Fossil fuel divestment necessary to avoid “carbon bubble”, says study

By: Canadian Centre for Policy Alternatives | Press Release | Posted March 29, 2013

For Immediate Release
March 26, 2013

Contact:
Kerri-Anne Finn, CCPA Senior Communications Officer
Tel: 613-563-1341 x306

Fossil fuel divestment necessary in order to avoid “carbon bubble”: study

CCPA CanadasCarbonLiabilitiesOTTAWA – Canada’s economy is experiencing a “carbon bubble” that could have significant consequences for Canada’s financial markets and pension funds, according to a new study released March 26 by the Canadian Centre for Policy Alternatives.

Between two-thirds and four-fifths of known fossil fuel reserves have been deemed to be “unburnable carbon” that cannot safely be combusted without leading to catastrophic climate change.

“Business-as-usual for the fossil fuel industry is incompatible with the need to keep the global temperature increase to 2°C or less,” says CCPA Senior Economist Marc Lee. “The recent experience of high-tech and housing bubbles should serve as a stern warning to investors and policy makers.”

The study, by Lee and SFU graduate student Brock Ellis, estimates Canada’s share of a global carbon budget and finds that, at least 78% of Canada’s proven oil, bitumen, gas, and coal reserves, and 89% of proven-plus-probable reserves would need to remain underground.

This unburnable carbon has implications for the Canadian fossil fuel industry, but also for financial markets, in particular pension funds who have invested in fossil fuel industries as part of their portfolios. The Toronto Stock Exchange is highly weighted towards the fossil fuel sector. At the end of 2011, the TSX had 405 listed oil and gas companies with a total market capitalization of over $379 billion.

The study compares assets and liabilities for more than 100 top fossil fuel companies in Canada to estimates of their “carbon liabilities”—the estimated damages from emitting a tonne of carbon. For Canadian-listed companies the low estimate amounts to $844 billion in carbon liabilities—more than two and a half times the market capitalization and nearly double the assets of those companies. The high estimate yields a figure just under $5.7 trillion, an amount 17 times larger than market capitalization and 13 times assets.

“There has been a general failure among pension funds to account for climate risk, and a tendency to view any screening for environmental purposes to be detrimental to financial performance,” says Lee. “Our analysis turns this on its head: by not accounting for climate risk, large amounts of invested capital are vulnerable to the carbon bubble.”

Pension fund managers must take inter-generational equity into account. While pension funds have to generate maximum current return value for existing (and soon-to-be) pensioners, at the same time they must equally represent the interest of young workers for their eventual retirements.

Pension funds and other institutional investors need to be part of the solution, according to the study, which makes several recommendations to green Canada’s financial markets, including: establishing a national carbon budget; developing green bonds; and mandating carbon stress tests for financing commitments and portfolios.

“We are in need of a ‘managed retreat’ from fossil fuel investments,” says Lee.

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Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds is available on the CCPA website:http://policyalternatives.ca

For more information contact Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.

The Canadian Centre for Policy Alternatives (CCPA) is one of Canada’s leading sources of progressive policy ideas. The organization’s work is rooted in the values of social justice and environmental sustainability. As non corporate-funded policy think tanks continue to be silenced, the importance of the Centre has never been greater. The CCPA’s National Office was established in 1980 when the Centre was founded. Located in Ottawa, it coordinates the CCPA’s national research agenda and publishes reports, studies, books and commentary on a wide range of public policy issues.

Editor’s Note: This press release is from an independent third-party. The Canadian Progressive makes no warranties or representations in connection with it.