Climate scenario analysis reveals expenditure risks for fossil fuel firms

Carbon Tracker’s latest report flags up $1.6trn of potential ‘wasted spending’

Fossil fuel companies are at risk of losing $1.6trn by 2025 if they align their business models with current government emissions policies rather than international climate goals, according to a new report from Carbon Tracker. 
Prompted by growing investor concern on the topic, Carbon Tracker performed scenario analysis on fossil fuel companies for Mind the Gap: the $1.6 trillion Energy Transition Risk, which claims to be the first study to model oil, coal and gas demand under three climate scenarios published by the International Energy Agency: the Beyond 2 Degrees Scenario (aligned 1.75°C), the Sustainable Development Scenario (aligned with 2°C) and the New Polices Scenario (aligned with 2.7°C).  
It finds that, when comparing demand in a 1.75°C world with that of a 2.7°C world, $1.3trn of future spending is at risk in the oil industry, with the US most exposed ($545bn at risk). For the gas industry, $228bn of future investment is at risk, and for coal it is $62bn. 
Andrew Grant, Senior Analyst at Carbon Tracker and author of the report, said: “As present, governments’ policies fall a long way short of the ultimate goal committed to that at Paris, but we should expect a ratcheting up of international efforts. Companies that misread the signals and overinvest in marginal oil, gas and coal projects based on a false sense of security could destroy shareholder value worth billions of dollars.” Carbon Tracker did the report after investors said they wanted analysis of fossil fuel capital expenditure risk under higher ambition climate scenarios since the Paris agreement, said Grant.  
“There is still space for new projects even in a 1.75°C scenario,” he said. “Even with falling demand you still need a bit of oil and gas investment. The question is how much.” 
Carbon Tracker has previously published evidence that develops in clean technologies undermine the business case for fossil fuel investment, irrespective of climate targets. However, the latest report reflects a growing move towards scenario analysis as a way of assessing future risks for companies and investment portfolios – spurred on by the Task Force on Climate-related Finance Disclosures (TCFD), which is being endorsed by a number of governments and regulators globally.
Broker firm Kepler Chevreux and consultancy The CO-Firm recently launched a report looking at how scenario analysis can be integrated into company valuations and responsible investment strategies.  
The document, titled Investor Primer to Transition Risk Analysis, builds on a report published by 2º Investing Initiative, entitled Transition Risk Toolbox – Scenarios, Data and Models and TCFD’s supplement on scenario analysis.