From CarbonTracker.org comes this very useful accounting of global fossil fuel reserves, by market listing on stock exchanges. The risk identified in their report, Unburnable Carbon – Are the World’s Financial Markets Carrying a Carbon Bubble?, is that markets have accorded value to energy resources which may never be extracted. The reason? A rather hopeful one. According to the group: “the threat of fossil fuel assets becoming stranded, as the shift to a low-carbon economy accelerates.” The report pays particular attention to the value of London listings, a country which itself has dwindling fossil fuel resources.
While I think Carbon Tracker has performed a useful exercise here, the prospect that fossil fuel resources are left in the ground may come about more from resource nationalism, extraction costs, or simply the end of industrial growth. It’s certainly true that present growth rates for renewable energy are amazing. But the monster known as coal continues its drive towards dominance. In a previous post of mine showing the world’s mix of energy resources, I highlighted the very encouraging fact that growth in power generation from wind and solar alone was running at 36% in non-OECD countries. Unfortunately, however, 20 years of coal-fired power generation in developing Asia has created a fearsome path-dependency. As the most recent IEA World Energy Outlook highlighted, “coal-fired capacity accounted for one-third of all the generating capacity additions worldwide over the period 1990 to 2010. Nearly 70% of these coal-fired capacity additions were in China.” Worse, coal is now the preferred energy source of the entire developing world as persistently high oil prices have dampened growth rates of autos and highways, and as rural populations move first towards electrification. In short, coal dwarfs renewables and even stands to dislodge oil.
That said, the map of reserves listed on exchanges is not without implications. As mentioned, London’s competitive edge as an otherwise resource-poor nation has been to offer global capitalism safe harbor and given the limited prospects for growth in the OECD generally, the regulatory framework offered by The Square Mile will likely be retained. Indeed, this past week’s machinations between Britain and the EU were undoubtedly guided by Britain’s motivations, in this regard.
Meanwhile, I’m not convinced stock market capitalisation of global resource companies reflects full extraction value of their resources. Multiples on global giants like Royal Dutch Shell and Rio Tinto remain low. If anything, markets are not pricing in a rapid energy transition away from fossil fuels but rather a slow-growth future as a result of scarcity. If so, this presents an increasingly familiar paradox: global industrial growth is restrained by geological limits on resource extraction—but—this will only serve to slow the forward speed economies really need to make the discretionary transition to renewables.