According to the current market, “the more fossil fuels a firm has underground, the more valuable its shares.” However, some of these reserves might actually be unusable — firms might not be able to dig them up, thus making the firms overvalued.
According to Carbon Tracker, a lot of the carbon would have to remain un-dug. Their analyses is based upon the estimation that the world’s temperature would not increase by more than 2°C from now until 2050. Based upon that estimation, the world’s “carbon budget” til 2050 is 1,000 gigatons (GTCO2).
As reported by IEA, the world’s reserves total 2,860GTCO2, around three times bigger than our carbon budget. Anything more than the estimated 1,000GTCO2 is marked as “unburnable carbon”.
Most of these reserves are owned by government and state energy firms, which could easily enact public policy to leave the fossil fuels in the ground. The rest of the reserves — 762GTCO2 are proven to exist, while 1,541GTCO2 potentially exist — are owned by oil companies and fossil fuel firms who have grown the reserves using investors’ money (i.e. investors who anticipate a monetary return). The best case scenario is that private firms’ proven reserves — the total of 762GTCO2 is within the allotted 1,000GTCO2 range — should be carefully used before 2050, giving more money back to investors. Governments, in turn, should not burn their reserves. This, however, isn’t happening: it seems that private firms are betting against government climate policies, and both governments and firms no longer seek long-term environmental improvements.
This could be fairly accurate, as the European Parliament recently voted against saving the EU’s Emissions Trading System from collapse, which is the EU’s leading environmental policy and the biggest global carbon market.
Energy firms assert that they are embracing green culture by increasing carbon prices for their investors, which is often untrue. The market actually overvalues the firms by assuming that all reserves will be burned, and that they are indicative of future monetary gains. When reserves are consumed, investors demand fossil fuel firms to resupply almost immediately. This is called the reserve replacement ratio, and fossil fuel firms’ ratios are expected to stay above 100%. Share prices decline if the ratio declines.
Carbon Tracker’s report advised that firms should be required to reveal how much carbon they have in their reserves; and firms’ enterprises should fall in line with international emission goals. Yet, none of this matters until the world takes serious steps to get ahead of climate change.
See my other entries:
Europe’s Emissions Plan Hits Turbulence
EPA Plans to Require New Standards on Gas
States Cooling to Renewable Energy
Utah Cracks Down on Smog
On Climate Change, Some Arguments Shift
Developed and Written by Dr. Subodh Das and Tara Mahadevan
May 24, 2013
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