Your Pension and the Carbon Bubble

Fossil fuel investments seem like a sure thing. Canada’s prime minister sees our future as an “energy superpower.” Our B.C. premier is betting the farm on liquefied natural gas exports.

market-bubble-graph

This view is short-sighted warns Marc Lee, senior economist for the Canadian Centre for Policy Alternatives. While fossil fuel investment seems like a sure bet now, future liabilities threaten to devalue those investments. Investors  sometimes have tunnel vision when it comes to bubble markets such as the U.S. sub-prime debacle.

Short-term thinking is seductive. Fossil fuels are non-renewable and that, you would think, should drive value. Fuels are harder to find, more expensive to mine, and increasingly difficult (if not impossible) to deliver to market.

But their liability dwells in the burning them. Millions of Canadians are exposed to that risk.

Six million Canadians have registered pension funds worth $1.1 trillion, and of that about one-third are in stocks. Fossil fuel stock investments are significant. “The Toronto Stock Exchange (TSX) is highly weighted towards the fossil fuel sector, with total market capitalization of fossil fuel companies around $400-500 billion,” says Lee.

Ominous dark clouds loom on the horizon. The cost of pumping CO2 into atmosphere has a price. According to an estimate by the Climate Vulnerable Forum in 2012, the cost of doing nothing was 1.2 trillion globally — about the same as invested by Canadians in registered pension funds.

Eventually, the value of fossil fuel stocks will depreciate because cost of cleaning up exceeds the selling price. The cost of doing business as usual will be swamped by the rising price of inaction on climate change. Global leaders (probably none from Canada) will eventually have to agree to do something about the grim reality of coastal flooding from rising water and flash floods from torrential deluges.

Rational world leaders will abandon grandiose ideas of economies based on fossil fuel extraction and come to their senses. Global climate treaties will limit the amount of CO2 we can dump into the air.

For those who have eyes to see, it’s happening sooner than later as the Earth reaches the tipping point of a two degree temperature rise. To prevent that, we need to limit CO2 to 500 Gigatonnes (billion tonnes) globally. Canada’s proven and probable fossil fuel reserves amount to 174 Gt. Much of that will have to stay in the ground. Treaty negotiations will determine our share. Let’s assume that Canadian negotiators get a global share that is ten times our population.

“So even with a generous carbon budget of 20 Gt, some 78% of Canada’s proven reserves, and 89% of proven-plus-probable reserves, need to remain underground,” says Lee.

If all this seems too hypothetical, too far off into the future, remember that its just these kind of things that keep actuaries awake at night. Pension managers have to consider not only the immediate needs of retirees but the viability of funds that affect future generations of retirees.

“Addressing risk is inherent to financial market investment, which routinely must account for risks due to inflation, currency movements, regulatory changes, political turmoil and general economic conditions.”

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