OTTAWA, March 26, 2013 /CNW/ - Canada's economy is experiencing a
"carbon bubble" that could have significant consequences for Canada's
financial markets and pension funds, according to a new study released
today by the Canadian Centre for Policy Alternatives (CCPA).
Between two-thirds and four-fifths of known fossil fuel reserves have
been deemed to be "unburnable carbon" that cannot safely be combusted
without leading to catastrophic climate change.
"Business-as-usual for the fossil fuel industry is incompatible with the
need to keep the global temperature increase to 2°C or less," says CCPA
Senior Economist Marc Lee. "The recent experience of high-tech and
housing bubbles should serve as a stern warning to investors and policy
The study, by Lee and SFU graduate student Brock Ellis, estimates
Canada's share of a global carbon budget and finds that, at least 78%
of Canada's proven oil, bitumen, gas, and coal reserves, and 89% of
proven-plus-probable reserves would need to remain underground.
This unburnable carbon has implications for the Canadian fossil fuel
industry, but also for financial markets, in particular pension funds
who have invested in fossil fuel industries as part of their
portfolios. The Toronto Stock Exchange is highly weighted towards the
fossil fuel sector. At the end of 2011, the TSX had 405 listed oil and
gas companies with a total market capitalization of over $379 billion.
The study compares assets and liabilities for more than 100 top fossil
fuel companies in Canada to estimates of their "carbon liabilities"—the
estimated damages from emitting a tonne of carbon. For Canadian-listed
companies the low estimate amounts to $844 billion in carbon
liabilities—more than two and a half times the market capitalization
and nearly double the assets of those companies. The high estimate
yields a figure just under $5.7 trillion, an amount 17 times larger
than market capitalization and 13 times assets.
"There has been a general failure among pension funds to account for
climate risk, and a tendency to view any screening for environmental
purposes to be detrimental to financial performance," says Lee. "Our
analysis turns this on its head: by not accounting for climate risk,
large amounts of invested capital are vulnerable to the carbon bubble."
Pension fund managers must take inter-generational equity into account.
While pension funds have to generate maximum current return value for
existing (and soon-to-be) pensioners, at the same time they must
equally represent the interest of young workers for their eventual
Pension funds and other institutional investors need to be part of the
solution, according to the study, which makes several recommendations
to green Canada's financial markets, including: establishing a national
carbon budget; developing green bonds; and mandating carbon stress
tests for financing commitments and portfolios.
"We are in need of a 'managed retreat' from fossil fuel investments,"
Canada's Carbon Liabilities: The Implications of Stranded Fossil Fuel
Assets for Financial Markets and Pension Funds is available on the CCPA website: http://policyalternatives.ca
SOURCE: Canadian Centre for Policy Alternatives
For further information:
Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.