We have burned 53% of this budget since the dawn of the industrial revolution, leaving 47% left to burn – ever. If the pace of emissions continues unabated, we will exhaust the budget by 2040.
The vast discrepancy between the budget and fossil fuel reserves means that, until a price of carbon is reached that deems reserves uneconomic to extract, we cannot rely on market forces to achieve our climate goals. According to the International Energy Agency, total proven international reserves contain 2860 gigatonnes (GT) of CO2. Proven reserves of listed firms contain 762 GTCO2 and potential reserves of 1,541 GTCO2. Logically, governments should leave their reserves earthed and companies return more earnings to shareholders while running reserves down. Illogically, state-owned companies are increasing their energy output share; and in 2012, the 200 largest listed oil, gas and coal companies spent five times as much ($674bn) developing new reserves as on paying dividends. Therefore, we can ascertain that company managements are not expecting a unilaterally binding agreement. Ultimately, although technologies exist that would meet the necessary emission reductions, they are economically uncompetitive.
However, energy companies/investors may be proven wrong in Paris, December 2015 (the date of the UN’s next emissions talks) if the first obligatory global emissions commitment since Kyoto 1997 is reached. Then, the effectively ‘unburnable’ reserves that are currently a significant factor in valuations will have to be written-off. This could burst the ‘carbon bubble’ and have a systemic impact in the equity and credit markets.
These views may differ from those of Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser.
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