Financial Advisor contributor Paul Ellis recently interviewed Anthony Hobley, chief executive officer of Carbon Tracker, to discuss their mission for a climate-secure global energy system.
Ellis: Anthony, let’s begin with the carbon budget. What is the carbon budget and why should an advisor in the U.S. care about it?
Hobley: Well, we should all care about the carbon budget, because the carbon budget is what climate scientists tell us is the amount of carbon we can put in the atmosphere, while having a reasonable chance of keeping a stable climate. This means keeping global average temperature rises below 2 degrees Celsius, and that means we can effectively put 2,000 gigatonnes of carbon dioxide into the atmosphere against a pre-industrial CO2 baseline measurement. When we did our original report in 2011, we only had 900 gigatonnes left in that budget. Under current business-as-usual trajectories we will burst through that 2 degrees budget by the mid 2030s. So, we must bend that curve that tracks CO2 emissions down quickly during the next 15 years.
As a financial market professional, you may or may not care about climate change and the physical impacts that going above 2 degrees will have, but how you translate that information into assessing risk and reward around investment decisions is important to your clients’ portfolios. That’s the interesting thing that Carbon Tracker has done. We’ve taken that carbon budget and overlaid it onto real world assets, particularly the assets and resources of the fossil fuel companies, out to 2050. There is about 3,000 gigatonnes of carbon dioxide locked up in oil, gas and coal reserves and resources, yet we can only burn 900 gigatonnes of it.
Ellis: What is Carbon Tracker’s focus as an organization and how is your business organized?
Hobley: We’re a not-for-profit, philanthropically funded organization. What’s unique about us, though, is that we’re all former financial market professionals, which is quite unusual for a philanthropically funded NGO. We’re mission-driven, and our mission is a climate-secure global energy system, which in effect means net zero emissions by 2050.
Our vision is to align financial capital market risk with climate risk and energy transition risk. Put another way, we use financial analysis to demonstrate that there is real financial risk tied up with climate risk and the energy transition. There is also opportunity on the other side of that equation.
Ellis: The fossil fuel reserves and resources you’ve talked about are in the ground, but also on the balance sheets of companies in the energy sector, is that correct?
Hobley: To some degree. We talk about reserves and resources out to 2050, and there are different types of reserves—proven reserves (P1), probable (P2) and possible (P3)—and then there are future resources. The P1s are the ones that are being proven and used now, so they are going to have greater value. Those P1 reserves have a life of eight to 10 years, and the companies must develop more reserves if they anticipate being in business beyond that. Their future business model depends on all of the reserves and resources if they want to be around three decades from now.
Some investors say, “well, in the current world of short-term investment horizons, we can worry about that tomorrow.” The problem is that companies are taking revenues from the currently-producing reserves, and they’re projecting those forward up the cost curve into ever more expensive exploration and development, like the Arctic, tar sands and deep ocean resources. At Carbon Tracker, we believe that is destroying value today within those companies, which makes neither climate nor financial sense.