Carbontracker “Unburnable Carbon 2013” Report

Carbontracker has published a 39 page report titled “Unburnable Carbon 2013”. Thanks to this article by Damian Carrington in the Guardian for the link.

I agree with some of the conclusions. For example, they note that most of the fossil fuel needs to stay in the ground if global warming is supposed to be kept under 2 degrees.

And they ask what that means for the financial stability of fossil fuel companies.

I think this is a very important question. However, the ideas the report presents are completely contrary to my thoughts.

For one, they seem to think that all “unburnable carbon” is of zero value. That is not true. Even if no fossil fuel could be burned from tomorrow on, there would still be a market for hydrocarbons as raw materials in the chemical industry. I don’t know how they could get such a simple thing wrong. But they really did.

And then they assume that fossil fuel companies would suffer financially if government regulation forced them to leave 80 percent of the treasure in the ground.

I could not disagree more.

Basic common sense tells us that the price per unit of all fossil fuel would go way up if we reduced supply by 80%. Fossil fuels are a finite resource to begin with. But if you put a big “off limits” sign on 80% of the reserves available, that reduces supply in a massive fashion. And that in turn strongly increases the unit price of fossil fuel on the market, and by extension, the value of the fossil fuel reserves.

The above is of course only a restatement of Phaseout Profit Theory.

However, there is an interesting new aspect I was not aware of until now. Right now, fossil fuel companies have invested around $676 billion last year to develop new resources.

The report argues that those investments are wasted. If most of the reserves can’t be developed anyway, it doesn’t make any sense to look for new resources.

They are right, of course. But this is also a very easy path to start putting the Phaseout Profit Theory into practice. Just stop all development of new resources. This will naturally lead to reducing supply over the next couple of decades, raising prices and profits for the fossil fuel companies, while saving those $676 billion a year in useless costs. Sounds like a great idea to me.

Maybe all governments should place a ban on all development of new fossil fuel resources, starting with the Canadian tar sands.

 

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

2 thoughts on “Carbontracker “Unburnable Carbon 2013” Report

  1. Hey there KFL, I’ve been trying to make this case with various Greens and policy makers since I saw your ideas about 2 years ago. Most people do get it. Please keep trying.

    As you say, it’s disappointing to see such fundamental errors being made about the possible alternate future value of those hydrocarbons. We don’t have to BURN them for the resource to be valueable.

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  2. Well you may disagree, but it actually was a very interesting response to your phaseout theory.

    The fact is that the market value of oil companies is based on how much oil reserve they have. If they don’t discover new ones to maintain inventories at the same level, their stock will crumble.

    That’s a very powerful motivation to find and extract new oil, and the fact you think it shouldn’t be like that changes nothing to the situation.

    But even if not taking that into account, it’s a lot less certain than you believe that your theory would work. It we go back to what happened a few years ago in 2008, at first the value of oil went very high because of lack of supply, but what happened next is that the economy crumbled because of this high price. And then the situation was very unpleasant for fossil fuel companies. The demand was lower as well as the price, so they were making a lot less profit. The lower price then help oil demand recover somewhat (if not the rest of economy), and the price raised again but stays since then at a much more reasonable price than the one reached during a few months in 2008.

    And so, I think that the fossil fuel companies analyze that if the supply was reduced a lot (2008 was just stable, and not diminishing), the whole consequence would be for them to lose money, not earn more.

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