Mounting evidence of climate change impacts worldwide will inevitably
lead to a new global consensus on climate action. Based on recent research,
between two-thirds and four-fifths of known fossil fuel reserves have
been deemed to be unburnable carbon — that cannot safely be combusted.
This is of profound importance to Canada, a nation making fossil fuel
development and expansion the centrepiece of its industrial strategy. This
study looks at the implications of unburnable carbon for the Canadian fossil
fuel industry and in particular for financial markets and pension funds.
We argue that Canada is experiencing a carbon bubble that must be strategically
deflated in the move to a clean energy economy.
Doing the Math
A carbon budget is the maximum amount of CO2 that can be emitted in the
future, based on scientifically-estimated probabilities of staying below 2°C
of global warming, above which would lead to catastrophic or “runaway”
climate change beyond humanity’s capacity to manage. The world’s carbon
budget is now approximately 500 billion tonnes (Gt) of carbon dioxide, an
amount that would provide an 80% chance at staying under 2°C.
Canada’s share of that global carbon budget would be just under 9 Gt
based on its share of world GDP, and 2.4 Gt based on share of world population.
An internationally negotiated carbon budget for Canada could go
up depending on export arrangements with other countries, or down if larger
historical emissions mean disproportionate reductions from rich countries.
A plausible carbon budget for Canada would almost certainly fall between
2 and 20 Gt.
Canada’s reserves of fossil fuels are significantly larger than Canada’s
fair share of a global carbon budget:
• Canada’s proven reserves of oil, bitumen, gas and coal are equivalent
to 91 Gt of CO2, or 18% of the global carbon budget.
• Adding in probable reserves boosts this figure to 174 Gt, or 35% of
the global carbon budget.
• A final, more speculative category including all possible reserves is
1,192 Gt — more than double the world’s carbon budget.
This means that business as usual for the fossil fuel industry is incompatible
with action to address climate change that keeps global temperature
increase to 2°C or less. Even at the high end of a 20 Gt carbon budget, this
would imply that 78% of Canada’s proven reserves, and 89% of proven-plusprobable
reserves, would need to remain underground.
Carbon Liabilities, Stranded Assets
The Toronto Stock Exchange (TSX) is highly weighted towards the fossil fuel
sector. At the end of 2011, the TSX had 405 listed oil and gas companies with
a total market capitalization of over $379 billion. When coal producers are
added this number rises further.
To assess the implications of Canada’s carbon bubble, we developed a
database of 114 fossil fuel companies operating in Canada — 103 listed on
the TSX (assets greater than $70M for oil and gas, and $50M for coal), and 11
foreign-owned subsidiaries. For each we compiled financial data on revenue,
assets and market capitalization. Then we added data on fossil fuel reserves
(proven and probable), which we converted into potential CO2 emissions.
We develop an estimated range of their carbon liabilities by applying a carbon
price, representing the estimated damages from emitting a tonne of carbon
(known as the social cost of carbon, or SCC, based on recent literature).
Global Climate Change http://courses.dce.harvard.edu/~envre130
Environmental Justice http://courses.dce.harvard.edu/~envre145
Environment Ethics http://courses.dce.harvard.edu/~envre120