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'Carbon Bubble': is the FTSE sitting on an energy time bomb?

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Are we serious about curbing climate change? And if so, can oil and mining giants survive? We assess the implications for savers.

by Gavin Lumsden on Oct 15, 2013 at 08:30

'Carbon Bubble': is the FTSE sitting on an energy time bomb?

In the past 15 years we’ve had the dot com technology bubble, the property bubble and the banking bubble. All ended with a nasty crash.

Now we’re faced with possibly the most dangerous bubble yet. It’s called the carbon bubble and it’s all to do with the climate change caused by burning fossil fuels like oil, gas and coal. Investors are increasingly concerned about the implications for the big mining and oil companies that dominate the UK's FTSE 100.

This is the latest Lolly Investor Programme, a series of weekly videos aimed at beginner investors.

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Can't watch now? Read my script instead

Investors have endured a lot of speculative bubbles in the past 15 years.

We’ve had the dot com technology bubble, the property bubble and the banking bubble. All ended with a nasty crash.

Now we’re faced with possibly the most dangerous bubble yet.

It’s called the carbon bubble and it’s all to do with the climate change caused by burning fossil fuels like oil, gas and coal.

Whatever kind of investor you are you want to pay attention to the carbon bubble debate because it could bring big changes to the stock market and where you invest your money.

In the City of London the penny has begun to drop that the issue of climate change caused by human activity releasing greenhouse gases can’t be ignored anymore.

A campaign group called the Carbon Tracker Initiative has caused a sensation with a report called ‘Unburnable Carbon’.

It makes the simple point that the giant oil and mining companies that dominate the UK’s FTSE 100 – and other stock markets around the world – will be left ‘stranded’ and their share prices damaged if we’re serious about reducing the amount of carbon dioxide that leads to global warming.

Companies like Royal Dutch Shell, BP, BHP Billiton and Anglo American are sitting on huge reserves of fossil fuels that can’t be used if we want to keep rises in global temperatures to within 2% of their level in the pre-industrial age.

The International Panel on Climate Change recently reiterated the 2% temperature increase as the crucial point of no return if we’re to avoid irreversible damage to the global environment and world economy.

Carbon Tracker cites research showing that our global carbon budget – that’s the maximum amount of carbon dioxide we can safely release into the world – is 886 gigatons for the period from 2000 to 2050. A gigaton is a billion tons by the way.

When you deduct what was released already in 2000-2010 that budget falls to just 565 gigatons for the remaining 40 years.

Now get this, the total carbon held within the world’s fossil fuel reserves is nearly 2,800 gigatons. That’s five times more than our global carbon budge

Mining and energy companies listed on stock markets around the world own 745 gigatons of that amount. (Governments own the rest.) If you divide the corporate reserves by five to get their share of the budget you are left with 149 gigatons.

That amount is probably enough on its own to push us past the 2% temperature increase, says the institute.

The ‘carbon bubble’ exists because if you believe this analysis – and an increasing number of people do – then mining and energy companies are massively over valued because 80% of their reserves are worthless.

The institute says between 20-30% could be wiped off stock markets in London, Australia, Canada and Brazil.

Analysts at HSBC bank have warned that European energy companies could see their share prices halve if tough climate protection policies are enforced.

But will they be enforced?

The fact that oil and mining share prices have not slumped in response to this analysis is not just investor complacency.

The stock market is betting that politicians will not pass sufficiently stringent laws to defend the world from devastating climate change. That we’ll continue as we are until it’s too late.

It’s pretty depressing stuff.

But what does it mean for ordinary investors? Should you give up on saving and investing for your retirement?

Not yet, but, as a precaution it may be time to start shifting your money away from the big energy stocks.

We’ve got used to seeing these companies in our funds. They’re huge businesses and they pay big dividends. But there are grave doubts about the long-term sustainability of  what they do.

12 comments so far. Why not have your say?

Micawber

Oct 15, 2013 at 09:07

I think there's a bubbles bubble.

In this particular case, there's not enough to go on to make investment decisions now. Would you rather have no oil stocks in your portfolio? If you want them, would you rather have companies with healthy reserve banks or not?

I don't go for oil stocks on a long-term basis myself.

Green energy shares & trusts have not done well since an initial burst of enthusiasm some eight years ago...

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Dave Hill

Oct 15, 2013 at 11:12

I don't think it's a major problem because as time goes on, we'll find a way to remove carbon from fossil fuels, so we will still be able to use it. Also major companies have the resources to diversify if necessary, so I think their shares are still worth keeping.

I have my doubts about this global warming as centuries ago we used to farm in Greenland (hence its name). Like David Bellamy I think its just part of the natural world temperature cycle.

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bigand

Oct 15, 2013 at 16:16

@Dave,

I agree but isn't it a marvelous way to create new taxes, he says sarcastically.

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John Griffiths

Oct 15, 2013 at 16:18

Too soon to speculate in this way - the Oil Majors have all been thinking about this for a long while and they have huge political influence. It is unlikely that decarbonisation will push ahead so fast in any case as the political will is not there and many major emerging economies have a long way to go to catch up.

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BILLFISH

Oct 15, 2013 at 19:39

Complete and utter rubbish.

Just watch the queues this week in Scotland with the Grangemouth plant starting to close down ahead of next weeks strike.

Nobody in governmant is going to force people to get out of their cars and walk to work.

( Or put another way people are not going to be forced by anybody including governments to give up their cars).

Look what happens to the petrol tax escalator whenever it gets anywhere near becomming effective- it gets "postponed" "put back" etc.

It is just taxation brinkmanship.

By the way there has been no temperature rise since 1998 - does that mean we can go back to the 1998 levels of carbon?

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Ladysaver

Oct 16, 2013 at 01:10

It's taken Citywire a while to get this! The Economist covered it on 4 May, the Observer on 21 April and the Grauniad on 2 August (the latter two rather loving the idea of oil-majors facing catastrophe). I recommend the Economist piece. It points out that markets can indeed misprice risk, and maybe they are: "the more fossil fuels a firm has underground, the more valuable its shares" - i.e. reserves drive the share price - "but what if some of those reserves can never be dug up and burned?". The Economist also referred to Citi Research worrying about this in April re Australian mining companies, and HSBC Global Research suggesting in January that “if lower demand led to lower oil and gas prices…the potential value at risk could rise to 40-60% of market cap”. So the story's not new.

But the Economist also says fossil fuel companies may be "betting that government climate policies will fail; they will be able to burn all their reserves, including new ones" and that "betting against tough climate policies seems almost prudent". It cites events such as the European Parliament's vote not to shore up Europe’s "flagship" emissions trading system, suggesting that "Europeans have lost their will to endure short-term pain for long-term environmental gain"; "several cash-strapped EU countries...cutting subsidies for renewable energy" and that "governments around the world have failed to make progress towards a new global climate-change treaty".

Dump fossil fuel companies if you believe CO2 targets will be enforced, or maybe take a more sanguine view. A perspective can also be gained from Shell's long term energy scenarios, which show a definite place for renewables but also the crying need the world will have for the fossil stuff (much of it gas) for quite a while to come. BTW, the biggest fossil fuel cos are also big in gas - a lot cleaner.

IMHO the sooner we get fracking, the better. In the USA, shale gas is saving consumers $125bn a year in cheaper gas, and has cut US emissions by twice as much as the EU and the rest of the world put together have managed to cut by flailing about with subsidies to wind and (useless) solar panels.

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richo266

Oct 16, 2013 at 09:49

How are solar panels useless exactly Ladysaver?

They harness energy from our most abundant and carbon free resource, the sun. They drive energy decentralisation. They are now price competitive (and in some cases a cheaper option) with fossil fuel generated electricity. They can play a massive role in helping us avoid destroying this planet.

Yeah, you're right. They're useless.

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Ladysaver

Oct 18, 2013 at 02:17

Some interesting numbers from Bjorn Lomborg, director of the Copenhagen Consensus Center and author of ‘How to Spend $75 Billion to Make the World a Better Place’: "The EU’s climate policy is estimated to cost $250bn annually, but will only reduce the temperature an immeasurable 0.05 degrees Celsius by the end of the century. Germany has paid over $130bn in solar subsidies, yet the CO2 reductions will only postpone global warming by the end of the century by 37 hours. Spain pays almost 1% of its GDP in renewable subsidies. Ineffective solar panels and wind turbines drain more than $10bn a year, delivering CO2 cuts worth less than $100m in the European market." Mr Lomberg's book documents what politicians might have done for the poorest people in the world if they hadn’t spent 25 years investing so much in global warming - e.g. tackling HIV/Aids, providing micro nutrients for hungry children, controlling malaria, making clean water available and liberalising trade. All likely a far better use of taxpayers’ money.

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Maverick

Oct 20, 2013 at 11:41

John Griffiths - "Too soon to speculate in this way"? All the oil and gas producers have been underperforming for the last two years - if you doubt me, look at their graphs. While investors doggedly hold on to BP and Shell and Tullow Oil shares, the rest of the market has moved ahead 40%.

I don't speculate, I invest. Losing money is not investment.

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rolo

Oct 20, 2013 at 18:43

>Germany has paid over $130bn in solar subsidies, yet the CO2 reductions will only postpone global warming by... 37 hours.<

But without heavy subsidies, would solar be nearing grid parity.

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Rob Morrison

Oct 20, 2013 at 23:55

I think that we are losing the plot!!

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Red sparrow

Oct 27, 2013 at 09:08

This article raises some interesting points. Indeed the Government/s are broadly rather serious about Climate Change and recognise the long term implications of it. Hence the drive towards the 2020 and 2050 targets. The challenge is about making the transition in the least painful way I.e. it's not about never using a car it's about changing to electric cars, the new BMWI being a really good example. Strong economies thrive on secure energy supply, so as fossil fuels run out there is a natural search for other sources e.g. Fuel cells to store energy from renewables and so forth.

It's a complex story and I don't honestly think that politicians are saying things just to get votes (a comment I read elsewhere). I think there is a bigger question about whether it really is appropriate to have energy supply being delivered by private companies who speak to shareholders rather than householders struggling to pay bills and eat. This story is going to grow and grow and that is a reality. PS The issue over green levies is I'm afraid a bit of a red herring. Some of the Government renewable,schemes are actually paid by general taxation.

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