By Jeff McMahon
The carbon bubble that’s driving investors away from stranded coal, oil and gas assets may be a scare tactic, the chief economist for ConocoPhillips said in Chicago yesterday—and if it succeeds, we may all find our assets stranded.
The share price of fossil fuel companies assumes their proven fossil fuel reserves will be consumed. The carbon bubble, an idea coined in a 2011 report by the Carbon Tracker Initiative and spread in a 2012 Rolling Stone article by climate activist Bill McKibben—holds that fossil fuel companies must be overvalued, because renewable energy sources will offset much of that consumption.
“This is a movement to frighten away investors and capital,” said ConocoPhillips chief economist Marianne Kah, “and God help us all if they’re successful because there won’t be enough supply.”
But the scare tactics—if that’s what they are—have not just come from greens like McKibben. At the Paris Climate Conference, leaders of powerful financial institutions called for a re-evaluation of companies dependent on fossil fuels, including Hermes Fund Managers, which manages $41.5 billion in investments, Cal-STRS, which manages $200 billion in pension investments for 800,000 California teachers, and the Financial Stability Board, an international body that monitors the global financial system.
Last year a team of analysts at Citigroup estimated that $100 trillion in fossil fuel assets may already be economically stranded:
“We examine the issue of unburnable carbon and stranded assets, in particular in which countries, industries and companies they are located, and find that at current prices, around $100 trillion of assets could be ‘carbon stranded’, if not already economically so,” according to the Citi report, Energy Darwinism II.
But oil companies are not valued on all the fossil fuels they may have to leave in the ground, according to Kah.
“Companies are valued on their proved reserves,” she told about 50 people Wednesday afternoon at the University of Chicago Booth School of Business, “and no company has more than maybe six years of proved reserves, seven at the most. And we’re talking about carbon as a much longer-term issue…. There’s a pretty good chance we’re going to get to use those seven years of reserves…