Carbon budget math is not that simple

The financial newswires are humming. An investment in African coal has been written down by three billion dollars less than two years after its acquisition. The household name in global mining has been forced to report the biggest loss in its history. The chief executive has been sacked unceremoniously, his bonus package in the shredder. Institutional investors vent their spleen to the media.

Is this a trailblazing casualty of the carbon bubble, a dirty spill of sub-prime fossil fuel investments?

Well, not quite, but it was a convincing dry run. The implosion of Riversdale Mining, the coal outfit in Mozambique that scuppered Rio Tinto’s full-year results declared last Thursday, was not caused by a sudden fall in the price of coal but a misjudgement of its quality and of the available means of transport to port.

What has raised the spectre of the bubble in this corporate misadventure is its timing, combined with the location of the bungled investment.

Just three days before the profit scare, Oxford University announced a new research programme which could have been designed for Rio Tinto. It aims “to help businesses and policy-makers future proof against investments in assets that might become devalued or written off, otherwise known as ‘stranded’.”

This stranded assets programme will investigate a range of business sectors but it’s bound to centre on the dysfunctional market valuations of fossil fuel corporations. Reserves booked as assets by these companies in aggregate massively exceed the estimated “carbon budget” which must be observed in order to contain global warming within two degrees.

Even the International Energy Agency, normally an ally of the industry, has advised that two-thirds of proven reserves needs to stay in the ground. If the new UN climate agreement scheduled for 2015 is successful in its aim of limiting warming by two degrees, then the balance sheets of many of the companies in which our personal savings are invested via institutional funds will be decimated. Last week’s Rio Tint0 debacle will look like a tea party by comparison.

Research in this field is by no means unchartered territory in the UK, notably thanks to The Carbon Tracker Initiative whose report Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble? was published almost a year ago. The Oxford programme, to be based at the Smith School of Enterprise and the Environment, brings together a number of such players and gives the overall concept a gold seal of approval.

The Mozambique factor prompted my recollection that existing analysis of the carbon budget in this context of capital markets has tended to be blind to the complication of how it should be divided between countries, especially between richer and poorer countries.

Indeed the Unburnable Carbon report seeded the idea that carbon budget math is a “simple” matter of comparing the carbon budget recommended by science with the aggregate potential emissions of proven fossil fuel reserves reported by national governments.

This presentation was seized upon by Bill McKibben in his recent successful Do The Math campaign roadshow for In mobilising students to persuade their college endowments to disinvest from fossil fuel companies, this has been the core message:

It’s simple math: we can burn 565 more gigatons of carbon and stay below 2C of warming – anything more than that risks catastrophe for life on earth. The only problem? Fossil fuel corporations now have 2,795 gigatons in their reserves, five times the safe amount.

But it’s not quite that simple. These numbers overlook the issue of who gets to burn the carbon. The complexity of that question explains why international climate negotiations are running almost ten years behind schedule.

Developing countries argue their case to consume the greater share of the remaining carbon budget on the grounds that the industrialised countries have had their turn. This position is based on very legitimate references to “the right to develop” or the “principle of common but differentiatied responsibilities,” often described as “equity”.

The significance of this debate is that a large proportion of fossil fuel reserves in developing countries are in the hands of state-owned enterprises. This is especially so in India and China where coal is super-abundant. Many African countries are also blessed (or cursed) with ample coal.

The Unburnable Carbon figures, on which has based its material, assume that the pain of respecting the carbon budget will be shared equally between state and private holdings. But if China, India and others negotiate the right to a big chunk of the carbon budget, as is likely, this assumption won’t hold. The balance available to the private sector will be even less than the report allows. The scope for stranded assets and plummeting share values is actually greater than the campaign message implies.

For the purposes of the campaign, the simplified approach seems fair enough. But I hope that the new Oxford project can introduce the math of equity into its considerations – that is equity in the sense of global justice rather than the share of a business.

Juxtaposing the campaign with the Oxford asset stranding project raises the embarrassing question as to whether they are happening in reverse order. The campaign has already persuaded some fund trustees to take action that the research is designed to consider.

“Immediately freeze any new investment in fossil fuel companies” has been the call to action on the US campuses.

“The four-year research programme aims to identify high-carbon sectors and assets that could be dramatically devalued or written off” is the rather British way of going about things – amongst the dreaming spires of Oxford.

That’s surely too dreamy. Four years hence marks one of the red lines of the International Energy Agency’s projections. Act now or build no more carbon emitting infrastructure after 2017 was the message of World Energy Outlook 2012.

If this was an Exxon research project, it would be completed in a couple of months.


Smith School launches Futures Programme on Asset Stranding

Unburnable Carbon – from Carbon Tracker Initiative

Climate Justice briefings