If you believe in the hypothesis of manmade global warming, then you believe a price must be paid for dealing with the issue. If you are pessimistic, you might say the price is just too high and we are doomed. If you are an optimist, you might say renewables and new technology will save the day. Either way, it appears that the markets, accountants, and big corporates are either burying their head in the sand, engaged in some kind of mass deceit, or just got sucked up by the madness of crowds.
According to a new report from Carbon Tracker and the Grantham Research Institute, companies listed on global stock exchanges may be overvalued by almost $6 billion, because they are counting as assets reserves of coal, oil and gas that, under carbon emissions targets, are unburnable.
The gist of the report is as follows:
In 2010 governments confirmed in the Cancun Agreement that: “emissions should be reduced to avoid a rise in global average temperatures of more than 2°C above pre-industrial levels, with the possibility of revising this down to 1.5°C.”
In order to meet this target, it has been calculated that the carbon budget between now and 2050 is between 565 and 886 billion tonnes of carbon dioxide. According to the World Energy Outlook 2012, the total reserves of oil, gas and coal – including state owned assets – are equivalent to 2860 billion tonnes of carbon dioxide.
In short, only around 25 per cent or so of total reserves of are burnable.
The total coal, oil and gas reserves listed on the world’s stock exchanges equals 762 billion tonnes of carbon dioxide. Presumably only 25 per cent or so of these reserves are burnable.
The report maintains that the oil, gas and coal reserves support $4 trillion worth of equity valuations and $1.27 trillion in outstanding debt.
Or to put it another way, stocks markets appear to be overvaluing these reserves by around $4 trillion.
The report stated: “If CAPEX continues at the same level over the next decade it would see up to $6.74trillion in wasted capital developing reserves that is likely to become unburnable.”
Professor Lord Stern – who you may recall was the author of the imaginatively entitled Stern Report on global warming, published when Gordon Brown was Prime Minister – wrote the foreword to the report. He said: “Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision. The report raises serious questions as to the ability of the financial system to act on industry-wide long term risk, since currently the only measure of risk is performance against industry benchmarks.”
© Investment & Business News 2013