The Rise of Nervous Carbon

by Ray Grigg

International institutional investors with an estimated $3 trillion in assets are getting nervous about their financial relationship with fossil fuel corporations. As global greenhouse gas emissions (GHG) continue to rise and their effects become more threatening, pressure is building to reduce carbon emissions. A government imposed carbon tax is now perceived as nearly inevitable. But the waiting and uncertainty is uncomfortable for investors.

One of the most noteworthy examples of their financial nervousness is contained in a letter sent to 45 of the world’s top energy corporations on behalf of 70 of the world’s largest fund managers. “As investors with long-term investment strategies,” the letter begins, “we would like to understand [your company’s] reserve exposure to the risks associated with current and probable future policies for reducing GHG emissions.” It adds, “We would also like to understand what options there are for [your company] to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in lower carbon energy sources, or returning capital to shareholders” (Shawn McCarthy, Globe and Mail, Oct. 25/13). In other words, given the anticipated arrival of regulations and taxes to control carbon emissions, the letter wants to know what fossil fuel corporations are doing to guarantee the security of investors’ funds.

Such questions are jeopardizing Canada’s tar sands projects and exposing the country’s reputation to scrutiny. The government’s Copenhagen Accord commitment to reduce 2009 GHG emissions 17 percent by 2020 could fall short by an estimated 50 percent, a failure that would place Canada and its energy projects at the centre of international censure. The oil produced by the tar sands causes particular nervousness for investors because it is carbon intensive, its cost of development is huge, and its investment period is long — exactly the attributes that make funds vulnerable when circumstances are in flux.

Investor nervousness is intensified by the recent realization that total proven fossil reserves contain about five times the carbon emissions tolerable for a habitable planet. This difference between what is available to burn and what can be burned is increasingly apparent as climate science evolves in sophistication and predictability. The resulting conflict between financial opportunity and ethical responsibility is becoming too conspicuous to avoid. One ecoomic study expects that some oil and gas corporations could suffer a 40 to 60 percent loss in market value as their assets become “stranded” — unable to be used.

If fossil fuels are to remain in the ground, then whose fossil fuels will be used and whose will not? Who will make those decisions and how will the constraints be enforced? These questions present opportunities for incredible national and international conflict — precisely the uncertainty that cautious investors do not like.

Meanwhile, the failure of carbon trading and other measures to reduce GHG emissions is forcing many countries to consider the option of a direct carbon tax — a further tension for investors in fossil fuel corporations. France, Italy and other European countries already have some form of carbon taxes. China and South Africa are intending to introduce their versions.

British Columbia’s adventure with a direct carbon tax has proven to be remarkably successful and instructive. Since introduced on July 1, 2008, it has been responsible for a reduction of 17.4 percent in fossil fuel consumption in the province and 18.8 percent compared to the rest of Canada. It has lowered GHG emissions by at least 11 percent with no discernible effect on BC’s gross domestic product. As such, the tax has become an exportable model for the world. It is simple to implement, easy to administer and subject to instant adjustment. It is also revenue neutral and demonstrably effective — so effective that California, Oregon, Washington and Alaska are considering joining BC in an amalgamated carbon-pricing system.

As fossil fuels become more expensive because of carbon taxes, efficient technologies become more appealing, while renewable energy sources such as wind, solar, geothermal and tidal become more competitive and viable. Oil spills, fracking, pollution and the ecological damage from drilling, mining, distributing and burning fossil fuels — now barely tolerated as the cost of progress — will become even more undesirable. Public attitude is reluctantly shifting to regard coal, oil and gas as necessary evils rather than necessary energies. If a practical alternative were available, consumers would readily abandon fossil fuels, leaving corporate owners to scrounge for economic viability — hardly the kind of endorsement that gives confidence to investors.

The trend is obvious and the momentum is unstoppable. The pressure is building to reduce carbon emissions — last year they went up 3 percent. Added pressure is coming from a global climate treaty being negotiated for a Paris meeting in 2015. Meanwhile, the latest report from the Intergovernmental Panel on Climate Change (IPCC) calculates that our historical total of greenhouse gas emissions cannot exceed 1,000 gigatonnes of carbon dioxide equivalents without risking a dangerous temperature increase of 2°C — as of 2011, we have already emitted 531 gigatonnes. At present emission rates of about 36 gigatonnes per year, we have little time to avoid the danger zone and possible climate calamity.

Given these compounding factors, the prospects for investing in oil, gas and coal are not promising. Understandably, the fund managers of the world’s largest institutional investors are getting nervous.

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