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I would say that runaway climate change would unleash a financial crisis - LOL
Unburnable
Carbon Bubbles
Ilargi
Raul Meijer
29
April, 2013
A
report came out in Britain 10 days ago that deserves more attention
than it got. If only because it uses the great term "unburnable
carbon", great even before it's defined. It makes me ponder the
popular and somewhat crazy claims about shale and fracking leading to
US energy independence, the holy grail du jour.
It
promises much vaunted freedom from outsiders, but what exactly does
it consist of? Does it mean the ability to burn ever more
carbon-based energy sources without having to buy them abroad? And
does "abroad" include Canada, or do we think of this as an
"energy Nafta"? Guys, if you would just waste a bit less of
the stuff, you'd have been energy independent ages ago without having
to inject tons of toxic concoctions into your land. What on earth are
you thinking?
"Unburnable
carbon" also makes me think of Professor Kenneth Deffeyes, who
stated that"Crude oil is much too valuable to be burned as
a fuel" , in reference to the long list of
products, some of which are very beneficial to us (think medicine),
that are made with oil carbons.
Deffeyes
also said: "Thirty years from now, oil will be little
used as a source of energy. Our grandchildren will say, 'you burned
it? All those beautiful molecules? You burned it?'" Will
we ever understand this? Not very likely. We don't even think about
it. We just want to find more of the stuff and then burn it. Give any
organism access to an energy surplus, and it will use it up as fast
as possible. Man is no exception.
But
first, that report. Which claims that national and international
climate targets risk leaving huge amounts of oil and gas stranded.
The risk alone should be enough to inject so much uncertainty into
the markets that they could plunge into a huge crisis. Damian
Carrington for The Guardian:
The
world could be heading for a major economic crisis as stock markets
inflate an investment bubble in fossil fuels to the tune of trillions
of dollars, according to leading economists.
"The
financial crisis has shown what happens when risks accumulate
unnoticed," said Lord (Nicholas) Stern, a professor at the
London School of Economics. He said the risk was "very big
indeed" and that almost all investors and regulators were
failing to address it.
The
so-called "carbon bubble" is the result of an
over-valuation of oil, coal and gas reserves held by fossil fuel
companies. According to a report published on Friday, at least
two-thirds of these reserves will have to remain underground if the
world is to meet existing internationally agreed targets to avoid the
threshold for "dangerous" climate change. If the
agreements hold, these reserves will be in effect unburnable and so
worthless – leading to massive market losses . But the
stock markets are betting on countries' inaction on climate change.
The
stark report is by Stern and the thinktank Carbon Tracker. Their
warning is supported by organisations including HSBC, Citi, Standard
and Poor's and the International Energy Agency. The Bank of England
has also recognised that a collapse in the value of oil, gas and coal
assets as nations tackle global warming is a potential systemic risk
to the economy, with London being particularly at risk owing to its
huge listings of coal.
Stern
said that far from reducing efforts to develop fossil fuels, the top
200 companies spent $674bn (£441bn) in 2012 to find and exploit even
more new resources, a sum equivalent to 1% of global GDP, which could
end up as "stranded" or valueless assets. Stern's landmark
2006 report on the economic impact of climate change – commissioned
by the then chancellor, Gordon Brown – concluded that spending 1%
of GDP would pay for a transition to a clean and sustainable economy.
The
world's governments have agreed to restrict the global temperature
rise to 2C, beyond which the impacts become severe and unpredictable.
But Stern said the investors clearly did not believe action to curb
climate change was going to be taken. "They can't believe that
and also believe that the markets are sensibly valued now."[..]
Paul
Spedding, an oil and gas analyst at HSBC, said: "The scale of
'listed' unburnable carbon revealed in this report is astonishing.
This report makes it clear that 'business as usual' is not a viable
option for the fossil fuel industry in the long term. [The market] is
assuming it will get early warning, but my worry is that things often
happen suddenly in the oil and gas sector."
HSBC
warned that 40-60% of the market capitalisation of oil and
gas companies [is] at risk from the carbon bubble, with the top
200 fossil fuel companies alone having a current value of $4
trillion, along with $1.5 trillion debt. [..]
The
report calculates that the world's currently indicated fossil fuel
reserves equate to 2,860 billion tonnes of carbon dioxide, but that
just 31% could be burned for an 80% chance of keeping below a 2C
temperature rise. For a 50% chance of 2C or less, just 38% could be
burned.
Carbon
capture and storage technology, which buries emissions underground,
can play a role in the future, but even an optimistic scenario which
sees 3,800 commercial projects worldwide would allow only an extra 4%
of fossil fuel reserves to be burned. There are currently no
commercial projects up and running. The normally conservative
International Energy Agency has also concluded that a major part of
fossil fuel reserves is unburnable. [..]
Jeremy
Grantham, a billionaire fund manager who oversees $106bn of assets,
said his company was on the verge of pulling out of all coal and
unconventional fossil fuels, such as oil from tar sands. "The
probability of them running into trouble is too high for me to take
that risk as an investor." He said: "If we mean to burn all
the coal and any appreciable percentage of the tar sands, or other
unconventional oil and gas then we're cooked. [There are] terrible
consequences that we will lay at the door of our grandchildren."
And
it's of course not just the US that is involved. All major energy
producers (and consumers) are. Nor is it just oil and gas: coal could
get hit hard. Damian Carrington had this on Australia over the
weekend:
Australia's
huge coal industry is a speculative bubble ripe for financial
implosion if the world's governments fulfil their agreement to act on
climate change, according to a new report. The warning that much of
the nation's coal reserves will become worthless as the world hits
carbon emission limits comes after banking giant Citi also warned
Australian investors that fossil fuel companies could do little to
avoid the future loss of value.
Australia
is already the globe's biggest coal exporter and "mega-mine"
plans in Queensland for more extraction are identified as the world's
second biggest "carbon bomb" threatening runaway global
warming.
"Investments
in Australian coal rest on a speculative bubble of climate denial,
indifference or dreaming," said John Connor, one of the new
report's authors and CEO of The Climate Institute, an independent
research organisation based in Sydney. "Investors, governments
and even some coal companies say they take climate change seriously,
but this report shows they do not or are taking risky gambles."
James
Leaton, at thinktank Carbon Tracker and also another of the report's authors, said: "Investors need to challenge the assumption that
coal demand will continue to rise in China and elsewhere, otherwise
billions of dollars of taxpayer, superannuation and shareholder funds
will be wasted in assets linked to unburnable carbon."
Carbon
Tracker's recent global report found that at least two-thirds of
existing fossil fuel reserves will have to remain underground if the
world is to meet existing internationally agreed targets to avoid the
threshold for "dangerous" climate change. The new report
shows Australian coal reserves owned by listed companies alone are
equivalent to 25% of the global carbon budget for the fuel to 2050.
However,
far from cutting back on exploration for new coal reserves,
Australian listed companies spent AU$6 billion on developing new
deposits. If only half of potential future reserves were exploited,
Australian coal would use up 75% of the global carbon budget for the
fuel.
Earlier
in April, Citi banking group issued a warning to investors in fossil
fuel companies. "We see limited potential for engagement to
alter the outcome in this case," concluded its report. "If
the unburnable carbon [scenario] does occur – even with carbon
capture and storage technology – it is difficult to see how the
value of fossil fuel reserves can be maintained."
Leaton
said China has indicated its coal use will peak in the next five
years, but that this had not been priced by markets. "I don't
know why the market does not believe China. When it says it is going
to do something, it usually does." Yet Australia is banking on
selling coal to China: "That doesn't add up."
Still,
you could argue that governments will try to find a way to ignore
climate treaties. Once they start painting a picture of plunging
economies and lifestyles for their people, the hope will be that the
treaties can be watered down to facilitate business as usual. Given
the strength and broad appeal of climate activism, that won't be as
easy as some might think.
For
the Canadian government and economy, climate issues may not be the
biggest headache going forward. Ottawa faces a growing and steadily
better organized resistance from Indigenous peoples. Who, if they
resist being divided and bought off, can be a major pain in the
government butt, not least of all because they still have many elders
who remember being raised on notions of keeping the land fit to pass
on to multiple generations. Large scale exploitation of carbon
resources doesn't seem to fit that bill. Martin Lukacs for the
Guardian in December last year:
Canada's
placid winter surface has been broken by unprecedented protests by
its aboriginal peoples. In just a few weeks, a small campaign
launched against the Conservative government's budget bill by four
aboriginal women has expanded and transformed into a season of
discontent: a cultural and political resurgence.
It
has seen rallies in dozens of cities, a disruption of legislature,
blockades of major highways, drumming flash mobs in malls, a flurry
of Twitter activity under the hashtag #IdleNoMore and a hunger strike
by Chief Theresa Spence, in a tepee minutes from Ottawa's parliament.
Into her tenth day, Spence says she is "willing to die for her
people" to get the prime minister, chiefs and Queen to discuss
respect for historical treaties.
[..]
What remains unspeakable in mainstream politics in Canada was
recently uttered, in a moment of rare candour, by former Prime
Minister Paul Martin:
"We
have never admitted to ourselves that we were, and still are, a
colonial power."
[..]
While Canada has the world's largest supply of fresh water, more than
100 aboriginal communities have tapwater so foul they are under
continual boil alert. Aboriginal peoples constitute 3% of Canada's
population; they make up 20% of its prisons' inmates. In the far
north, the rate of tuberculosis is a stunning 137 times that of the
rest of the country. And the suicide rate capital of the world? A
small reserve in Ontario, where a group of school-age girls once
signed a pact to collectively take their lives.
Such
realities have not stopped politicians and pundits from prattling on
about the sums supposedly lavished on aboriginal peoples. [..]
Billions have indeed been spent – not on fixing housing, building
schools or ending the country's two-tiered child aid services, but on
a legal war against aboriginal communities.
Every
year, the government pours more than $100 million into court battles
to curtail aboriginal rights – and that figure alone went
to defeating a single lawsuit launched by two Alberta First Nations
trying to recover oil royalties essentially stolen by bureaucrats.
Despite
such odds, the highest courts of the land have ruled time and again
in favour of aboriginal peoples. Over the last three decades, they
have recognized that aboriginal nations have hunting, fishing and
land rights, in some cases even outright ownership, over vast areas
of unceded territory in British Columbia and elsewhere.
Parliament
will soon debate a bill that would break up reserves – still,
mostly, collectively held – into individual private property that
can be purchased by non-native speculators. The undeclared agenda of
government policy is the same as it was a century ago: a grab for
resource-rich lands, and the assimilation of aboriginal nations.
The
Canadian federal and provincial governments act on a "shoot
first, talk later" basis. As in many other places in the world,
government policy is based on bullying citizens into compliance with
what are labeled "democratic policies", which actually
hugely benefit both the government and its corporate backers
financially, but leave those citizens with mere scraps off the table.
In
Canada, the situation is far less simple than the government would
like, because aboriginal - land - claims that have been ratified in
various treaties, and on many occasions confirmed by its own Supreme
Court, numerous times, can't just be ignored without trampling both
democracy itself and the rule of law.
In
a very cynical move, Ottawa spends $100 million per year in legal
fees to fight these aboriginal claims in courts across the country.
Cynical because one might argue that this stunning amount of money
rightfully belongs to the aboriginal population in the first place:
hence, their own money is being used to keep them poor. Lukacs again:
In
a boardroom in a soaring high-rise on Wall Street, Indigenous
activist Arthur Manuel is sitting across from one of the most
powerful financial agents in North America.
It's
2004, and Manuel is on a typical mission. Part of a line of
distinguished Indigenous leaders from western Canada, Manuel is what
you might call an economic hit-man for the right cause. A brilliant
thinker trained in law, he has devoted himself to fighting Canada's
policies toward Indigenous peoples by assailing the government where
it hurts most – in its pocketbook.
Which
is why he secured a meeting in New York with a top-ranking official
at Standard & Poor's, the influential credit agency that issues
Canada's top-notch AAA rating. That's what assures investors that the
country has its debts covered, that it is a safe and profitable place
to do business.
This
coveted credit rating is Manuel's target. His line of attack is to
try to lift the veil on Canada's dirty business secret: that contrary
to the myth that Indigenous peoples leech off the state, resources
taken from their lands have in fact been subsidizing the Canadian
economy.
In
their haste to get at that wealth, the government has been flouting
their own laws, ignoring Supreme Court decisions calling for the
respect of Indigenous and treaty rights over large territories.
Canada has become very rich, and Indigenous peoples very poor.
In
other words, Canada owes big. Some have even begun calculating how
much. According to economist Fred Lazar, First Nations in northern
Ontario alone are owed $32 billion for the last century of
unfulfilled treaty promises to share revenue from resources. Manuel's
argument is that this unpaid debt – a massive liability of
trillions of dollars carried by the Canadian state, which it has
deliberately failed to report – should be recognized as a risk to
the country's credit rating.
How
did the official who could pull the rug under Canada's economy
respond? Unlike Canadian politicians and media who regularly dismiss
the significance of Indigenous rights, he took Manuel seriously. It
was evident he knew all the jurisprudence. He followed the political
developments. He didn't contradict any of Manuel's facts.
He
no doubt understood what Manuel was remarkably driving at: under
threat of a dented credit rating, Canada might finally feel pressure
to deal fairly with Indigenous peoples. But here was the hitch:
Standard & Poor's wouldn't acknowledge the debt, because the
official didn't think Manuel and First Nations could ever collect it.
Why? As author Naomi Klein, who accompanied Manuel at the meeting,
remembers, his answer amounted to a realpolitik shoulder shrug.
"Who
will able to enforce the debt? You and what army?"
[..]
The movement confronts a Conservative Canadian government
aggressively pursuing $600 billion of resource development on or near
Indigenous lands. That means the unbridled exploitation of huge
hydrocarbon reserves, including the three-fold expansion of one of
the world's most carbon-intensive projects, the Alberta tar sands.
Living closest to these lands, Indigenous peoples are the best and
last defence against this fossil fuel scramble.
No
surprise, then, about the government's basic approach toward First
Nations: "removing obstacles to major economic development."
Hence the movement's next stage – a call for defiance branded
Sovereignty Summer – is to put more obstacles up. The assertion of
constitutionally-protected Indigenous and treaty rights – backed up
by direct action, legal challenges and massive support from Canadians
– is exactly what can create chronic uncertainty for this corporate
and government agenda. [..]
The
"Lord Stern report" focuses on the carbon bubble caused by
the discrepancy between climate targets and the exploitation of
carbon resources.
But
there's another potential bubble in carbon that the report does not
address: a large part of the resources will simply never become
economically viable.
Even
before you run into climate related limits, a lot of carbon will
prove unburnable not primarily because of climate change legislation,
but because of either one of two issues: 1) physics meets monetary
limits, i.e. developing the asset makes no sense economically, or 2)
physics meets physics, i.e. developing the asset makes no sense in
energy terms because it costs more energy than it delivers.
In
connection with these two issues, at present a substantial part of
America's unconventional oil and gas only looks financially
interesting because of the fortunes being made in speculation, for
instance in land and land rights (in true Enron spirit, Aubrey
McClendon and Chesapeake Energy have blown a huge market distorting
bubble there).
Far
more money is spent on the promise of oil and gas plays than on the
actual product. The result is a carbon related land (rights) bubble,
and a typical case of something that looks good; until it doesn't.
But
there's more. A large part of the money that is being lavished on the
carbon bubble is zombie money. If that money were not available,
there would be no bubble. Every single debt that is not properly
recognized, and restructured or defaulted upon, leaves zombie money
present in a financial system. And every single asset this zombie
money is invested in is by definition in a bubble.
If
people had a more profound understanding of what occurs when debts
are not cleansed the way they should be, there would be no zombie
money. As it stands, accounting standards in nations hit by the
2007-08 crisis have become running jokes, all in order to hide the
real state of both governments and financial institutions.
Hiding
debt means hiding reality. Neither can remain hidden forever. Which,
come to think of it, sets them apart from a lot of carbon resources.
Which will never see the light of day.
The
point to take away from all this is that a storm cloud of
uncertainties is taking shape above the carbon industry. And that
alone will be enough to leave a lot of carbon unburnable. Which may
not be such a bad thing.
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