Climate Change

Climate Change: Fossil firms risk US $2.2 trillion as investment in non-viable projects

If companies across the world continue fuel production in a business-as-usual scenario, UN action to achieve the climate goal will stall many investments

By Anupam Chakravartty
Published: Friday 27 November 2015

A London-based energy think tank has warned that fossil fuel producers across the world are wasting up to US $ 2.2 trillion after 2020 by investing in projects that could hinder world’s fight against climate change. The producer companies, including Coal India Limited – world’s biggest coal mining company – are now a substantial threat to investor returns.

Ahead of climate talks in Paris, the report was released by London-based think tank Carbon Tracker Initiative, on Wednesday, and titled “The US $2 trillion stranded assets danger zone: How fossil fuel firms risk destroying investor returns”. It has warned that the investments may be stalled with world switching to stricter limits on emissions.

The report that highlights the danger zone between industry’s business-as-usual strategies and action that would be needed to meet the UN commitment to limit climate change to 2˚C finds that no new coal mines will be needed, oil demand will peak around 2020, and growth in gas will disappoint industry expectations.

The report asserts that such investments also affect both listed and public companies. “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 – if companies are committing to future production which may never generate the returns expected,” the report warns.

James Leaton, head of research and co-author of the report, says: “Too few energy companies recognise that they will need to reduce supply of their carbon-intensive products to avoid pushing us beyond the internationally recognised carbon budget. Clean technology and climate policy are already reducing fossil fuel demand – misreading these trends will destroy shareholder value. Companies need to apply 2˚C stress tests to their business models now.”

The US has the greatest financial exposure with US $412 billion of unneeded fossil fuel projects that are at risk of becoming stranded assets by 2025. It is followed by Canada (US $220 billion), China (US $179 billion), Russia (US $ 147 billion) and Australia (US $103 billon).

The companies that represent the biggest risk in the next decade are a mix of state-owned and other listed companies, including oil majors Royal Dutch Shell, Pemex, Exxon Mobil, and coal miners Peabody, Coal India, and Glencore. Around 20-25 per cent of oil and gas majors’ potential investment is on projects that will not be needed in a 2˚C scenario.

The report looks at production to 2035 and capital investment to 2025. It warns that energy companies must avoid projects that would generate 156 billion tonnes of carbon dioxide (156Gt CO2), in order to be consistent with the carbon budget in the International Energy Agency’s (IEA) 450-point demand agenda that sets out an energy pathway with a 50 per cent chance of meeting the climate change target.

Mark Fulton, advisor to Carbon Tracker, former head of research at Deutsche Bank Climate Change Advisors and co-author of the report said, “Our work shows thermal coal has 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 2˚C world.”

Earlier in October, Carbon Tracker had warned that big energy companies are ignoring rapid advances in clean technologies like renewables, battery storage and electric cars as they threaten to undermine their business models.

“Business history is littered with examples of incumbents who fail to see the transition coming. Fossil fuel incumbents seem intent on wasting capital trying to hold onto growth by doing what they have always done rather than embracing the energy transition and preserving value by adopting an ex-growth strategy. Our report offers these companies both a warning and a strategy for avoiding significant value destruction,” says Anthony Hobley, CEO of Carbon Tracker.

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