Up to 80% of fossil fuel reserves are "unburnable carbon" that can't be safely combusted without catastrophic climate change.
OTTAWA – Canada’s economy is experiencing a “carbon bubble” that could have significant consequences for Canada’s financial markets and pension funds, according to a study by the Canadian Centre for Policy Alternatives (CCPA), a left-leaning policy research institute based in Ottawa.
Up to 80% of known fossil fuel reserves have been deemed to be “unburnable carbon” that cannot safely be combusted without leading to catastrophic climate change.
“Business-as-usual for the fossil fuel industry is incompatible with the need to keep the global temperature increase to 2 degrees C or less,” says CCPA senior economist Marc Lee. “The recent experience of high-tech and housing bubbles should serve as a stern warning to investors and policy makers.”
The study, by Lee and SFU graduate student Brock Ellis, estimates Canada’s share of a global carbon budget and finds that, at least 78% of Canada’s proven oil, bitumen, gas, and coal reserves, and 89% of proven-plus-probable reserves would need to remain underground.
This unburnable carbon has implications for the Canadian fossil fuel industry, but also for financial markets, in particular pension funds who have invested in fossil fuel industries as part of their portfolios. The Toronto Stock Exchange is highly weighted towards the fossil fuel sector. At the end of 2011, the TSX had 405 listed oil and gas companies with a total market capitalization of over $379 billion.
The study compares assets and liabilities for more than 100 top fossil fuel companies in Canada to estimates of their “carbon liabilities”– the estimated damages from emitting a tonne of carbon. For Canadian-listed companies the low estimate amounts to $844 billion in carbon liabilities – more than two and a half times the market capitalization and nearly double the assets of those companies. The high estimate yields a figure just under $5.7 trillion, an amount 17 times larger than market capitalization and 13 times assets.
“There has been a general failure among pension funds to account for climate risk, and a tendency to view any screening for environmental purposes to be detrimental to financial performance,” says Lee. “Our analysis turns this on its head: by not accounting for climate risk, large amounts of invested capital are vulnerable to the carbon bubble.”
“We are in need of a ‘managed retreat’ from fossil fuel investments.”
Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds is available on the CCPA website.