The Carbon Tracker Initiative (CTI) has created waves in the global debate on finance and climate change by launching two reports that allow investors to measure the risk associated with oil and coal investments. Known as the ‘Carbon Supply Cost Curves’, the reports empower investors with vital information to challenge investments in fossil fuels and begin the journey to divestment.
Recognising the importance of leveraging the financial muscle of capital markets in the fight against climate change, CTI set out to transform communications between investors and fossil fuel companies. It bridged the divide by interpreting climate risks in readily accessible financial language, enabling investors to enter the debate equipped to discuss both returns and carbon. In particular, it sought to highlight the discrepancy between the heavy investment required for oil and coal projects and the dwindling demand for fossil fuels.
Published in 2014, the new ‘Carbon Supply Cost Curves’ oil and coal reports build on CTI’s influential ‘Carbon Bubble’ and ‘Unburnable Carbon’ studies. They bring an extra level of detail and clarity to the conversation around the carbon bubble (whereby stock markets overvalue companies that produce fossil fuels by neglecting to account for the true environmental cost of carbon emissions) and stranded assets (investments that lose their value because projects are cancelled to prevent further global warming). They provide investors with a comprehensive analysis of current and future projects, and an important tool to understand their exposure to risk.
The centrepiece of the analyses is the ‘Carbon Supply Cost Curve’ concept. This takes the classic supply curve (which typically shows production against time using different break-even prices), and draws on the same model to pinpoint how much CO2 is likely to be produced by projects at different break-even prices. Adopting a well respected financial tool to demonstrate risk, used by analysts and energy policy experts alike, also boosted the credibility of the concept.
CTI discovered that many projects make neither economic nor climate sense, while unconventional oil projects such as tar sands and deepwater projects present the greatest levels of financial and environmental risk. It identified $1.1tn of potential capital expenditure on oil projects up to 2025 that may be cancelled, as efforts to keep global warming below two degrees continue. Similarly, its coal report suggests that $112bn of future coal mine expansion and development may be excess to requirements due to lower demand forecasts.
Equipped with this information, analysts, asset owners, investors and financial regulators can scrutinise investments and push companies to diversify portfolios away from fossil fuels and high risk, carbon-intensive projects, and adopt a more progressive approach to managing climate risks. CTI’s oil and coal analyses can be used by any industry and address the entire global energy and financial system.
The journey to igniting a global conversation on climate and finance has not been easy. But the CTI team, which expanded from three to eight people in 2014, pulled together to deliver beyond expectations despite their limited resources and budget. In order to gain the confidence of seasoned investors and achieve the authoritative voice necessary to address financial markets, the team partnered with high profile experts from major investment banks. Further, the organisation combined technical reports with simple info-graphics to make its findings accessible to a wide range of audiences.
The ‘Carbon Supply Cost Curves’ reports prompted reactions far and wide. Companies, investors and policy-makers are now openly debating the link between finance and climate change. Oil companies, energy consultancies and industry associations are also wading into the discussion.
Importantly, CTI’s oil and coal analyses are at the centre of multiple divestment and engagement initiatives worldwide. Stanford University divested from coal in May 2014, while the Rockefeller Foundation has also committed to divesting $50bn from fossil fuel investments, targeting coal and tar sands assets. Coalitions of investors have sought greater transparency from major oil industry players, and pension funds have also take action to decarbonise their portfolios. For example, inspired by CTI’s work, Norwegian insurer Storebrand has divested 24 coal and oil sands companies.
Prominent policy-makers and regulators including President Obama, the Bank of England and Christiana Figueres, Executive Secretary of the UNFCCC, have all voiced commitments to putting stranded assets and the carbon bubble on their energy, climate and financial agendas.
The judges commented that CTI is addressing the systemic barriers to dealing with climate change by creating and repurposing language. And tangible change has resulted from their work. “From a communications perspective, CTI is very clear about how it is perceived by its target audience,” the judges agreed. “The team has created a wave with its messaging, going from a standing start to being central to the debate in a short time.”