The Carbon Bubble: Unburnable Reserves, Stranded Assets
We've known for some time, but latest data confirm what we knew: it no longer makes sense to continue looking for fossil fuels, because we won't even be able to use a large share of currently available reserves, if avoiding catastrophic climate change is what we want. Such a situation reduces the relevance of the Peak Oil debate and concentrates our attention on something entirely different: on the role of private energy companies, which continue to profit from reserves they should not be able to extract, and on the desperate need for governments to accept a binding agreement to drastically curtail emissions.
If from this moment forward the end of the century CO2-equivalent concentrations in the atmosphere can be maintained in the 430–480ppm1 range, we will have a 66% chance of limiting global average temperature increase to less than 2°C. Above this 2ºC threshold, the climate change already taking place could take on a much more sinister, irreversible character. And the scientific community is in consensus on this2. Let’s overlook for a moment that such probabilities sound a little too much like flipping a coin, as that would imply being willing to accept a 34% chance of the opposite scenario happening. Let’s also forget for a moment the fact that more and more scientists are in favor of establishing an even lower, “safer” threshold3. Because, after all, what we already have in hand is an international agreement signed in Cancun (Mexico) in 2010, in which the international community affirms its intention to avoid exceeding temperature increase by these 2°C before the end of the century with respect to pre-industrial levels4.
The University of San Diego (USA) has measured atmospheric CO2 concentrations at its Mauna Loa Observatory in Hawaii since 1958 (The Keeling Curve)5. On May 14, 2013, scientists at this research station recorded the landmark figure of 400 ppm6 for the first time. And in April of this year, monthly atmospheric CO2 concentrations7 were already above this level for the entire northern hemisphere8. The annual growth rate of the Keeling Curve has been approximately 2ppm each year averaged over the last decade. It’s important to remember that there is a delay between the increase in CO2 concentrations, and the response in global temperatures: as a consequence of this “catching up” to the CO2 humans have already put out into the atmosphere, temperatures will continue to rise for many years after atmospheric CO2 levels stabilize.
The Carbon Budget
The above photo brings us to The Big Question: How much CO2 can we still release into the atmosphere before we cross the 2ºC threshold at century’s end? Or to put it into economic terms: How much do we have left in the Carbon Budget?
Climatologists at the IPCC calculated in fall of 2013 that this number is 3670 Gt9 of CO210 (to have a 66% chance of achieving the 2ºC target). And it seems that, between the beginning of the industrial revolution and 2011, we have already released a little over half (1890 Gt), which leaves a remainder of 1780 Gt. According to the IPCC, the available budget shrinks even further, to 1010 Gt, if we include the global warming impact of other gases (methane, nitrous oxide, CFCs, etc.)11. If we continue at the current emission rate of 30 Gt per year, we will be able to continue emitting CO2 for only about the next 25-30 years.
However, if we were to take into account all the CO2 stored in fossil fuel reserves which are currently known and proven but have not been extracted, the emissions potential is one of 2860 Gt. Comparing these two numbers makes it clear that we cannot use all the fossil fuels in reserve because this would suppose a release of CO2 into the atmosphere that would go significantly over the budget. The International Energy Agency (IEA) has already predicted in its 2012 report that in order to comply with climate change agreements, at least two-thirds of the reserves would have to remain untouched underground. 12.
To put it simply: Not only do these numbers, in and of themselves, serve to bench any political initiative to search for new fossil fuel reserves —as in the case of shale gas in all of Europe, or offshore drilling in the Canary Islands or the Mediterranean— they also make the entire debate around Peak Oil moot.13 Although some authors try to deny its relevance, arguing that technological innovation has the capacity to delay its arrival until a very distant future, they would have to concur on the insanity of continuing to rely on an energy source which, if we had any sense left, we could not continue using. The first limiting factor in this case does not appear to be coming from resources availability, but from our possibilities to use them.
The Numbers Agree
In addition to the IPCC report, other studies have proposed similar enough carbon budgets with differing emission ranges depending on the probability of achieving the 2ºC goal of the Cancun Agreements. For example, Carbon Tracker and the Grantham Research Institute for Climate Change and the Environment estimated in 2013 that we have a budget of 900 Gt of CO2 available from now until the middle of the century to have an 80% chance of keeping average temperature increase under 2ºC, whereas we could allow emissions of up to 1075 Gt of CO2 if we could settle for a 50% chance14 (See Table 1). This carbon budget assumes a scenario in which we are able to achieve large reductions in the emissions of other greenhouse gases, such as methane, compared with present-day levels. However if we consider the most recent data on methane emissions, it doesn’t look like we have much basis to feel optimistic15.
Table 1. Various CO2 budgets in relation to the probability of temperature increase.
Maximum temperature increase
of no exceeding the given temperature threshold
Reformatted table based on http://carbontracker.live.kiln.it/Unburnable-Carbon-2-Web-Version.pdf
Looking at such a tableau, it is quite tempting to beg for a magical solution of some sort to appear from technological innovation. As a matter of fact, the IEA indicates the Carbon Capture and Sequestration (CCS) window is a way to avoid keeping these reserves underground17. Nevertheless, CCS projects don’t seem to hold much water18, and even assuming the idealized scenario of CCS development suggested by the IEA, the data indicate that they would only allow for an additional 125 Gt of CO2 in the carbon budget19, which does not substantially alter the general outlook.
Who’s Got their Hands on All This CO2?
We have counted that if we were to burn all the presently known proved reserves (1P),20 this would produce the release of 2860 Gt of CO2 into the atmosphere. This is enough to produce a global temperature increase of 3 ºC. But who is it exactly that has these reserves?
The most of the reserves are in the hands of governments. If we convert reserves to CO2 emissions, according to Carbon Tracker, only about 762Gt of the CO2 that potentially may be released is in the hands of private companies. Even so, when compared with the total carbon budget of 900Gt of CO2 estimated in this study, this number leaves very little margin for government reserves if we assume private companies will burn their proved reserves in their entirety.
Then, in addition to proven reserves, when we consider reserves industry expects to soon be able to develop (2P reserves)21, it becomes evident that total CO2 emissions in private ownership is greater still. If 2P reserves were to be developed commercially in their entirety, CO2 emission potential in private hands would double to 1541 Gt.
Consequently, we could say that if the energy companies' current plans for fossil fuel reserve use and development were to be carried out, the CO2 that would be released as a result (1541Gt CO2) would not only go over the budget for but a 50% chance of staying within the 2ºC limit (1075Gt CO2), it would also exceed the emission levels needed to produce a 3ºC temperature increase. (1425Gt CO2) (See Table 1). And this is predicated on the supposition that governments, exercising good environmental stewardship, would leave their share of reserves underground untouched.
The Carbon Bubble
If we were to distribute the total carbon budget among owners of proved reserves proportionately, (governments and business), the businesses would have "rights" to release only about125-275 Gt of CO2 (about 20-40% their current potential–762 Gt–) It is worth asking, with things appearing as they do, whether these companies' investors know that 60-80% of gas, oil, and coal reserves in their portfolios will never be able to be utilized. One might say that there is a generalized lack of knowledge in financial markets regarding the real value of energy companies; many important financial products, such as pension plans, are "anchored" to reserves which, from a logical standpoint, are unusable.22
The short-term thinking that characterizes financial markets does not take into account the inherent risks of assets which, if we expect existing environmental accords to be honored in practice, become toxic or outdated when they lose their value23. One tends to assume implicitly, based on past market performance, that energy companies will continue to grow and sell fossil fuels indefinitely, and that the capital obtained thereby will be used to replace older reserves with newly discovered ones. The reserves are still in the substratum but their value is already being sold on the surface. An HSBC analysis suggests that the valuation of these assets could fall by about 40-60% in a low-emissions policy scenario. Consequently, investors have the threat of a carbon bubble looming over them — a carbon bubble that will inevitably burst if CO2 emissions are really to be limited.
Some reports suggest that by taking measures directed toward tighter regulation and supervision of the markets, it would be possible to gradually redirect the current course, relocating investor capital in low-carbon assets24. Some important cities, such as San Francisco, Seattle, and Vancouver, whether out of financial prudence or political responsibility, have begun to take steps to divest from fossil fuels25.
Nevertheless, this does not seem to be the overall trend. In 2012, gas and oil business spent $647 billion on new reserve exploration and on the development of extraction technologies, and the forecasts a total expense of $6 trillion over the next decade.26 Such a path leads directly in the opposite direction to making progress toward renewable energy, US investment in which is down by 5% in 2013 compared to the previous year.27 Energy companies are acting as though they will be able to utilize these reserves because there really isn't anything on the table that would prevent them from doing so. The onus is on government to act in accordance with scientific data and to initiate firm measures that will lead to an urgent transition in energy, for which less and less time is left with every passing day.
1 Parts per million.
2The Physical Science Basis, AR5, WG1, IPCC 2013 http://www.ipcc.ch/report/ar5/wg1/
3“UN's 2C target will fail to avoid a climate disaster, scientists warn”, The Guardian, 3 December 2013
4The Cancun Agreements (UN), 2010 http://cancun.unfccc.int/
6Heat-Trapping Gas Passes Milestone, Raising Fears
7 Here we are considering only CO2, not CO2 equivalents. This is relevant because for an understanding of the overall picture, we would have to add in the effect of other greenhouse gases, such as methane, which is already and will become an even greater factor in a scenario that opts to rely strongly on Natural Gas (see 16).
8CO2 Concentrations Top 400 Parts Per Million throughout Northern Hemisphere. World Meteorological Organization, May 26, 2014 http://www.wmo.int/pages/mediacentre/press_releases/pr_991_en.html
9Gt, 1 gigatonne = 1 billion tonnes
10The Physical Science Basis, IPCC Working Group I Fifth Assessment Report, Summary for Policymakers, p 27, September 2013 http://www.climatechange2013.org/images/report/WG1AR5_SPM_FINAL.pdf
11These data come from a scientific estimate in which in a 2ºC increase scenario, 0.4ºC would come from gases other than carbon dioxide, leaving a 1.6ºC increase caused by CO2 contributions, which would correspond to 2900Gt of CO2.
12World Energy Outlook 2012, Executive Summary International Energy Agency http://www.iea.org/publications/freepublications/publication/English.pdf
13El cénit del petróleo y de los combustibles fósiles y sus críticos. Antonio García-Olivares, 2014
15More and more studies indicate that real methane emissions, particularly from Natural Gas production –on the rise because of fracking –, are notably higher than estimated values, whilst the IPCC (see note 3) has simultaneously revised the warming potential of methane, concluding that it, also is greater than previously thought.
For more information, see: “El gas que ralentiza” Samuel Martín-Sosa, Energías Renovables, junio 2014
16 It is important to stress that nearly the entirety of these atmospheric CO2 emissions “should” occur during the first half of the century. During the second half, according to the Carbon Tracker study, it would be barely acceptable to release 75Gt of CO2 (if we desire to preserve an 80% chance of staying within the 2ºC increase limit), which is equivalent to two years’ worth of emissions at the current rate.
17World Energy Outlook 2012, Resumen Ejecutivo, Agencia Internacional de la Energía
18The Carbon Capture and Sequestration Adventure Comes to an End
19Carbon Tracker 2013
20Proven Reserves (1P) refers to those deposits for which the probability that they can be profitably extracted is 90%. See: Shale Gas in Spain, Jesús Garijo, Ecologista, 77 http://www.ecologistasenaccion.org/article26536.html#nb2-4
21Proven and Probable Reserves (2P reserves): deposits for which the probability that of profitable extraction is 50%. See: Shale Gas in Spain, Jesús Garijo, Ecologista 77 http://www.ecologistasenaccion.org/article26536.html#nb2-4
22Unburnable carbon: Rational Investment for sustainability, NEF, 2012 http://b.3cdn.net/nefoundation/4335af2e57cdeaefb7_2rm6b0e81.pdf
23 Investors scrutinize portfolio performance according to specific parameters, without necessarily paying attention to the fundamental value of an asset, which may be at risk in a low-carbon economy.
24Stranded Carbon Assets. Why and how risks should be incorporated in investment analysis. Generation Foundation, 2013 http://genfound.org/media/pdf-generation-foundation-stranded-carbon-assets-v1.pdf
27Fracking Absorbs Investment for Renewable Energy in the USA
Samuel Martín-Sosa Rodríguez, International Coordinator, Ecologistas en Accion