Shaking up the Business Community’s Climate Change Complacency
Climate change—although a hot-button issue for environmentalists and a concern of many Canadians—has taken a political backseat in recent years. This has allowed the fossil fuel industry and investors to delay thinking about transitioning to a low-carbon economy. The wait is over. The growing understanding of the carbon bubble is set to shake up the business community’s complacency.
There is growing consensus that climate change must remain below two degrees Celsius of warming to avoid the most harmful impacts to ecosystems and vulnerable populations.Already major changes are being observed. Existing warming of 0.8 degrees Celsius above pre-industrial levels has led to the acidification of the world’s oceans, increasing heat waves, and droughts.Furthermore, our current fossil fuel habits are setting us on a path to cause four degrees Celsius of warming by 2100. This four degrees Celsius scenario has been described as no less than “devastating” by a recent World Bank Report—inundating coastal cities and severely impacting food supplies.
Consequently, the United Nations Framework Convention on Climate Change and the 2011 Cancun Agreements propose a long-term goal of “reducing greenhouse gas emissions so as to hold the increase in global average temperature below two degrees Celsius above pre-industrial levels.” A draft version of a global climate deal to be signed in Paris at the end of 2015 even includes references to a complete phase-out of fossil fuels by 2050.
Regulators around the world are taking note. In Canada—although concrete action on climate change has been slow at the federal level—provincial policies are having significant impacts. British Columbia already has a carbon tax, and Ontario’s Premier, Kathleen Wynne, has pledged to unveil a carbon pricing plan in the spring of 2015.
Lawyers are also leading the charge. The International Bar Association commissioned a Task Force on Climate Change Justice and Human Rights co-chaired by Osgoode’s very own McMurtry Fellow and respected environmental lawyer, David Estrin. The Task Force’s July 2014 report, Achieving Justice and Human Rights in an Era of Climate Disruption, call upon “policy makers, human rights, judicial and other dispute resolution bodies, bar associations, corporate leaders, legal practitioners, businesses, NGOs and individuals” to embrace and implement its recommendations to harness the law to achieve climate change justice.
This is where the carbon bubble comes in. Given that scientists, regulators, and lawyers are finally on the same page about the need to restrict climate change below a dangerous two degrees Celsius of warming, to achieve this target, only 565 more gigatons of carbon dioxide may be released into the atmosphere. Comparing this number to existing fossil fuel reserves, approximately two-thirds of proven fossil fuel reserves must remain in the ground. By this logic, fossil fuel companies are overstating the value of their unexploited reserves, creating a “carbon bubble” in the economy. Just like the sub-prime mortgage bubble in the US before the 2007 financial crisis, the carbon bubble, if ignored, may have significant consequences for industry and investors.
The Carbon Tracker Initiative reveals the crux of the problem—something environmentalist Bill McKibben has coined as “global warming’s terrifying new math.” The amount of carbon already contained in proven coal, oil, and gas reserves of fossil fuel companies is 2,795 gigatons—five times higher than the 565 gigaton limit. For Canada, the numbers are equally stark. Since all possible Canadian fossil fuel reserves are estimated to be 1,192 gigatons—more than double the world’s carbon limit—seventy-eight per cent of Canada’s proven reserves would have to remain in the ground.
With numbers like this, even prominent members of the financial community are coming around. Mark Carney, Governor of the Bank of England and former Governor of the Bank of Canada, has warned that the “vast majority of [fossil fuel] reserves are unburnable” if we are to avoid catastrophic climate change. Likewise, at the World Economic Forum in Davos climate change featured prominently on the agenda with business leaders discussing how to use low carbon energy sources and participate in a circular economy—designing product materials to be reused instead of thrown out.
How the carbon bubble impacts Canada is still unfolding but, likely, many changes are in store. Given the significant limits on Canadian fossil fuel reserves to keep temperature increases below two degrees Celsius of warming, Canadian fossil fuel companies will have to adjust their strategies. Industry must confront reality by accurately valuing “burnable” fossil fuel reserves and planning for alternative, and less environmentally-harmful, revenue opportunities.
Investors, for their part, will want to reduce their exposure to climate regulatory risks by divesting of fossil fuels or pressuring management to take the carbon bubble more seriously. As researchers Mark Lee and Brock Ellis explain, pension funds and other institutional investors can be part of this “managed retreat” from fossil fuel investments mandating that carbon exposure risks be evaluated prior to investing in companies.
The time of climate complacency is over. The growing understanding of the carbon bubble might just be the shock to the system we need to transition to a lower carbon world.
Check out the following resources for more details:
Bill McKibben, “Global Warming’s Terrifying New Math” Rolling Stone Magazine (19 July 2012), online: < http://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719 >.
Carbon Tracker & The Grantham Research Institute, Unburnable Carbon 2013: Wasted capital and stranded assets (London: Carbon Tracker, 2013).
International bar Association (IBA) Task Force on Climate Change Justice and Human Rights, Achieving Justice and Human Rights in an Era of Climate Disruption (London: IBA, July 2014).
Marc Lee & Brock Ellis, Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds (Vancouver: Canadian Centre for Policy Alternatives, March 2013).
Postdam Institute for Climate Impact Research and Climate Analytics, Turn Down the Heat: Why a 4°C Warmer World Must Be Avoided (Washington, D.C.: The World Bank, 2012).
Jessica Shankleman, “Mark Carney: most fossil fuel reserves can't be burned” The Guardian (13 October 2014), online: <http://www.theguardian.com/environment/2014/oct/13/mark-carney-fossil-fuel-reserves-burned-carbon-bubble>.