Are Fossil Fuel Companies Recognizing Climate-Related Risks of Business?

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Carbon Tracker Institute CEO Anthony Hobley speaks to TRNN correspondent Dimitri Lascaris about how global capital markets are realizing that fossil fuels companies will not be able to burn all of their reserves without wrecking the planet.

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DIMITRI LASCARIS, TRNN: This is Dimitri Lascaris reporting for the Real News from COP21 in Paris. I’m here today with Anthony Hobley, the CEO of Carbon Tracker. Thank you for joining us today.

ANTHONY HOBLEY: It’s a pleasure. Happy to talk to you.

LASCARIS: And could you tell me a little bit about Carbon Tracker, and what its mission is, and the role it plays in terms of assessing risk for investors in the fossil fuel sector?

HOBLEY: Sure. Carbon Tracker, we’re a not for profit think tank. We focus on the energy sector. I think the very unique thing about Carbon Tracker is we’re all ex-financial market professionals. So until two years ago I was a partner at the global law firm Norton Rose Fulbright. Our founder, Mark Campanale, built some of the biggest SRI funds through asset managers like Henderson’s and Jupiter in the city of London.

Probably the biggest component of Carbon Tracker is we now have a team of seven or so former investment bank analysts from careers at HSBC, CitiGroup, Deutsche, Barclays, et cetera. Our vision is that we want a climate-secure global energy system. But our particular mission, our contribution to that, is aligning capital market or financial market risk with climate risk. And the tools that we use is investment-grade financial analysis and regulatory analysis, and obviously translating those things into easily understandable terms that resonate in the financial market.

LASCARIS: And as I understand it, the analysis of the institute and other analyses that have been done of the known reserves of the top fossil fuels company suggest that those reserves are something on the order of five times in excess of what we can safely burn in order to remain within the 2 degrees Celsius limit. Is that correct?

HOBLEY: Well, we took a key bit of the climate science, the carbon budget. So the carbon budget tells us that approximately we can put about 2,000 gigatonnes of carbon dioxide and equivalent into the atmosphere by reference to pre-industrial levels. But above that, if we go above that, we are going to go above the two degrees, which is the, the level that’s been, that scientists tell us has been politically agreed is a safe level of climate change.

Now, the problem is since pre-industrial times we’ve already used well over half of that budget. So we have around approximately 900 gigatonnes left. But if you look at the world’s oil, gas, and coal reserves and resources out to 2050 you find, as you say, that there’s many times the amount of carbon locked up in those reserves than we can safely put into the atmosphere. So if all of those reserves and resources up to 2050 are burned, we will put in excess of 2,000 more gigatonnes, 3,000 or so gigatonnes into the atmosphere.

LASCARIS: And the scientific community has estimated what degree of warming that would precipitate, has it not?

HOBLEY: Well, yes. I mean, if we put all the oil, gas, and coal reserves, then we would go above 2 degrees. We may go as high as 6 degrees. So we clearly cannot burn it all. And there’s also probability at play here. So what we, you know, we’ve simplified it. So if we want to–if we’re willing to live with a 50 percent chance of keeping below 2 degrees, we can maybe use up to one-third of the known reserves and resources up to 2050. If we want to play safer, and we want an 80 percent chance of staying below 2 degrees, we can only use around 20 percent of the known, you know, oil, gas, and coal reserves and resources.

Now, think about that in terms of risk. I mean, imagine if you got on an airplane and they said, well, you know, there’s a 50 percent chance you’ll get there safely. Or there’s a 20, you know, there’s an 80 percent chance you’ll get there safely, but there’s a 20 percent chance we’re going to crash. Would you get on that airplane?

LASCARIS: And the extent to which the reserves must be left in the ground in order to remain within the 2 degrees Celsius limit varies according to the type of fossil fuels we’re talking about, because, for example, coal generates far more CO2, the burning of coal, than conventional oil, as I understand it. Is that fair?

HOBLEY: Well, certainly coal–well, look. They’re two different–I think we need to differentiate between two different uses. Oil is predominantly used for transport. In the internal combustion engine. Oil is actually quite dirty when it’s burned to produce electricity. When you’re comparing coal, it’s probably more normal to compare coal with gas, if you’re burning it to produce electricity. Clearly gas, you know, we think–there is an element of doubt here. But we think that gas is considerably less carbon-intensive than coal. The doubt for gas relates to the fugitive emissions and all of the associated emissions from extracting and transporting the gas. And I think the jury is still out as to whether those fugitive emissions, you know, would make gas as carbon-intensive as coal. So the industry still has work to do to, I think, address that perception of that issue.

LASCARIS: And has your institute or others looked specifically at what proportion of the reserves of companies in the tar sands sector, some of us call them oil sands, I call them tar sands, would have to remain in the ground in order for us, for example, to have a 50 percent chance of remaining within the 2 degrees Celsius limit?

HOBLEY: Well, we, when we looked at oil we looked at all the oils, all the oil projects in the world, and the oil supply. So all the reserves and resources. And we put them on a–we created something called a carbon supply cost curve. So we took the cost curve, which is the sort of workhorse of the financial markets, but we combined it with carbon intensity. So we said, okay, let’s look at every single oil project in the world that’s on the industry database, and look at the breakeven prices of those projects and the carbon intensity of those projects.

And what we found at the top end of the cost curve, there’s the high correlation between the carbon intensity and the cost. And what you find with tar sands, or oil sands projects, is that one, they’re carbon-intensive and two, they’re extreme–many, most of them are extremely expensive. So they make neither climate nor financial sense. So you know, we do not think we need the vast majority of the tar sands projects within the 2 degrees pathway.

LASCARIS: You say vast majority. Could you be a little bit more precise?

HOBLEY: There may be a few small projects that are already in production. But the vast majority of the tar sands, you know, we do not need. We do not need to open up more tar sands and more tar sands supply.

LASCARIS: And so looking at the current valuations of companies like Canadian Natural Resources, SunCorp, Canadian oil sands companies that are really focused on the tar sands and don’t have a diversified portfolio of fossil fuel assets, is it fair to say that the market is not properly valuing those corporations?

HOBLEY: Well, I think increasingly the market’s beginning to see this risk. And as we know, with the low oil price environment we’re currently in, the markets have adjusted considerably. There’s certainly in the last 18 months, the markets have got better at understanding the risk of companies exposed to high-cost projects, and particularly companies that I guess to a degree are one-trick ponies. You know, they’re almost 100 percent, or you know, a vast majority of their portfolio is exposed to high-cost projects like tar sands. And I think the market is, you know, actually is already punishing those companies. Perhaps there’s still more risk that they need to understand.

I mean, we would, we look at all of the world’s oil, gas, and coal projects. And particularly when we look at, say, the oil projects, we would sort of evaluate them by reference to their entire portfolio, and how exposed they are through their portfolio to these high-carbon, high-cost projects. And of course if you’re a company, and the vast majority of your portfolio is tar sands, then you are heavily exposed to high-cost, high carbon-intensive projects. We would say that that means you’re, you know, you have a much higher risk as a company. And it’s very difficult to understand how you would change that business model to be part of the low-carbon transition.

Whereas, you know, if you are a major, with a much broader spread in your portfolio, there may be things you can do. You could start to, you know, cut from your portfolio these types of high-cost, high-carbon projects. And we’re already seeing a number of major oil and gas companies have already started doing that with tar sands. We’ve seen, you know, they’ve already started doing that with the Arctic. I mean, Shell and Statoil in recent months have announced they’re pulling out of Arctic projects, and same thing with ultra-deep-sea projects, all of which are high-cost and, you know, in our view don’t make climate sense, as well.

LASCARIS: And you attended the other day, as did I, a presentation by Michael Bloomberg and Mark Carney, an official announcement of the appointment of a task force, a FASB task–that’s financial accounting standards board task force, to look at disclosure of climate risk by oil and gas, or fossil fuel corporations. And apparently the task force is going to try to develop common standards for disclosure.

But I as a lawyer, and you as a lawyer as well, found it curious that there was any need for such a task force at all, because companies already have a disclosure requirement to reveal to the public on a timely basis all material risk, whether of a climate-related nature or otherwise. And if companies are, in fact, complying with that obligation, do we really need a task force? And if they’re not complying with that obligation, and I’d like to hear from you on that, why aren’t regulators taking action against them to ensure compliance?

HOBLEY: Well, I think that’s a very important question. But I think the fact that the governor of the Bank of England is at a climate summit–I think this is the first climate summit where the governor of a major central bank has attended. And the fact that he’s here also in his capacity as chair of the financial stability board is an incredibly important message. Now, the announcement is not a [SASB] task force, it’s a financial stability board task force, albeit Michael Bloomberg has been appointed chair of this task force, also chairs the SASB board. So there’s obviously a correlation, and probably an important correlation.

I actually think you’re right. I mean, it’s always been our view in Carbon Tracker that the existing obligations on disclosure around financial risk should encompass climate risk, and the extent to which that creates a financial risk. And our, you know, Carbon Tracker’s analysis is all about showing that financial risk arising from climate risk.

But I think there’s a lot of work. There’s a lot of capacity building and work to do, educating the financial regulators and the financial professionals to help prepare these disclosures that this is a financial risk, and that it’s a financial risk that’s relevant today, not next year or in five years’ time. So I agree with you. I think the, the underlying legislation and obligations are there. We just, there’s quite a degree of education and capacity-building to get those applied properly in relation to financial risk arising from climate risk.

LASCARIS: One last question, following on this topic of disclosure obligations. Existing disclosure obligations. Last year I believe it was, or very recently, ExxonMobil voluntarily undertook to major institutional investors to address climate risk in its disclosure documents. And I’m paraphrasing here, but ultimately what it disclosed after having undertook to do so was the world isn’t really going to change. Again, very much this is my own language. But essentially the message was, the world isn’t going to have to change, and we’re not going to have to strand a material portion of our assets. And this task force, as I understand it, is going to be developing voluntary standards.

In light of the Exxon experience and the quality of disclosure you’re seeing in the fossil fuels industry today, do you really think a voluntary regime is likely to materially improve disclosure?

HOBLEY: Well, I think if we can get agreement around it, I think it could improve it. But again, I agree with you that we need to ensure that the existing obligations on disclosing financial risk are properly applied. But I think it could actually help in terms of this capacity building and education.

Now, that disclosure by Exxon was a result of a letter that Carbon Tracker working with [Syria’s] CDP and the investor groups in climate change put together and wrote to the 45 top fossil fuel companies. And they all made, they all, most of them responded to that letter. But yes, you know, one of the most famous responses, as you point out, is the one from Exxon where it was well, you know, we don’t believe governments are going to act, and we’ll be able to sell all of our products. It was, you know, a very much a sort of a blight on all your houses type response. And they may be well ruing that, I mean, as you know, with the attorney general’s investigation. The New York State attorney general’s investigation now. They’re perhaps wishing they had taken a slightly more responsible approach to that letter.

And some other companies did. And it’s worth looking at some of the responses, I mean, Shell’s was a little bit better, but there was still a massive cognitive dissonance. At least Shell clearly acknowledged the problem and the science, but then went on to say but we’re not going to deal with that till the second half of the century, which of course will be too late. But there was some good responses from some other companies from the 45 that were written. So it is worth looking at all of those.

LASCARIS: Well, thank you very much for your time, Anthony. And this is Dimitri Lascaris for the Real News.

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