Pricking the carbon finance bubble

After the first year of the Dodd-Frank reform [PDF] in the USA, the too-big-to-fail financial bubble still looms. The deficit debate revealed decades of unsustainable policies, practices and money-corrupted politics. Subsidised fossilised industries still dominate in energy, healthcare, agriculture, military and on Wall Street. Massive misallocations of capital led to the financial crises of 2008-9 (see FCIC), papered over by bailing out the perpetrators. 

The USA was stuck with a symptomatic debt to GDP ratio of 90% and reckless, diversionary politicizing of the debt ceiling. The best way to cut the deficit: closing tax loopholes and putting Americans back to work, so as to restore lost tax revenues. MSNBC's Dylan Ratigan calls for restructuring US debt—and facing up to the global debt overhang.

Missed by Frank-Dodd are the obsolete fossilised asset allocation models and Rigged Carbon Markets. An explosive new report from Carbon Tracker shows how these errors in asset valuation have saddled stocks and sovereign bonds with unrealistically over-valued fossil fuel reserves. These coal, oil and gas deposits carried on company and government books as "assets" may actually prove unmarketable and worthless! This bombshell hits investors already reeling from the financial crises of 2007-2008 still requiring massive debt write-downs.

The Carbon Tracker reports:

• The top 100 coal, oil and gas companies' combined value: $7.42 trillion.
• Stock exchanges in London, Sao Paulo, Moscow, Toronto and Sydney all have an estimated 20-30% of their market cap connected to fossil fuels.
• The total carbon emissions potential from burning the Earth's known fossil reserves: 2,795 gigatons of CO2 (65% from coal, 22% from oil and 13% from gas).
• UN scientists and governments have concluded that CO2 emissions need to be capped at 565 gigatons to avoid exceeding 2°C of global warming.

So we join Carbon Tracker in asking why are financial and accounting models carrying on their books as "assets" these fossil fuel reserves, which governments have agreed can never be burned? For example, Britain, like other EU countries, imposes mandatory caps on CO2 emissions. Yet, one third of the London's FTSE 100 lists the "assets" of Shell, BP and other fossil-based companies and continues to list new company IPOs without disclosing or assessing what percentage of these "proven reserves" must remain in the ground!

James Leaton, Carbon Tracker author, estimates that if all these proven reserves were recovered and burned, this would release 745 gigatons of CO2. Yet, limiting CO2 emissions to below 2°C of temperature rise sets that maximum at 565 gigatons. Leaton and Jeremy Leggett, executive chair of Solarcentury and chair of Carbon Tracker, reveal that company prospectuses ignore these issues that are material to investors, i.e., at zero risk! Leaton adds,

"This illustrates how disconnected the world's capital markets are… It shows that the short-term profit based approach of today's financial instruments do not recognise the signals of long-term regulatory action to limit climate change."

Leggett concludes, "Regulators should require reporting of reserves and potential CO2 emissions by listed companies and those applying for listing. They should aggregate and publish this data."

We at Ethical Markets agree and have called for updating fossilised asset allocation and retraining of all portfolio managers beyond out-dated "Modern Portfolio Theory," "efficient markets" to the behavioral science view that markets exhibit "herd behavior" and require ESG valuations ("Changing the Game of Finance," SRI in Rockies) and triple bottom line models (Winninghoff, E. "New Tools for Investing in a Black Swan World").

Dodd-Frank is falling further behind. Congress starves regulators mandated to implement its feeble rules. Meanwhile, credit default swap positions still total a notional $600 trillion while global GDP is only $65 trillion; Europe's PIIGS teeter toward restructuring while Congress dithers. The world needs the global debt write-down I describe as the "Great Jubilee of 2014" in my forthcoming article, "Looking Back from 2020."

Good news: financiers are waking up. John Fullerton, Capital Institute, sees a stunning choice: blow through the 2°C rise in global warming or write off up to $23 trillion on global balance sheets. Meanwhile, our Green Transition Scoreboard® tracks the accelerating shift beyond fossilised sectors and stranded assets totaling over $2 trillion of private investments in greening the global economy since 2007. As UNEP-FI's upcoming Roundtable in DC for institutional investors, we are at the Tipping Point!

This article was also published as part of the Green Economy Series on Corporate Social Responsibility Newswire