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Divestment may protect from 40-60% overvaluation of fossil fuel stock

A growing number of municipalities have resolved to shift out of oil company investments. Meanwhile, research on the “carbon bubble” builds the case that such divestment reflects financial prudence as well as ethical leadership.

This week, San Francisco’s Board of Supervisors voted unanimously to urge the city’s retirement fund to stop new fossil fuel investments and sell more than $583 million worth of shares in Chevron, ExxonMobil and 200 other fossil fuel companies within five years.  Other cities that are urging their fund managers to divest include: Seattle, WA; Madison, WI; Bayfield, WI; Ithaca, NY; Boulder, CO; Rochester, MN; Eugene, OR; Richmond, CA, Berkeley, CA and State College, PA. In Canada, the City of Vancouver has passed a resolution asking the municipal employee retirement fund to research divestment. Canadian students are campaigning for divestment at UBC, the University of Ottawa, the University of Toronto, McGill, University of New Brusnwick-Frederiction and Trent University.

Most institutions cite moral reasons for divestment: that it publicly recognizes the catastrophic consequences of our carbon emissions and acknowledges that investing the fossil fuel industry requires complicity. The looming “carbon bubble” provides an equally compelling financial reason.

Bill McKibben of states that we have five times as much oil, coal and gas on the books as scientists think it is safe to burn. It may be physically underground but its economically above ground because it is figured into share prices, companies borrow money against it and nations base their budgets on it: “The numbers aren’t exact, of course, but the carbon bubble makes the housing bubble look small by comparison.”

Why invest in assets that will be stranded by any effective response to climate change?

According to a new study by Carbon Trackers, Lord Stern and the London School of Economics, investors are on track to spend US$ 6 trillion developing new oil and gas reserves over the next decade -even though use of  known reserves will push the climate beyond safe limits. Investments that expect oil companies to reap profit from these reserves based on past performance bet that we will also have destructive storms, submerged cities, drought, famine, water shortages and the civil disruptions that would likely ensue – scenarios of unlikely profitability for any sector.

Carbon Trackers estimates are based on science that states that humans can emit between 565 to 886 billion tonnes (Gt) of CO2 before 2050 and still avoid (with an 80% probability) unstoppable changes to the earth. Fossil fuel companies book their reserves at 762 Gt CO2, enough to spend the entire global carbon budget without any contributions by other sectors such as waste and agriculture. A pro-rata share of the global carbon budget would give these companies around 125 to 275 GtCO2, or 20-40% of their known reserves. Although fossil fuel companies can’t safely use even their known reserves, they spent $647 billion last year finding additional reserves and developing new extraction technologies.

This gap between known reserves and the global climate budget creates a carbon bubble: fossil fuel company valuations are based on reserves that they can’t burn. HSBC, the world’s second largest bank, suggests that setting aside reserves that are too dangerous to burn could reduce equity valuations by 40-60%. Fossil fuel company bond ratings could be downgraded.

Canada’s carbon bubble

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