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Author: Tom Arup
Source: The Age
Date: 19 April, 2013

Hundreds of billions of dollars in fossil fuel investments would be stranded, triggering a potential economic crisis, if companies continue to invest in fossil fuels while governments introduce stronger policies to limit global warming, a new report says.

The joint study from UK-based Carbon Tracker Initiative and the Grantham Institute finds that $674 billion was spent on exploring and developing new fossil fuel reserves around the world in 2012.

But the groups found the greenhouse gas emissions associated with current and planned fossil fuel development will easily eclipse what can be emitted to limit global warming to 2 degrees – the target agreed by countries at United Nations climate talks.

The Grantham Institute’s Lord Nicholas Stern – who wrote the the landmark 2006 Stern Review on the costs of climate change for the UK government – writes that the findings show a “gross inconsistency between current valuations of fossil fuel assets and the path governments have committed to take in order to manage the huge risks of climate change”.

The report warns the inconsistency could lead to a financial “carbon bubble”.

“Smart investors can already see that most fossil fuel reserves are essentially unburnable because of the need to reduce emissions in line with the global agreement [on climate change],” he said.

The report estimates the plant’s proven fossil fuel reserves, including those owned by state owned companies, have potential emissions of 2860 billion tonnes of carbon dioxide.

Companies listed on the stock exchange represent about a quarter of those potential emissions, at 762 billion tonnes. But if all future development flagged by global resource companies goes ahead then those emissions will double to 1541 billion tonnes.

Modelling used by the groups indicates that to have a 50 to 80 per cent chance of keeping global warming to 2 degrees, emissions to 2050 will have to be capped at 1075 to 900 billion tonnes.

Climate Tracker says the difference reflects a stark contradiction between capital markets and climate change policy, and fossil fuel investment continues unabated without recognising potential future constraints on its use.

It says once fossil fuels from state owned projects is factored in, private firms will need to leave unused 60 to 80 per cent of the coal, oil and gas they are developing if the 2 degree target is to be met.

Climate Tracker’s research director James Leaton said: “The message we want to get out there is that with every dollar you put into developing more you are making the problem worse. We really want shareholders to push companies to give more scrutiny on where they are spending their money,” Mr Leaton said.

The report says financial regulators and investors should reassess their definitions of risk to account for the “carbon bubble”, and push for greater transparency around the financial exposure of companies and markets to future constraints on greenhouse gas emissions.

An Australian analysis of the “unburnable carbon” by Citibank, released earlier this month, found investments worth about 14 per cent of the value of the Australian Stock Exchange was exposed to future limits on fossil fuel emissions.

But the report, by Citibank analyst Elaine Prior, said it was more likely the world will have greater fossil fuel use, and subsequently a greater degree of warming, than it was to keep global warming to 2 degrees.

Read article in The Age