Unburnable carbon: A new ally in the battle against climate change

When you want someone to stop doing something, is it more effective to ask them to be altruistic or to tell them they might lose money if they keep doing it? 

When you want someone to stop doing something, is it more effective to ask them to be altruistic or to tell them they might lose money if they keep doing it?

More specifically, if you’re against an energy megaproject, should you ask the CEO to think about the global climate change implications, or tell the shareholders they are about to kiss a few billion dollars goodbye?

Lots of newspaper columns, including this one, are often filled with mentions of big new projects with eye-popping multi-billion dollar capital budgets. In the last few weeks alone, I’ve mentioned Russia’s Yamal liquefied natural gas project, Alaska and B.C. pipelines and LNG export terminals, and the Alberta oil sands.

Meanwhile, in some other part of the paper, there is usually a story about the increasingly convincing evidence that human carbon emissions are changing the climate in scary ways.

Some smart financial types, mostly in London, connected these dots and asked the question: why are people investing billions in megaprojects that take decades to pay back, if there is a sizeable risk that future climate change policies will make these projects lose money?

The call themselves the Carbon Tracker Initiative, and their think tank is funded by some big name European and American foundations. Their reports, couched in language familiar to CEOs and investment fund managers, has rippled through the energy markets like a post-frack quake.

The people that manage billion-dollar investment funds are supposed to be smart. But the markets can make big mistakes. Look at the giant write-offs the big global mining companies are announcing these days. All those acquisitions, mergers and megaprojects attracted a lot of capital a few years ago, but a lot of them look like duds today.

Carbon Tracker reports that the major oil companies have $548 billion (all figures U.S. dollars) in investment planned over the next decade in projects that require oil prices to be at least $95 per barrel. It’s a third of their total spending. The number would likely be over a trillion dollars if you included plans by the big state-owned oil companies around the world (but they tend to be less transparent than Big Oil and their owners are largely immune to stock market pressure).

Many of the projects on this list include Arctic and deep-water initiatives that give environmentalists the heebie-jeebies.

Carbon Tracker points out that these projects could turn out to be “low return assets in a low-demand scenario” and that investors should “challenge developments that carry an undue risk of wasting capital and destroying value.” Carbon Tracker’s latest report includes a handy table of how many billions each oil company plans to spend on Arctic, oil sands and deep water projects, even listing the cancellation candidates by name.

CEOs hate going on the quarterly earnings call and having analysts ask pointed questions about big projects that carry an undue risk of wasting capital and destroying value.

Any think tank that wants to get noticed has to come up with some snappy buzzwords, and Carbon Tracker has excelled at this. They popularized the phrase “carbon bubble” and put out reports with catchy titles like “Unburnable Carbon: Wasted Capital and Stranded Assets.” The general idea is that there is irrational optimism in the markets around investment in energy megaprojects, which will leave unwary investors owning money-losing assets. If the planet ever gets serious about reducing carbon emissions, then plenty of the oil and gas under these megaprojects will have to stay in the ground forever (hence the “unburnable carbon” concept).

Coming so soon after the popping of the U.S. housing bubble, these ideas have caught the attention of investors.

Carbon Tracker is not the only group thinking along these lines. Some energy companies have already been talking about greater “discipline” in capital spending. A number of high-profile projects in Alberta, Arctic and deep-water regions have recently been put on hold due to concerns about marginal economics and risk.

We have yet to see whether this focus on capital discipline will be just a speed bump on the road to another trillion dollars in fossil-fuel infrastructure, or the start of a major re-think by the energy industry.

In the meantime, you might want to have a look at some of those mutual fund prospectuses you throw right into the recycling. If you own Canadian mutual funds or index funds tracking the Canadian or U.S. markets, as most Canadian investors do, you probably own more shares than you think in companies on Carbon Tracker’s list. The answer to the question of who is investing risky energy megaprojects might be “you.”

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or

Twitter @hallidaykeith