FFI Perspectives

Carbon Emissions Measurements for Investors, Part 1: The Big Picture

With the advent of the United Nations 21st Conference of Parties (COP21) for climate change, many investors are starting to use carbon dioxide (CO2) emissions as a metric to evaluate companies. Current emissions figures are commonly cited, and although they do provide some useful information, they fail to measure the sheer amount of carbon controlled by energy companies.

The most popular measure of emissions is current annual greenhouse gas (GHG) emissions (known as Scope 1 and Scope 2 emissions). Current emissions measures include any emission-generating activities that a company controls as well as emissions from electricity and heat that the company buys directly.

But these measures don’t work for energy because of what’s left out. Only the GHG generated from extracting, refining, and transporting fossil fuels are counted as current emissions – the fossil fuels that energy companies sell are not. By convention, the actual fossil fuels that energy companies sell are counted elsewhere – with those of the industries that burn fossil fuels for power.

And there’s another problem. Current emissions measures for energy companies capture only their consumption of fossil fuels. What about the vast inventories of fossil fuels these companies own? The inventories of fossil fuels that these companies own are called proven reserves, i.e., the coal, oil, and gas that companies have discovered but not yet extracted. These reserves are not counted in measures of current emissions.

To truly grasp the emissions big picture, it is necessary to measure energy companies’ potential to contribute to future emissions. Our research shows that proven reserves hold about 3,200 GtCO2.1 That’s one hundred times annual Scope 1 and 2 emissions globally – for all industries combined. 3,200 GtCO2 is a vast volume of greenhouse gases; it is four or five times the emissions that can be released into the atmosphere while keeping within the 2 degree Celsius target for global warming established by the Intergovernmental Panel on Climate Change (IPCC).

Another way to evaluate the risks of proven reserves is to treat those reserves as assets owned. As assets, proven reserves contribute to the overall value of a company. When an asset becomes worthless, it is referred to as stranded. Imagine a warehouse full of beer at the onset of Prohibition, or, using a more recent example, a car dealer’s lot full of unsold Volkswagen diesels. Stranded assets such as these can have an enormous impact on a company’s value. For energy companies and for their shareholders, stranded asset risk, the return on the companies’ stock, and the methods we choose to meet the challenge of climate change, are all closely tied.

In my next blog post, I’ll discuss how stranded assets may affect the energy industry and why their impact pose a serious risk for investable companies. Stay tuned.

To read Part 2 of this blog, click here.

1 The 3,200 GtCO2 figure is our own consensus estimate, based on data from the following sources: “BP Statistical Review of World Energy June 2013,” Conglin Xu and Laura Bell, “Worldwide Reserves, Oil Production Post Modest Rise,” Oil and Gas Journal, 12/02/2013; IEA (2013), “World Energy Outlook 2013,” IEA; and inventory estimates by the Intergovernmental Panel on Climate Change (IPCC) Working Group 3, Fifth Assessment, Table 6.2, April 2014.


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