Carbon Tracker’s 12 days of Christmas…

A summary of how the landscape for Carbon Tracker’s work has progressed…

As 2014 draws to a close, we momentarily step back from the mince pies to take stock of what has been another monumental year for Carbon Tracker with our research evolving from high-level risk statements to deep-dive analytics on oil and coal projects globally (with gas to follow in 2015), unprecedented progress being made within climate risk financial regulation, all made possible by the expansion of our team from 3 to 10 employees.

Back due to popular demand, this summary of how the landscape for Carbon Tracker’s work has progressed will take a certain festive form.

“On the 12 days of Christmas, 2014 gave to me:

One elephant in the atmosphere

Volatility in the price of oil, especially in the latter parts of 2014, has increased scrutiny on the viability of future oil production with high break-even points in the mainstream media. Back in July the Economist concluded that managers of oil firms betting on high oil prices despite the need for a climate fix are taking a ‘gamble’ – the ‘elephant in the atmosphere’ as the Economist put it, is the possibility that this will backfire and lead to investors dumping their oil shares. In light of the current oil price, this will certainly be an area to watch in 2015.

Two many sub-prime assets

The Telegraph have been issuing similar warnings this year. The breakthrough article titled ‘Fossil industry is the subprime danger of this cycle’ continued to focus on breakeven points, specifically the fact that not a single large project has come on stream at less than $80 a barrel for three years while capital expenditure continues to soar. The newspaper continued flagging such risks in November when it reported that climate regulations, typified by the US and China agreement, could lead to ‘trillions of stranded assets’ for the oil industry.

Three oil sands projects shelved

Carbon Tracker research has found that almost 40% of investments to 2025 on ‘risky’ projects requiring $95+ a barrel are in Alberta’s oil sands. 2014 saw the Corner, Joslyn and Pierre River oil sands projects get shelved due to unfavourable market conditions therefore avoiding at least $11 billion of stranded investments – at significantly higher oil prices than we see today. Carbon Tracker’s report questions whether the market will upturn sufficiently to make some projects economic. And in December the FT ran a letter from Carbon Tracker pointing out how the Keystone XL pipeline would only make production more attractive in the short run – a real trap as argued by our research.

Four majors engaging on the carbon bubble

Shareholder resolutions from As You Sow and Arjuna Capital challenging oil and gas companies to demonstrate their consideration of and resilience to carbon asset risk led to unprecedented comments from BP, Shell, ExxonMobil and Statoil on the issue. As expected, each company dismissed the possibility of carbon constraints constraining future demand for oil and gas, while asserting that the risk of the ‘carbon bubble’ is overstated. Interestingly, however, each company acknowledged that climate change is a serious issue on which action must be taken – but none proposed a solution – Carbon Tracker issued analytical rebuttals to Shell and ExxonMobil.bq. FIVE COAL THINGS!

1. Carbon Tracker’s Carbon Supply Cost Curve report on thermal coal forecasts demand to peak in 2016 rendering $112bn of future capital expenditure in potential production at risk of being stranded. The highlight of media coverage of this report was a detailed piece from FT Lex.
2. Underpinning this forecast of global peak coal demand was the suggestion that thermal coal demand will peak in China in 2016. This year Carbon Tracker released a report looking specifically at stranded asset risk in China’s coal sector.
3. Since 2011 the US coal sector has crashed, largely due to the emergence of shale gas and US EPA regulations. Peabody Energy, the largest producer, has lost 78% of its market capitalisation.
4. Outside the US, a growing number of mining companies are trying to exit thermal coal, with Rio Tinto, Anglo American and Vale trying to sell its cost assets, as well as Japanese trading houses Itochu and Sumitomo, while BHP Billiton are spinning theirs off.
5. The coal industry has responded by stating that in the future coal will be fundamental to any efforts to eradicate global poverty. However, Carbon Tracker’s report on coal and energy access suggests that in most instances renewable energy is a more cost effective solution to provide energy for all.

A SIXth of European utilities-a-spinning (off)

In 2014, E.On became the first of the six major European utilities to adapt their business model in light of the energy transition occurring in the region which has already cost the sector trillions to date. This will involve E.On splitting into two companies, one focusing on growing renewable energy, power grids and energy efficiency, the other potentially winding down its coal and nuclear assets.

Seven engagement comments for the Norwegian oil fund

December saw the expert panel of the Norwegian Government Pension Fund Global release its review of their holdings in terms of unburnable carbon and stranded assets. They concluded that more active ownership and additional climate change criteria was the best approach to allow the most extreme companies to be excluded on a case-by-case basis. Carbon Tracker published seven key points on this analysis.

Eight hundred thousand years since current greenhouse gas levels…

…was one factor that led FT columnist Martin Wolf to conclude that ‘humanity is making risky bets in the climate casino’. Citing Carbon Tracker’s research, Martin Wolf went on to state that if humanity wakes up to this risk fossil fuel reserves would be stranded and that, crucially ‘the risk of that cannot be zero’. Wolf’s emergence as a voice on this issue, and the ‘climate casino’ more broadly, has been vital to introduce climate risks to investments to previously untapped audiences this year.

Nine members of the FPC to examine climate risk

A major breakthrough this year was the announcement from Bank of England Governor, Mark Carney, that the bank will conduct a deeper and wider inquiry into the risks associated with unburnable carbon and stranded assets. Furthermore, Mr. Carney said he expects the Financial Policy Committee (FPC) to consider these issues in examinations of financial stability risks. This announcement was quickly followed by a statement made by Energy and Climate Change Secretary, Ed Davey MP, calling on financial authorities to examine the risk of coal, oil and gas assets to pension funds in what could become ‘the sub-prime assets of the future’.

*Ten*-uous link to Barack Obama

In a public broadcast interview in June, US President Barack Obama made a hugely significant admission that ‘we’re not going to be able to it [fossil fuel reserves] all’. He said, ‘if we burned all the fossil fuel that’s in the ground right now, that the planet’s going to get too hot and the consequences could be dire’. This was supported by Obama’s climate change envoy, Todd Stern, who has since said global warming needs ‘a solution that leaves a lot of fossil fuel assets in the ground’. These announcements have helped accelerate mainstream support for the unburnable carbon and stranded assets theses.bq. Eleven hundred billion of potential oil investments too expensive

Carbon Tracker’s Carbon Supply Cost Curves report on the oil sector, launched in April 2014, found that $1.1 trillion (or 1100 billion to shoehorn into song format) of future oil investments to 2025 requires a market price of $95 a barrel or more. Especially in light of today’s oil price, Carbon Tracker recommend investors seek to reduce their exposure to the high end of the production cost curve.

Twelve NYPD officers-a-popping

The biggest climate march ever happened in New York City around the UN Climate Summit in September. The carbon bubble was present as an inflatable prop, travelling up and down the hundreds of thousands of marchers…until NYPD officers (numbers unconfirmed but either 12, less or more) decided to pop the bubble on the Wall Street Bull! The hashtag #ironyoverload subsequently trended on social media.” Link