The Bankwatch

Tracking the consumer evolution of financial services

Carbon Tracker Initiative isolates a new systemic risk to financial markets from global warming

All politics aside there is no doubt the earth is becoming warmer.  Ice caps are reducing, the snow is almost gone from Mt Kilimanjaro and weather patterns are displaying erratic behaviours.

The Carbon Tracker Initiative is interesting because the team behind it are experienced in financial markets and they have produced a report entitled “Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?”

Unnburnable Carbon – Are the world’s financial markets carrying a carbon bubble? (pdf)    |

The Carbon Tracker initiative is a new way of looking at the carbon emissions problem. It is focused on the fossil fuel reserves held by publically listed companies and the way they are valued and assessed by markets. Currently financial markets have an unlimited capacity to treat fossil fuel reserves as assets. As governments move to control carbon emissions, this market failure is creating systemic risks for institutional investors, notably the threat of fossil fuel assets becoming stranded as the shift to a low-carbon economy accelerates.

In the past decade investors have suffered considerable value destruction following the mispricing exhibited in the boom and the more recent credit crunch. The carbon bubble could be equally serious for institutional investors – including pension beneficiaries – and the value lost would be permanent.

They point out that the $ 27 trillion in carbon based assets owned by the worlds energy companies produce an intrinsic value that is factored into their stock valuations. 

They go on to argue that the impact of using that carbon as we currently do, will result not in the generally accepted (but flawed) 2 degrees C temperature increase, but in some far larger increase.  The impact of the 0.8 C degree increase which we have so far experienced has dramatically altered the earth.  If we see increases of 6 – 8 degrees or more the impact on the earth is unimaginable, but at a minimum would include flooding of all coastal areas, dramatic weather shifts and more.

So we have this dichotomy between asset valuation, and a presumed inability to use those assets without destroying much of life as we know it.  Therein lies the systemic risk which the team has identified and places the unburned carbon valuation  in terms of risk, alongside the other bad valuations of dot com companies and banks following the banking crisis (which is still unfolding).

For an excellent review of the paper in a quite concise form (the first three pages are best) refer to this Rolling Stone article, which is how I found this report in the first place. 

Global Warming’s Terrifying New Math:

Three simple numbers that add up to global catastrophe – and that make clear who the real enemy is

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Written by Colin Henderson

July 21, 2012 at 14:16

Posted in Uncategorized

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