Investors in fossil fuel companies need to question spending on reserves exploration to hedge against the risk of strong climate policy to maintain global warming below a 2°C target, according to new research by the UCL Institute for Sustainable Resources at University College London.
The research, which analyses unused fossil fuels and its implications for climate change policy, is funded by the UK Energy Research Centre and has been published in scientific journal Nature this week.
It has been written by Professor Paul Ekins, Professor of Resources and Environmental Policy and Research Associate Dr Christophe McGlade.
It finds that a third of oil reserves, half of gas reserves and over 80% of current coal reserves globally should remain in the ground and not be used before 2050 if global warming is to stay below the 2°C target agreed by policy makers.
Speaking to Responsible Investor, McGlade said: “If we are in a world of stringent carbon control, investors in fossil fuel companies have to question whether spending budgets on reserves exploration is valuable. They should be considering hedging against strong climate policy and asking for a dividend pay-out instead perhaps.”McGlade cites research from UK-based non-profit the Carbon Tracker Initiative that calculates the development budgets of fossil fuel companies is around $670bn. “It’s self-defeating in aggregate,” said McGlade. “Even if anything is discovered there may be no production of it.”
Reacting to the UCL research today, James Leaton, Research Director of Carbon Tracker said: “The UCL research confirms that expensive coal, oil sands, Arctic and unconventionals are beyond the carbon budget. It is a reminder that companies need to justify spending more capital on high-cost projects given the clear direction of travel towards a low carbon economy.”
The UCL paper was originally written around a year ago, before the current drop in oil prices. McGlade said a low oil price could put further impetus behind the introduction of a carbon tax. “It makes it more feasible, as to date it has been difficult for policy makers because of the fear of a consumer backlash. With consumers feeling cheaper prices at the pump there is the potential for a carbon tax.”
He also speculated that the risk of climate policy could lead to oil-producing countries to ramp up activity as they anticipate much lower demand in 40-50 years.