The latest report from the Intergovernmental Panel on Climate Change (IPCC), which I very briefly summarised yesterday, has some huge and obvious implications for business. Perhaps the most important and far reaching is that, as New Scientist has pointed out, like it or not we will now have to leave most known reserves of fossil fuels in the ground if we are to continue to enjoy a stable climate. Yes, that’s huge.
The new IPCC report details how much the world is likely to warm during this century, depending on the amount of greenhouse gases, chiefly CO2, we continue to pump into the atmosphere. The burning of fossil fuels is the main source of the vast amount of CO2 humanity is emitting each year. To have a decent chance of keeping global temperatures from rising more than the 2 degrees celsius scientists have estimated to be a “safe” level, we are going to have to not exceed more than a 1 trillion tonne “carbon budget”. The trouble is, we have already burned more than half of that, so we have less than 500 gigatonnes of CO2 left in the carbon budget.
A major complication is that some (well, a lot) of fossil fuels are already counted as assets by energy companies. There’s obviously going to be a great deal of resistance to having those assets written off as worthless because they, in all good conscience, cannot be dug up and burned. It has been estimated that burning all known fossil fuel reserves would release almost 3000 gigatonnes of CO2, when we only have 500 left to safely emit. What’s more, energy companies (and supported by governments) are currently spending a great deal of money attempting to find even more.
This is a really basic equation that doesn’t add up to a stable climate, and investors in fossil fuel companies should be alerted to it. No doubt this will be an increasingly major issue for investors, including big institutional investors, in coming years as the reality of the carbon budget equation starts to hit home.
Recently we have started to see an increasingly successful movement encouraging investors to start to divest (remove investment money) from fossil fuel companies. Now, with the carbon budget findings set out in black and white in a major scientific report on climate change, no doubt this movement will start to gain more momentum. In particular, if a lot of people’s superannuation savings remain locked up in carbon intensive investments that are destined to lose value, that’s a problem that will need to be addressed by governments sooner rather than later.
Image CC licensed by Jeremy Buckingham