MARKET VIEW: Carbon countdown
As the former head of a financial research team, I recall dealing with an exposure to a brown coal-fired power generator. At the time, evidence was mounting that climate change impacts were quite likely, but they seemed to be far enough into the future not to worry us that much. Our debt exposure to the power generator did not mature until 2027; and who could predict what might or might not happen over that period of time?
For this investment, it wasn’t so much the physical effects of climate change that I was concerned about – it was the risk that market or regulatory impacts could make or break the project in the meantime. If we’d factored in a sizeable carbon tax, even in 2015, it would have seriously affected the prospective performance of our investment. When the uncertainty of future cash flows increases, the market value of the investment generally falls.
The emergence of new research from the highly respected Potsdam Institute in Germany has made the issue of market and regulatory impacts resulting from climate change very real. The timeline for significant impacts on investment returns is now finite, with estimates of 2015 becoming a reality. As Paul Gilding and I argue in our forthcoming paper entitled Carbon-Induced Financial Disruption, the investment implications of this research are breathtaking.
The Potsdam Institute research says that, if we are to have a reasonable chance of containing global warming to within 2 degrees, we only have a “budget” of 890 billion tonnes of CO2 emissions. This is a fixed budget, because carbon stays in the atmosphere for hundreds of years. So what is important is how much we emit – not when we emit it. If we continue to burn fossil fuels in line with our current business-as-usual approach, then we use up our budgeted emissions by 2024!
To add insult to injury, the quantum of fossil fuels required to emit 890 billion tonnes of CO2 is equivalent to only 25 per cent of proven, economically recoverable reserves. This means that, in theory, 75 per cent of known proven and probable reserves have no economic value.
This has startling implications for investors because there will either be (a) some form of global action that will seek to limit warming to 2 degrees; or (b) no effective action, with the consequence being runaway climate change. These are the only two options we have. The first one severely devalues our fossil fuel reserves as we scramble to reconfigure global energy networks; and the second one, while possibly maintaining the market value of those reserves for longer, is like driving off the edge of a cliff.
Coming back to the brown coal-fired power generator for a moment – won’t carbon capture and storage (CCS) technology ride to the rescue? There is little doubt that CCS in combination with coal-fired power generation can work. The problem is that a carbon price of $US50-100 per tonne is required to make it commercially viable. Therefore it is not competitive with investment in energy efficiency and most renewable energy sources. Placing faith in CCS to mitigate carbon exposure is a very risky investment strategy.
There is a commitment by the world’s largest emitters – including the EU, US, China and India – to limit warming to 2 degrees. How this commitment will play out is anyone’s guess. We are, however, left with two clear conclusions:
– Governments will have to follow through on their commitments to act unless they, and their electorates, prefer more destructive outcomes in the future; and
– At some stage, markets will price in those policy implications, and they could do so ahead of policy actions.
Now that we have an emissions budget and we comprehend how meagre it is, it puts a sharp limit on the window of time we have for policy actions.
The prospect of large-scale, major change and energy transformation is not automatically bad for long-term economic activity. For example, the International Energy Agency forecasts that $US10.5 trillion in additional capital spending would be required for energy infrastructure under a proactive response to climate change between now and 2030. But we cannot escape the fact that large-scale change will produce a reasonable level of protracted disruption to economies and markets.
Investment in alternative technologies is happening at a reasonable rate, but our incumbent coal, oil and gas extractors have been slow to embrace change. The valuations of companies in these sectors are driven by their proven and probable reserves, so they have a lot of value at risk. To illustrate their significance to investors, they account for more than 25 per cent of the value of the UK stock market (FTSE 100 Index).
If I was still involved in financial research today, I would be picking apart all existing exposures and subjecting new financing proposals to an intense level of carbon scrutiny. This is because the timeline for a significant policy response to climate change is now finite and much shorter dated than many of us originally expected.
Bookmakers have a strong financial incentive to constantly re-assess their assets and liabilities. Likewise, investors constantly re-assess the merits of their investments. The faintest whiff of widespread policy developments may be all that is required for a significant market re-rating of carbon-exposed stocks.
Phil Preston is the Principal of Seacliff Consulting, a firm offering specialised consulting services in the financial and responsible investment fields. His prior work includes 17 years of financial research and portfolio management in the funds management industry.

Comments on this article
On John Davidson's non-compensation idea
I'll go along with John Davidson's idea about the government not compensating those "..people who are silly enough to assume that nothing will be done to reduce emissions..", so long as he agrees that if it turns out that warming is either much less than the warmists believe for a given level of CO2 emissions, or that on balance boosted CO2 turns out to be beneficial, the government undertakes to fully compensate those who who lost out needlessly, and further pay them a cut of the benefits their resistance to mob hysteria helped secure.
The compensation would be paid by targeted taxes on those persons and institutions which played a conspicuous role in promoting CAGW (or by savings by closing said institutions where they were government funded).
On Hugh Saddington's non-citation
I'm surprised the best you can come up with is the RealClimate blog, which is not a citation. As you may know, RealClimate is run by Gavin Smith, an unrepentent apologist for the Hockey Team - consisting of authors Mann, Bradley & Hughes, and various other supporters of the thoroughly discredited Hockeystick curve, including the disgraced Drs. Jones of CRU & Mann of Penn State.
This unthinking and unscientific loyalty to a discredited position by itself tends to discredit Gavin, his supporters, and anything at all on Gavin's blog. A critique by Gavin, a humble employee of a NASA-funded office at Columbia U, on the paper by Lindzen, a serious empirical researcher at MIT, simply lacks credibility.
Naturally, Gavin objects to serious, empirical research that undermines his beliefs, particularly when the research is at a level where few people have the expertise to argue the technicalities. It threatens Gavin's and indeed all AGW believers' entire intellectual posture.
As I said, this is no longer about research outcomes - it's about ideology and the culture wars.
The critical objective issue here, Hugh, on which the entire debate will be settled, is whether climate sensitivity is postive (i.e. >1) or negative (<1). The entire case for catastrophism rests on the assumption by IPCC & its acolytes that CS is positive, a theory that's only tenable if water vapour is proven to amplify temperature rise by a factor of 2 to 5 (IPCC isn't actually sure). This theory is central to the entire AGW construct.
If CS is negative, as Lindzen, Spencer & others indicate it may well be, that is if water vapour doesn't amplify temperature rise but attentuates it, then AGW as a theory is falsified, the CO2-as-culprit scare story falls over, and the politically correct of the western world have serious egg on their faces.
I single out the western world, because its well-meaning but possibly deluded chatterati seem to have the time, leisure & hubris to be suckered by what is looking more and more like a historic mistake and one at which non-westerners just laugh.
Useful numbers
Timothy Curtin's point is addressed at skeptic claim no. 68 on the site I mention below. Alexander Stuart's claim at no. 30 and possibly nos. 1 and 4 There is a comments thread where you can critique the claims and counter--claims at that site and several others.
In response to Alexander Stuarts Citations
thanks for citing the papers purportedly disputing IPCC findings
well the beauty of science is people come up with an idea and do some research, over time it's confirmed by further research, or some-one finds holes in the analysis and it is rejected
the first paper you cite, to quote from elsewhere, "underlines the danger in reading too much into single papers. For papers that appear to go against the mainstream (in either direction), the likelihood is that the conclusions will not stand up for long, but sometimes it takes a while for this to be clear."
well it didn't take long
here's the rebuttal of lindzen and choi's paper, which is found to be "gravely flawed and its results are wrong on multiple fronts."
http://www.realclimate.org/index.php/archives/2010/01/lindzen-and-choi-unraveled/
I won't take the time to check out the other citation, but every climate denial claim/paper etc I've checked out so far has been found to be incorrect. The IPCC work is the synthesis of decades of research that's been challenged and revised over the years until we have a robust science. These one off papers don't cut the mustard. Sorry. Even if every denialist on the planet prematurely jumps on them and publishes them with trumpets accross the bloggosphere.
References (citations actually) for Hugh Saddington
On the central question of climate sensitivity (usually defined as the level to which average temperature would rise if CO2 concentration were doubled from the present 390ppmv to 780ppmv), I’ll cite 2 recent peer-reviewed papers by highly respected academics published in accepted scientific journals:
1.) Lindzen, R.S. & Choi, Y-S. (2009) On the determination of climate feedbacks from ERBE data, Geophys. Res. Lett., 36, L16705, doi:10.1029/2009GL039628
(ERBE stands for Earth Radiation Budget Experiment, a research project based on instruments aboard three satellites: ERBS, launched October 1984; NOAA-9, launched December 1984; and NOAA-10, launched September 1986)
You may be aware that Dr. Richard Lindzen is Alfred P. Sloan Professor of Meteorology at MIT. The authors lead the Program in Atmospheres, Oceans, and Climate, Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cambridge, MA 02139
2.) Spencer, R.W. & Braswell, W.D. (2010), On the diagnosis of radiative feedback in the presence of unknown radiative forcing, J. Geophys. Res., 115, D16109, doi:10.1029/2009JD013371
As you may know, Dr. Spencer works for the Earth System Science Center at the University of Hunstville, Alabama, and publishes the highly-regarded and widely-followed UAH satellite temperature time series.
Your piece is titled “Noticed that denialists never offer references” - but I certainly don’t see too many catastrophists giving academic citation for their beliefs here. And make no mistake about it: this whole debate has descended into one more about beliefs, ideology and faith, than about research outcomes. It’s not surprising really – when a problem of physics becomes an issue of ideology, you should expect the discussion to have far more to do with ideology than physics. The debate has become part of the culture wars, pure and simple.
This deplorable state of affairs is due in large part to an excessively generous stream of funding by the Directorate General for Research of the European Commission under their Framework Programmes 4 (1994-96) to 7 (2007-2013), which has totalled €165,580,451 since 1994. Much of this largesse has gone to institutions and NGOs that advocate catastrophism and as far as I can tell not much of it has been directed to objective experimental research.
If you’d been looking for a cushy professional life, Hugh, followed by a well-funded retirement, I daresay you’d have climbed aboard, drunk the cool-aid and spouted the mantras too, just as certain EU-funded, IPCC-connected, but now-disreputable academics in the UK & USA have done. They will certainly not be the last to be similarly disgraced.
Potsdam
Phil Preston: you said "The Potsdam Institute research says that, if we are to have a reasonable chance of containing global warming to within 2 degrees, we only have a “budget” of 890 billion tonnes of CO2 emissions."
I assume you refer to papers by Potsdam's Meinshausen et al in Nature 30 April 2009. Those papers explicitly assume there are not now nor ever again will be biospheric uptakes of CO2 emissions. In fact Knorr (GRL) and myself (E&E) (both 2009) have presented the CDIAC/NASA data showing that Uptakes have averaged 56% of emissions since 1850 (Knorr) and 1958 (CDIAC and myself). it follows that the Potsdam "budget" is out by a factor two, and it will take emissions of over 2000 GtC to yield a net addition to atmospheric CO2 of 890 GtC; at our present all-in anthro emissions of just over 10 GtC p.a. it will take around 200 years to reach the Potsdam doomsday, especially as all the evidence is that dU/dE are positively related - more Emissions means more Uptakes pro rata at 56% on average.
You added "This is a fixed budget, because carbon stays in the atmosphere for hundreds of years". A previous poster showed this to be untrue, as even the IPCC's Houghton (2004) concurs there is a total annual average turnover of 200 GtC from the stock of just 800 GtC in the atmosphere. Did you ever do any inventory analysis?
Again, you said "So what is important is how much we emit – not when we emit it. If we continue to burn fossil fuels in line with our current business-as-usual approach, then we use up our budgeted emissions by 2024!" Simply untrue, as elementary budget analysis shows.
Then you said "To add insult to injury, the quantum of fossil fuels required to emit 890 billion tonnes of CO2 is equivalent to only 25 per cent of proven, economically recoverable reserves. This means that, in theory, 75 per cent of known proven and probable reserves have no economic value." Nonsense! - not least because proven reserves of oil & gas are ALWAYS equal to 30-40 years of current consumption (check the BP Annual Energy reports since 1970)
Do not believe everything you read from scientists like those at Potsdam with their vested interest in spreading disinformation!
Reply to Bernard Walsh
Re: Bernard Walsh on Tue, 2010-09-14 12:48.
Bernard, I suggest you read the "Critique of the Zero Carbon Australia Stationary Energy plan":
http://bravenewclimate.com/2010/08/12/zca2020-critique/
Solutions
McKinsey also has a site that looks at carbon reduction solutions. There is an updated world wide greenhouse gas abatement cost curve and, further down, an analysis of the specific abatement opportunities for australia
http://www.mckinsey.com/clientservice/sustainability/Costcurves.asp
Rarely have I read such scare-mongering rubbish X 2
Well said Alexander Stuart - I couldn't agree more & also with the comments from the indefatigable Peter Lang & his continued argument in favour of the only sensible long term energy solution ie nuclear.
CCS
Apologies to Joe Dortch whose name I managed to misspell in my last post, now corrected
This link to a McKinsey article on the economics of carbon capture and storage may be interesting.
http://www.mckinsey.com/clientservice/ccsi/pdf/ccs_assessing_the_economics.pdf
Credible Science
Dortch and Glenn (thankyou), have posted links to good sites that provide referenced scientific articles rebutting the sceptics/deniers false claims. I recommend those links to you if you have not seen them before.
Ignore the denialists bogus links that they claim rebut Dorch and Glen's links. I've checked out a number of them and while they may appear scientific and objective some effort to follow through will show that they misrepresent scientific papers, use findings out of context, use non peer reviewed papers that are not consistent with the body of scientific knowledge, simply spout unsubstantiated opinion and are flashy efforts designed to confuse.
If you want to check out why climate science is more robust than forecasting next weeks weather, why using "models" is reliable and well tested and to answer any number of questions you might have, I would look to the sites that Dorch and Glenn have recommended.
Noticed that denialists never offer references
Alexander Stuart - please reference your claims. What is good for the goose is good for the gander. thank you
Australian Academy of Science can shed some light here
Just last month the Australian Academy of Science published “The Science of Climate Change: Questions and Answers”, which aims to address confusion created by contradictory information in the public domain.
http://www.science.org.au/policy/climatechange.html
It answers questions such as "“Could changes in the sun be causing global warming?” and “If we can’t forecast the weather 10 days in advance, why should we believe long-term climate forecasts?”(re Al Deeb's comment: if their models are so good...
how much rain will perth get next week?)
I know there's mistrust of investors and those profiting from carbon trading etc but at the heart of the issue good, solid, peer-reviewed science is telling us there's a problem. A lot of the antagonism between climate believers and deniers seems to come from differences of opinion in what we should DO about the problem. Let's not confuse the two things.
Red herrings
I had a quick look and didn't find those alternative websites to mainstream climate science very convincing, and no more authoritive than the site I suggested. Why not put those denialist views on Brave New Climate where discussion is usually forthright, well-informed and sustained. But that's not the point.
My point is that I and possibly others would like to read more about the response of industry to a price on carbon, which is one of the things Phil is trying to get us to consider. I don't think there is any doubt that many nations consider this is important, including the BRIC countries which are not as subject to the supposed scams and scare-mongering that denialists would have us believe prevail in the West. Thanks to Graham Palmer and Peter Lang for trying to steer the discussion back to energy generation and the implications of the article, such as the limitations of renewables & energy efficiency.
Doomersville?
Is all of this talk of climate change overwhelming any discussion on the mitigation of peak oil?
The global social and economic future arriving at peak oil will drive fear over the implications of climate change into history. Of course, mitigation of peak oil and climate change have in common the need to conserve fuel and adopt renewable and alternative low-carbon energy sources.
I think we're putting the cart before the horse in this discussion.
Head in the clouds....
@ Peter Lang - Oh Peter the same old nuclear spin from you - stop regurgitating the same comments repetitively - it's getting very tiresome - your pie in the sky wish (Australia 90% nuclear by 2035) just aint gonna happen when it is so cheap to dig up coal and burn it and the sooner you deal with that the better....move on man!
A greater energy mix is the sensible approach here - a bit of this and a bit of that keeps all parties happy and keeps the lights on in Australian homes.
Rarely have I read such scare-mongering rubbish.
First, both Potsdam and the writer assume a rise in average temperature of 2deg.C is a valid limit before catastrophe sets in. It isn’t: it was plucked from the air by a couple of German researchers because it had some political topspin and was adopted by the G8 a year before Copenhagen for the same reason. It’s no more than a scare-mongering slogan.
Second, believers in the catastrophe-beyond-2deg.C scenario ignore the central question in the climate debate, namely whether climate sensitivity is positive or negative. IPCC and the catastrophist clique know that without an assumed multiplier effect from atmospheric water vapour, greenhouse gases cannot lift temperature to a catastrophic level, so to get to catastrophe they assume that water vapour amplifies temperature rises. Maybe it seemed like a good idea at the time.
Third, we’re now beginning to see publication of empirical evidence from ever-more capable instruments on newer satellites that show the water vapour theory is bunk, which means that greenhouse gases can’t cause catastrophe, which means that CO2 isn’t the problem the politically correct of the western world think it is.
Fourth, catastrophists ignore the exponentially-diminishing nature of CO2 as a greenhouse gas. Physics of IR spectra prove that a doubling of atmospheric CO2 can at most lift average temperature by about 0.5deg.C – in historical terms, nothing to be concerned about.
Fifth, and perhaps most significant, solar physicists, who are real hard-science types, unlike most catastrophists who are soft-science types, or no science-at-all types, agree that the physics of solar magnetism and solar cycles are likely to cause an extended cold spell for the next 25 years or so.
In those circumstances, we’ll need all the fossil fuel we can get, markets will value it accordingly, and to feed the growing population of this planet, we’ll also need as much CO2 in the air as possible.
New age nuclear
There are nuclear alternatives to uranium
http://www.cosmosmagazine.com/node/348/
http://www.abc.net.au/news/newsitems/200604/s1616391.htm
http://www.ga.gov.au/minerals/research/national/thorium/index.jsp
Rebuttals
To Joe Dortch. The web site Skeptical Science is actually a pseudo science site. As a scientist I find the discussions at this site simplistic and unsustantiated. The arguements presented there do not rebut anything and are just so much more hand waving. If you want real science then you should look elsewhere perhaps at climate audit or CO2 science or WUWT or Jonova.
Skepticalscience scepticism
Submitted by Joe Dortch on Tue, 2010-09-14 11:37.
Can I suggest as an editorial policy that there should be a permanent link on Climate Spectator to a suitable site rebutting all climate denialist claims such as http://www.skepticalscience.com/argument.php Everything I have read from climate denalists on this site is ably refuted at the above link.
In answer to Joe Dortch: See: http://motls.blogspot.com/2010/03/john-cook-skeptical-science.html debunking John Cook's 'pseudo' skepticism.
Excellent article
Phil
Excellent article, and raises some interesting questions. Agree about future uncertainty, but one thing we can be certain of is that society is still going to demand power 24/365, and how we get that power remains the challenge. Maybe energy efficiency can play a marginal role, but if anyone stares at the graphs of carbon abatement for long enough, you'll believe anything - assuming large scale efficiency gains will translate into meaningful aggregate energy reductions is a triumph of hope over experience. And regardless of what the science says about climate change, coal is almost certain to make a substantial contribution to global energy for decades, and this remains the fundamental problem.
Bernard Walsh
Agree with you that the anti-nuclear sentiment is the major barrier to the uptake of nuclear - but in the absence of CCS, nuclear remains the only commercially available, scalable technology that can allow us to decommision fossil fuel assets. This doesn't exclude a rational discussion of renewables, but nuclear must be included in any rational debate or we're simply wasting our time.
The ZCAplan is critiqued here:
http://bravenewclimate.com/2010/08/12/zca2020-critique/
which showed that the solar technologies recommended are not off-the-shelf, commercially available. It showed that according the the IEA, solar thermal base-load is still decades away. It showed that 17 hours storage, while useful, cannot provide reliable base-load power 24/365 - it only takes one cloudy day to render the system inoperable. The report has seriously underestimated the timescale and cost of the plan, and made heroic assumptions about future energy use, electric cars, public transport, smart grids and home heating, among other issues, that defy common sense.
Another thought
Thanks to Joe Dortch for the link, these denialists have no place here until they can read the science and be sensible about it.
As an aside to this article, another further consideration is how quickly industry can actually transform to a low carbon model. There are growth limits on industry transformation and infrastructure which probably would make the timetable even tighter.
Moving on...
Nobody knows the future, but we all assess probabilities of events many years hence and make decisions that affect our lives and the lives of others on the basis of probabilities. I would think climate science is well aware of such philosophical issues.
Moving on, let's have more discussion of carbon pricing. Will it make a difference? As a lay person I would have thought it could work as a disincentive to carbon-intensive energy generation. If not, why not? And what about nuclear power? As I understand things nuclear power is banned in Australia and in the USA it has an almost prohibitively long approval process. Hypothetically, if such constraints were removed, would carbon pricing make any difference to the speed of its implementation or not?
if their models are so good...
how much rain will perth get next week?
Nuclear Power - Topics are available
I'd just like to note that there are several articles available on Climate Spectator regarding Nuclear Power as an alternative and as a power source for Australia. See:
http://www.climatespectator.com.au/commentary/solar-vs-nuclear-clash-numbers
or try typing Nuclear into the search box and scan the available articles for yourselves.
Nuclear is not the only answer...
Re: Peter Lang on Tue, 2010-09-14 12:10
"the one proven, low cost solution to low emissions energy – nuclear power"
Peter, I suggest you read the Zero Carbon Australia Stationary Energy plan put out by the University of Melbourne. http://energy.unimelb.edu.au/index.php?page=zero-carbon-plan
The strategy it outlines uses off-the-shelf, commercially available technology that can be deployed within 10 years. They excluded nuclear simply because experience overseas shows a timeframe of at least 15 years to get new nuclear plants into operation. It might be much worse in Australia, given the anti-nuclear sentiment here.
In any event, there is currently several thousand megawatts of solar thermal power generation worldwide - and some of it has heat storage to allow 24-hr baseload generation capability. More is being built in the US right now. The capability to generate large portions of Australia's electricity needs with solar is there, but the local market seems skewed too much toward cheap coal & the royalty revenues that flow to the state governments.
More advocacy for high cost, uneconomic solutions
“Therefore it is not competitive with investment in energy efficiency and most renewable energy sources. Placing faith in CCS to mitigate carbon exposure is a very risky investment strategy.”
True. Placing faith in CCS is a risky strategy. So is placing faith in renewable energy and energy efficiency. The fact that you avoided the one proven, low cost solution to low emissions energy – nuclear power – demonstrates that this article, like so many, is more about ideology than it is about actually reducing emissions. If you were serious about wanting to cut emissions you’d be arguing that Australia needs to get to where France is now (i.e. 90% of its electricity is emissions free) by 2035. That is not going to happen with renewable energy or energy efficiency.
Carbon countdown
Joe Dortch - Thank you for spelling my name correctly, I do read all sides of the debate and I wasn't not aware that I made any claims in my posting.
I just do not believe that we can foretell the future using computer models when we do not know what the effects of all the natural inputs are. These are just guesses presented as facts.
I do believe good sense requires not wasting our resources and minimising pollution and I practice what I believe. .I also believe that technology has brought us in the western world high standards of living, better health and longer life, and that these should be more widespread. I also believe that so long as we continue to reward inefficient technology .such as wind and solar, there is no incentive for these to improve to the point where they are competetive.
Hydro or nuclear, the others are uneconomic.
@ Alan Fields on Tue, 2010-09-14 11:45 (Last paragraph).
Bravo! I could not agree more. So we agree on something, at least.
collapse
This is not what the market is saying.
http://www.chicagoclimatex.com/market/data/summary.jsf