The document discusses the concept of a "carbon bubble" where fossil fuel companies' assets are overvalued since they assume all reserves will be burned, contradicting the goal of limiting global warming to 2C. This poses major financial risks. It advocates strategies like divestment campaigns and removing fossil fuel subsidies to exert political and market pressure for climate action. If taken advantage of now, low oil prices and renewable energy advances provide an opportunity to rationalize energy policies and transition to a cheaper, greener system.

1. DIVESTMENT AND THE CARBON BUBBLE
Oil Sand Extraction Site in Northern Alberta, Canada. Oil Sands are, like Deepwater Drills beneath
the arctic, among the most expensive ways of crude oil extraction with an average break even of 74
$/bbl (Rystad Energy, Dec 2014). Projects like these constitute major asset values in the balance
sheets of fuel companies.

2. I. THE CARBON BUBBLE – WHAT IS THAT?
I. UNDERLYING PROBLEM AND FINANCIAL RISKS
II. THE CARBON INDUSTRY’S CURRENT PREMISES
ASIDE: CURRENT SITUATION ON THE OIL MARKETS
II. MARKET LEVERAGE – THE DIVESTMENT STRATEGY
I. INITIATIVES AND THEIR STRATEGIES
II. IMPACT ANALYSIS
III. SOVEREIGN LEVERAGE – SUBSIDIES… AND ONE MORE
I. GLOBAL FOSSIL SUBSIDIES
II. THE YASUNÍ ITT INITIATIVE
IV. WHAT DO YOU THINK?
INTRODUCTION

3. THE CARBON BUBBLE
IEA Estimate:
“No more than one-third of proven
reserves can be consumed if the
world is to achieve the 2 °C goal,
unless carbon capture and storage
technology is widely deployed.”
– IEA Energy Outlook, Jan 2012
McGlade & Ekins Estimate:
“Our results suggest that, globally, a
third of oil reserves, half of gas
reserves and over 80 per cent of
coal reserves should remain unused
[…] in order to meet the target of 2°C. “
– Energy Policy vol 64, Oct 2014

4. • The ecological perspective:
• We want to stick to a maximum of 2ºC increase in average global
temperature
• Recent efforts to increase supply are orders of magnitudes more
devastating to nature than traditional oil fields (deforestation &
acidification)
• The economic perspective:
• market valuation of fossil fuels companies might assume that all
reserves will be consumed (keep in mind: CCS technology)
• fossil reserves are booked as upstream in the companies’ assets
according to their total expected turnover: write-downs are to be
expected
any future exploration investments will increase lobby interest for
preventing “stranded assets”
THE FUNDAMENTAL PROBLEMI. The Carbon Bubble

5. • Unfeasible and risky asset valuation:
• “A loss of $28 trillion in revenues over the next two decades is
expected, if the world takes action to address climate change.” (This
is compared to an extremely unlikely status quo)
– Kepler Chevreux, Apr 2014
• In comparison to the subprime crisis:
• Due to the subprime crisis financial institutions around the world
approximately booked $0.5 trillion ($501 billion) in write-downs on
loans, MBS’s and CDOs
– Bloomberg, Aug 2008
WHAT ARE THE RISKS?I. The Carbon Bubble

6. “The more you own, the more you are worth”
Fossil Companies are acting on outdated premises
INVESTING IN THE FUTURE?
Global Upstream Capital Expenditures (billion $) in Oil & Gas
(US Energy Information Administration, Apr 2014)
“We maintain our bullish outlook for oilfield services. […] We are in the midst
of a multi-year, double-digit growth spending upcycle internationally
characterized by […] aggressive drilling programs.”
– Barclays Global E&P Capex Outlook, Dec 2013
I. The Carbon Bubble

7. INVESTING IN THE FUTURE?
Production Cost ($per bbl) versus
remaining recoverable resources
(billions of bbl)
Production Cost ($per BTU) versus
remaining recoverable resources
(trillions of cubic metres)
I. The Carbon Bubble
– McGlade & Ekins, Jan 2015

8. Break-even prices for non-producing assets ($/bbl) with confidence
intervals vs total liquid production forecast for 2020 (mil boe/d)
– Rystad Energy, Jan 2015
BREAK-EVEN VS PRODUCTION COSTI. The Carbon Bubble

9. MARKET SITUATIONA. Current Oil Markets
50
70
90
110
2011 2012 2013 2014 2015
• The current situation is comprised of three main factors
• US Shale Revolution: Small & flexible companies with top-notch
technology can react quickly (Economist, Mar 2015)
• OPEC market position forces high production, in hope to push out
high-cost producers (Economist, Dec 2014)
• ‘Losing’ NOCs like Russian Rosneft are playing along and increase
production to keep their market share (International Business Times,
Jul 2015)
Futures Price WTI Crude Oil ($/bbl) - Quandl 7/15 2015

10. • Demand Decline & Supply Decisions
• At $40 a barrel—just 1.6 percent of the world's oil supply would represent
unprofitable production
• US Shale Oil and Tar Sands production will still remain profitable by first
mover advantage – Rystad Energy, Jan 2015
• About 20% ($150bil) of planned exploration projects will be cut due to
profitability – Reuters, Dec 2014
• Russia’s Economy is heavily influenced: Average production cost for Russia
are estimated at 74$/bbl. State Budget balance relies on a price of $100/
bbl, Russias 1year government bonds are at 10% interest
• Iranian Nuclear Deal will support trend: As sanctions are lifted from Iran,
global supply will increase once more. European Companies likely to invest in
Iran to bring down cost of production – Politico, Jul 2015
MARKET SITUATIONA. Current Oil Markets

11. • “Divestment is the opposite of an investment – it simply means getting
rid of stocks, bonds, or investment funds that are unethical or morally
ambiguous.”
• A three-pronged approach:
• fossil stocks are risky for investors due to carbon bubble
• divestment negatively impacts financial leeway for fossil companies
• campaign induces political and moral leverage on the companies
• Strategy has proven track record i.e. against Apartheid South Africa
• Aiming at the commitment of Institutions: More than 220 Colleges,
religious groups, pension funds and other institutions have committed
DIVESTMENT – FOSSILFREE INITIATIVEII. Market Leverage

12. • Encouraging Foundations, Funds and Firms to rid their Portfolio of
Fossil-Fuel Companies
• Rockefeller oil fortune started to pull out their investments last year
• Cities divesting include San Francisco, Seattle and Oslo.
• World’s largest sovereign wealth fund, Norway’s State Pension Fund,
has dropped 114 companies
• recent addition (independent): Axa Insurance has divested $550m
following a press release in January, that warned about the risk for
insurance companies.
• 2014 UN Climate Summit Divest-Invest Movement Commitments
• Total fossil free assets estimated at $50 bil. (own website)
DIVESTMENT – DIVESTINVEST INITIATIVEII. Market Leverage

13. • Market Value and Paper Value of the Assets are two different things.
Write-down happens on the market value
• The global Market Capitalisation of Fossil Fuel Companies, dwarf the
current disinvestment sums
• Divestment cannot solve the underlying problem: The risks attached to
property acquisition and exploration are not priced in, regardless of
market value (if companies start writing down, this will still happen.
• If significantly strong, divestment will increase investor revenues for
buyers
• The fear of a financial crisis could well be a significant damper on
climate change action
IMPACT ANALYSIS & CRITIQUEII. Market Leverage

14. • The Carbon Industry is strongly
dominated by national players:
• National Oil Companies (NOC’s)
account for 75% of global Oil
production and control 90% of
proven oil reserves.
– World Bank, Oct 2011
• Today’s ever more expensive
exploration projects are largely
driven by up-front exploration
costs, that are heavily subsidised
WHY THINK ABOUT STATES?II. Sovereign Leverage
Other
13%
Other IOC's
21%
Royal Dutch Shell
2%
Exxon Mobil
3%
BP
3%
Petro China
3%
Saudi Aramco
12%
Petróleos de Venezuela
4%
National Iranian Oil
5%
other NOC's
34%
Energy Policy and Supply are the single most important issues
of global power & hegemony!

15. More from The Economist My Subscription Log in or registerSubscribe
World politics Business & finance Economics Science & technology Culture Blogs Debate Multimedia Print edition
Jan 17th 2015 | From the print edition
Energy
Seize the day
The fall in the price of oil and gas provides a once-in-a-generation opportunity to fix bad energy policies
MOST of the time, economic policymaking is about tinkering at
the edges. Politicians argue furiously about modest changes
to taxes or spending. Once in a while, however, momentous
shifts are possible. From Deng Xiaoping’s market opening in
1978 to Poland’s adoption of “shock therapy” in 1990, bold
politicians have seized propitious circumstances to push
through reforms that transformed their countries. Such a once-
in-a-generation opportunity exists today.
The plunging price of oil, coupled with advances in clean
energy and conservation, offers politicians around the world
the chance to rationalise energy policy. They can get rid of
billions of dollars of distorting subsidies, especially for dirty
fuels, whilst shifting taxes towards carbon use. A cheaper,
greener and more reliable energy future could be within reach.
The most obvious reason for optimism is the plunge in energy costs. Not only has the price of oil halved in the past six months, but natural gas is the cheapest it has
been in a decade, bar a few panicked months after Lehman Brothers collapsed, when the world economy appeared to be imploding. There are growing signs that low
prices are here to stay: the rising chatter of megamergers in the oil industry (see article) is a sure sign that oilmen are bracing for a shake-out. Less noticed, the price
of cleaner forms of energy is also falling, as our special report this week explains. And new technology is allowing better management of the consumption of energy,
especially electricity. That should help cut waste and thus lower costs still further. For decades the big question about energy was whether the world could produce
enough of it, in any form and at any cost. Now, suddenly, the challenge should be one of managing abundance.
Clean up a dirty business
That abundance provides the potential for reform. Far too many economies are littered with the detritus of daft energy policies, based on fears about supply. Even
though fracking has boosted America’s oil output by two-thirds in just four years, the country still bans the export of oil and restricts exports of natural gas, a legacy of
“The most straightforward piece of reform, pretty much everywhere, is
simply to remove all the subsidies for producing or consuming fossil fuels.
Last year governments around the world threw $550 billion [pre-tax] down
that rathole.” - Economist, Jan 2015
FOSSIL FUEL SUBSIDIESII. Sovereign Leverage

16. • Potentially enormous benefits to global economy:
• Eliminating post-tax subsidies for fossils in 2015 could raise
government revenue by $2.9 trillion (3.6 percent of global GDP), cut
global CO2 emissions by more than 20 percent.
• Taking higher energy prices into account, this action would raise
global economic welfare by $1.8 trillion (2.2 percent of global GDP).
– International Monetary Fund, May 2015
FOSSIL FUEL SUBSIDIESII. Sovereign Leverage
$4.1tr
IbisWorld, Mar 2015 estimate of the
Global Upstream and Downstream
Oil and Gas Revenues for 2014
$5.3tr
Pat Mooney, Japan Times, Jul 2015
IMF estimate of all loans, equity and
grants received post tax by Global
Oil and Gas industry for 2015

17. … AND ONE MORE
Aimed at keeping Ecuadorian Oil Supplies
in the Yasuní National Park untouched
(around 920 mil. bbl and 20% of all national
reserves)
Compensation for 50% of the foregone
revenues ($3.6 bill.)
After 6 yrs only $300 mil. were promised
and $13 mil. actually paid
II. Sovereign Leverage

18. • Why do Energy Companies and Investors not recognise the carbon
bubble?
• systemic oversupply because pollution is not priced in
• energy supply is #1 tool of global power
• What can divestment achieve?
• it can dampen possible financial havoc and induce political
pressure
• it can (occasionally) prevent exploration projects
• What would a political agenda look like?
• foremost importance is killing fossil subsidies
• subsidies are mostly spent on high risk exploration projects
• The Yasuni ITT exemplifies a combination of developmental and
environmental goals
SUMMING IT UP

19. Could this be the beginning of a long, steady decline for the oil
and coal industries?
Will the bubble turn out to be the next financial crisis?
WHAT DO YOU THINK?

20. THANKS!
http://www.shiftthesubsidies.org
http://www.carbontracker.org
http://www.divestinvest.org
http://www.gofossilfree.org
… for more …