While concerned citizens joined Global Divestment Day activities over the weekend, the finance world has raised further questions about the long-term viability of the fossil fuel industry.
However, these nervous rumblings seem to be falling on deaf ears as the industry’s biggest players press on with rampant exploration and development of reserves.
On Thursday, US-based Fossil Free Indexes (FFI) released a report titled The Carbon Underground 2015: The World’s Top 200 Public Companies Ranked by the Carbon Content of their Fossil Fuel Reserves. It found that far from acknowledging and acting to reduce their exposure to potentially unburnable reserves of fossil fuels, the potential CO2 emissions from the top 200 coal, oil, and gas companies’ reserves have increased to 555 Gigatonnes, 10% more than at the end of 2010.
While demonstrating the fossil fuel industry’s continued disregard for climate change targets, these figures are also totally at odds with dire market analysis and predictions that continue to surface from within the financial sector.
According to Jag Alexeyev, Director of Research at FFI, “Institutions and individuals increasingly recognise the risks that fossil fuel reserves could be unburnable and stranded, and are taking steps to reduce their holdings of coal, oil, and gas investments.”
Likely explanations for such a financially motivated move away from fossil fuel investment have been presented in a recent Deutsche Bank Research House report titled Peak Carbon Before Peak Oil, which provides an analysis of the drastic decline of oil prices throughout 2013.
Published late last month in Deutsche Bank’s market analysis magazine Konzept, the report hypothesises a sharp drop in fossil fuel demand as a result of increasing global political action to curb carbon emissions.
“A deal with stringent CO2 emission limits in order to honour previously agreed climate change targets means accepting that the entirety of the world’s known fossil fuel reserves cannot be extracted and burned,” explain the report’s authors Rinesh Bansal and Stuart Kirk.
While this is hardly breaking news for anyone who has kept a discerning ear to the climate change debate, it is yet another example of the financial sector’s growing malaise regarding the economic viability of fossil fuel companies and projects.
Recent market evidence, such as China’s most recent import figures, which surfaced last week, also hints at a shift away from fossil fuel dependency.
According to Chinese government customs data, the country’s coal imports throughout January 2015 were 53% less than the same period last year. While it is impossible to interpret this as definitive evidence of waning demand, put in the context of an 11% fall in year-on-year imports and an overall fall in Chinese coal consumption by 2-3%, statistics like these appear more and more like the beginnings of a decoupling of the economy with coal that the industry will be dreading, and those who value a safe climate rejoicing.
This pressing issue of future fossil fuel demand, and its relationship to political climate change action, is neatly summarised within the Deutsche Bank report; “If the currently agreed climate change targets are to be met with any reasonable certainty, over half the proven fossil fuel reserves would have to stay where they are – underground”, a sentiment that carries all the conservatism of a large financial institution. After all, just last month University College London provided a geographical breakdown of the world’s unburnable carbon and that could only lead to the conclusion that if Australia has not already dug up its last “safe” lump of coal, it will do any second now.
Subsequently, this notion of ‘unburnable carbon’ raises perhaps the most pertinent question currently facing the fossil fuel industry – if demand is constrained to less than the amount that current reserves can provide, why does such continued emphasis and expenditure on exploration and development of further reserves remain? Greater book value in the short term? It just doesn’t seem to be fooling the finance sector.
There seems to exist a worrying cognitive dissonance between the actions of the fossil fuel industry’s biggest players and the ominous market analysis that is mounting to dissuade these actions. And, frankly, the institutions providing this advice on the incompatibility of most fossil fuel reserves with a safe climate are proving to be equally out of touch with themselves.
Encouraging though it is to see Deutsche Bank wade in on ‘unburnable carbon’, they remain the tenth biggest lender to coal worldwide. Seems that Deutsche’s specialised finance team needs to pick up its own analysis!
If the industry continues to ignore the writing on the wall, then sustained community action becomes evermore important in ensuring these environmentally devastating and financially unsustainable projects are unable to proceed – whether that be due to political intervention or, more likely, a lack of willing financiers.
With public activities such as Global Divestment Day, the increasingly vocal divestment movement continues to apply pressure to investors, adding to their growing list of reasons to discontinue funding of the fossil fuel industry. It might even force a few resource analysts to pick up their colleagues’ research.
The author is a researcher with Market Forces.
