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The fossil fuel industry may waste as much as USD$2.2 trillion (£1.45 tn) in the next decade if it persists in pursuing projects that prove uneconomic in a world beginning to turn its back on carbon.
An independent think tank, the Carbon Tracker Initiative (CTI), says the industry faces “a perfect storm” of factors, including international action to limit global average temperatures to 2C above their pre-industrial level and rapid advances in clean technologies.
The CTI report says there will be no need for new coal mines—oil demand will peak around 2020. If world leaders implement the necessary policies to meet the UN commitment to keep climate change below 2C, the threshold agreed to by most governments, growth in gas will disappoint industry expectations.
At next week’s UN climate change conference in Paris (COP21), participating countries will try to reach a global agreement.
Excess of Supply
The report warns, “If the industry misreads future demand by underestimating technology and policy advances, this can lead to an excess of supply and create stranded assets. This is where shareholders should be concerned.”
"Too few energy companies recognize that they will need to reduce supply of their carbon-intensive products to avoid pushing us beyond the internationally-recognized carbon budget," James Leaton, CTI's Head of Research and co-author of the report, said. "Clean technology and climate policy are already reducing fossil fuel demand. Misreading these trends will destroy shareholder value. Companies need to apply 2C stress tests to their business models now.”
With $412 billion of unneeded fossil fuel projects to be implemented before 2025, the U.S. has the greatest financial risk in fossil fuels becoming stranded assets, followed by Canada ($220 bn), China ($179 bn), Russia ($147 bn) and Australia ($103 bn).
The companies that represent the biggest risk to the climate and to their shareholders include oil majors Royal Dutch Shell, Pemex and ExxonMobil and coal miners Peabody, Coal India and Glencore. Around 20-25 percent of oil and gas majors’ potential investment is in projects that will not be needed in a 2C scenario and canceling them would mean seeing very little or no growth, known as ex-growth.
The report examines production to 2035 and capital investment to 2025. It warns that energy companies must avoid projects that would generate 156 billion tons of carbon dioxide (156Gt CO2) by 2035 in order to be consistent with the carbon budget in the International Energy Agency 450 demand scenario, which sets out an energy pathway with a 50 percent chance of meeting the 2C target.
Mark Fulton, a CTI adviser and co-author of the report, said the group had found that coal had “the most significant overhang of unneeded supply in terms of carbon of all fossil fuels on any scenario. No new mines are needed globally in a 2C world.”
Carbon Tracker warned last month that big energy companies are ignoring rapid advances in clean technologies, such as renewables, battery storage and electric cars, that threaten to undermine their business models.
"Business history is littered with examples of incumbents [dominant companies] who fail to see the transition coming," Carbon Tracker CEO Anthony Hobley said. “Fossil fuel incumbents seem intent on wasting capital trying to hold onto growth by doing what they have always done ... Our report offers these companies both a warning and a strategy for avoiding significant value destruction.”
"It is the end of the road for expansion of the coal sector,” says the report. And as for oil, it concludes: “In the 450 scenario, oil demand peaks around 2020. This means the oil sector does not need to continue to grow, which is inconsistent with the narrative of many companies.” In a 2C world, gas growth will be “at a lower level than expected under a business as usual scenario.”
Carbon Tracker’s analysis assumes that carbon capture and storage (CCS) will remove 24Gt of CO2 by 2035, but says this would require a huge expansion of CCS, a technology that remains unproven at a commercial scale and which many scientists doubt will work soon enough.
In the UK, a significant group of corporate investors is being warned that they may need to screen out fossil fuels, as many do with other types of investment, such as tobacco, armaments and pornography.
The warning stems from a legal opinion expressed by prominent lawyer Christopher McCall QC. He argues that investing in fossil fuels could be said to be irreconcilable with the intentions behind charities concerned with the environment, health, poverty reduction and “the consequences of dangerous climate change.”
Charities in England and Wales have a combined income of almost £70 bn (US$106 bn) and the legal opinion is being referred to the body that regulates them, the Charity Commission.
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