible with the internationally agreed two degree global warming limit.
The Price of Doing Too Little Too Late: The impact of the carbon bubble on the EU financial system
EU Parliament Greens-European Free Alliance Group
This report investigates the carbon exposure of Europe’s top 43 banks and pension funds and assess the risk a carbon shock posed to them. The study highlights a number of individual institutions which are at risk, and with them their associated countries. This is particularly the case for France where two of the largest European banks (Société Général and BNP Paribas) have a “relatively high” exposure, and the United Kingdom and the Netherlands, where national pension funds have a “high” exposure. According to the report, the exposure to the carbon bubble has been markedly higher for the pension fund sector than it has been for the banking sector.
Extracting Fossil Fuels from Your Portfolio
350.org, Green Century Funds, and Trillium Asset Management
Resilient Portfolios and Fossil-Free Pensions
Climate Change Best Practice Methodology
The Climate Institute
News and commentary:
Carbon Bubble Threat to UK Economy – The Guardian, 2014
The Case for Fossil Fuel Divestment by Bill McKibben – Rolling Stone, 2012
Global Warming’s Terrifying New Math? byBill McKibben – Rolling Stone, 2012
Bigger Than That (The Difficulty of) Looking at Climate Change by Rebecca Solnit Toms Dispatch, 2013
Will fossil fuels melt the global economy? – The Guardian, 2014