9 december 2011

A profound contradiction at the heart of climate change policy

By Nicholas Stern, Financial Times, December 9, 2011

As the negotiations at the UN climate change summit in Durban reach the critical stage, we must not overlook a fundamental contradiction between the way global fossil fuel reserves are evaluated and long-term policy goals. By ignoring this contradiction, companies and markets, as well as governments, are undermining management of the huge risks that rising levels of greenhouse gases pose to their survival.

At Cancùn last December, countries attending the last climate change summit agreed on curbing annual greenhouse gas emissions in order to avoid global warming of more than 2 centigrade degrees from the mid-19th century, which would carry unacceptably large risks.

Scientists warn that achieving about a 50 per cent chance of meeting the 2 degree goal requires cutting global annual emissions from the current level of about 48bn tonnes a year of carbon dioxide equivalent, to about 44bn tonnes in 2020, less than 35bn tonnes in 2030 and less than 20bn tonnes in 2050.

It is cumulative emissions that are important and such paths are consistent with a total emissions budget of 1,200bn to 1,400bn tonnes between 2010 and 2050. A more stringent target, say consistent with an 80 per cent chance of meeting the 2 degree goal, would have an even smaller budget of 500-600bn tonnes.

More than two-thirds of current annual emissions of greenhouse gases are carbon dioxide produced by the burning of coal, oil and gas. But according to the Carbon Tracker Initiative , proven reserves of fossil fuels, the big majority owned by nation states, would, if burned, produce 2.8tn tonnes of carbon dioxide, about double the carbon budget for the 50-50 chance of meeting the 2 degrees target.

Of this total, the proven reserves of the world’s top 100 listed coal companies and top 100 listed oil and gas companies could produce 745bn tonnes of carbon dioxide, more than half of the entire greenhouse gas budget for the next 40 years. National oil companies, often not listed, have far bigger proven reserves. Companies probably have substantial further potential reserves, and there are billions of dollars committed to searching for more, including tar sands and shale gas.

It is hard to believe that these companies, with a combined value of $7.42tn, are banking on an imminent deployment of carbon capture and storage, which prevents carbon dioxide from being emitted from the burning of fossil fuels.

So are they assuming countries will not meet their pledges for reducing emissions, and that we will carry on with “business as usual”? If this is the case, the resulting rise in atmospheric concentrations could eventually mean, with a substantial probability, global warming of 5 degrees or more, to temperatures not seen on Earth for more than 30m years. That would probably transform where and how people could live and lead to the migration of hundreds of millions, as well as to conflict and severe economic decline.

There is therefore a profound contradiction between declared public policy and the valuations of these listed companies, based on their fossil fuel reserves, which appear to assume that the world will not get anywhere near its targets for managing climate change.

This contradiction is important. It means that the market has either not thought hard enough about the issue or thinks that governments will not do very much – or somewhere between the two. This presents problems for markets’ assessment of risk; for governments’ credibility; and for regulators, whose approach appears to contradict their own governments’ policies.

This argument makes no prediction of where the world may go. It points to a logical contradiction between what many governments are saying and what markets appear to believe – implying severe risks both to the markets themselves and to the environments that shape lives and livelihoods across the world.

We should recognise that this kind of tension affects not only producers of fossil fuels, but also the industries that use them intensively and the fiscal position of governments holding large reserves.

Surely honesty and transparency require that this contradiction and its implied risk to the balance sheets of large companies – or to the planet, or both – be recognised and tackled.

The writer is I.G. Patel professor of economics and government and chair of the Grantham Research Institute at the LSE

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