Divestment from fossil fuels is an idea whose time has come. Sparked by Bill McKibben’s Rolling Stone article last summer, “Global Warming’s Terrifying New Math”, divestment campaigns are now up and running on over 300 university campuses in the US, with 4 early victories already notched. Students in Canada have declared tomorrow (March 27) Fossil Fools Day, a national day of action, with many campuses launching divestment campaigns.
This makes for great timing for us to release a new national report, Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds (summary below). We “do the math” on Canadian fossil fuel reserves, in the context of a global carbon budget of 500 Gt. This builds on the great work of the Carbon Tracker Initiative, who found that too much “unburnable carbon“ – known reserves of fossil fuels that are five times larger than what can “safely” be burned — made for a carbon bubble in the financial markets.
My research partner, Brock Ellis, a student just finishing up his Masters of Public Policy at Simon Fraser University, put together a database of fossil fuel companies in Canada and their fossil fuel reserves. We convert these into potential emissions and apply a price of carbon at $50 and $200 per tonne to estimate a range of their ”carbon liabilities”. Even with our conservative estimates, these carbon liabilities end up being much larger than assets or market capitalization. In a nutshell, their business model is incompatible with the need for a (relatively) stable climate, and this is compounded by having a large share of that in coal and bitumen, the dirtiest of fossil fuels that would most likely take an early hit from new global climate action.
Of particular concern is the impact Canada’s carbon bubble could have on pension funds. After housing, the right to future income through a pension is significant asset for millions of middle-class workers. It is a financial problem if fund managers are systemically ignoring climate risk by holding vast reserves of fossil fuel companies, whose value could plummet. Pension funds — as well as university endowments – need to go through a careful process of evaluating their portfolios for climate risk. We wrap up the paper with some broad recommendations to government for a “managed retreat” from fossil fuel investments.
Summary: Canada’s Carbon Liabilities
Mounting evidence of climate change impacts worldwide will inevitably
lead to a new global consensus on climate action. Based on recent
research, between two-thirds and four-fifths of known fossil fuel
reserves have been deemed to be unburnable carbon — that cannot safely
This is of profound importance to Canada, a nation making fossil fuel
development and expansion the centrepiece of its industrial strategy.
This study looks at the implications of unburnable carbon for the
Canadian fossil fuel industry and in particular for financial markets
and pension funds. We argue that Canada is experiencing a carbon
bubble that must be strategically deflated in the move to a clean
Doing the Math
A carbon budget is the maximum amount of CO2 that can be emitted in
the future, based on scientifically-estimated probabilities of staying
below 2°C of global warming, above which would lead to catastrophic or
“runaway” climate change beyond humanity’s capacity to manage. The
world’s carbon budget is now approximately 500 billion tonnes (Gt) of
carbon dioxide, an amount that would provide an 80% chance at staying
Canada’s share of that global carbon budget would be just under 9 Gt
based on its share of world gdP, and 2.4 Gt based on share of world
population. An internationally negotiated carbon budget for Canada
could go up depending on export arrangements with other countries, or
down if larger historical emissions mean disproportionate reductions
from rich countries. A plausible carbon budget for Canada would almost
certainly fall between 2 and 20 Gt.
Canada’s reserves of fossil fuels are significantly larger than
Canada’s fair share of a global carbon budget:
• Canada’s proven reserves of oil, bitumen, gas and coal are
equivalent to 91 Gt of CO2, or 18% of the global carbon budget.
• Adding in probable reserves boosts this figure to 174 Gt, or 35% of
the global carbon budget.
• A final, more speculative category including all possible reserves
is 1,192 Gt — more than double the world’s carbon budget.
This means that business as usual for the fossil fuel industry is
incompatible with action to address climate change that keeps global
temperature increase to 2°C or less. Even at the high end of a 20 Gt
carbon budget, this would imply that 78% of Canada’s proven reserves,
and 89% of proven-plus-probable reserves, would need to remain
Carbon Liabilities, Stranded Assets
The Toronto Stock Exchange (TSX) 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.
When coal producers are added this number rises further.
To assess the implications of Canada’s carbon bubble, we developed a
database of 114 fossil fuel companies operating in Canada — 103 listed
on the TSX (assets greater than $70M for oil and gas, and $50M for
coal), and 11 foreign-owned subsidiaries. For each we compiled
financial data on revenue, assets and market capitalization. Then we
added data on fossil fuel reserves (proven and probable), which we
converted into potential CO2 emissions. We develop an estimated range
of their carbon liabilities by applying a carbon price, representing
the estimated damages from emitting a tonne of carbon (known as the
social cost of carbon, or SCC, based on recent literature).
For the Canadian-listed companies:
• Our low estimate considers a $50 per tonne Scc applied only to the
proven reserves category, and 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.
• Our high estimate of $200 per tonne Scc applied to their
proved-plus-probable reserves yields a figure just under $5.7
trillion, an amount 17 times larger than market capitalization and 13
• For 12 companies in our database included in the S&P/TSX 60 index,
total carbon liabilities are between $0.5 and $3.5 trillion. Even the
low estimate of carbon liabilities exceeds both assets and market
For foreign companies, the estimated carbon liability of their
Canadian fossil fuel reserves is between $0.3 and $1.2 trillion. The
latter amount, incredibly, is larger than the full market
capitalization of foreign companies, and 81% of their assets, even
though market capitalization and assets are based on global
This situation is exacerbated by the predominance of bitumen and coal
in the reserve mix because these particular fuel types are far more
GHG-intensive than other fossil fuel products, and are much more
likely to be regulated earlier under a global climate action
• Bitumen and coal account for more than three-fifths of both the
proved and proved-plus-probable potential emissions in our database.
• If synthetic oil is added, which is crude oil produced from oil
sands bitumen, the proportions jump to more than four-fifths for both
categories of reserves.
An important consideration is that Canada’s oil and gas sector has a
very high degree of foreign ownership.
• Foreign corporations owned 35% of the sector’s $518 billion in
assets in 2010, and received roughly half of the sector’s revenues and
profits in 2010.
• US corporations have been the principal foreign investors, although
their share has declined in recent years from 79% in 2001 to 64% in
2010. Recent takeovers of oil and gas assets by China’s cnooc and
Malaysia’s Pentronas in late 2012 — deals worth $21 billion combined —
have increased the foreign-owned share.
Canada has a unique role in the global economy with regard to fossil
fuels. Some 80% of the world’s oil reserves are held by state-owned
companies; that is, countries who have made public ownership of this
strategic asset a top priority. Of the remaining global oil reserves,
two-thirds are found in Canada, making the country a top destination
for private investments.
As foreign capital flows in, so it may flow out. External drivers such
as international, regional or national rules that shrink Canada’s
export markets for fossil fuels, or successful divestment campaigns in
other jurisdictions could have a spillover effect that could trigger a
withdrawal of capital from Canada. This is an additional source of
instability or external shock that could lead to a bursting carbon
Pension Funds and Climate Risk
The recent experience of high-tech and housing bubbles should serve as
a stern warning to policy makers. In 2008, the collapse of a housing
bubble (in particular, in the United States and Europe) threatened the
global financial system as a whole. The fallout from the housing crash
affected a broad segment of society because housing is the most
important asset for middle-class households.
Next to home ownership, the right to future income through employer
pension plans is the second-most important asset for a wide swath of
middle-class households. Registered pension plans cover more than 6
million members in Canada, and the total market value of trusteed
pension funds in 2012 was over $1.1 trillion, of which almost
one-third was held in stocks.
At a system-wide level, however, it is difficult to ascertain the
exposure of Canadian pension funds and other investment types to the
• More than half of Canada’s pension system is in the form of employer
pension funds (55%), followed by RRSP assets holdings (35%), and the
Canada Quebec Pension Plans (under 10%).
• In the US, pension funds alone owned almost one-third of oil company
stocks in 2011.
• About one-third of the assets of the Canada Pension Plan are
invested in publicly traded equities, representing $13 billion in
Canadian equities and $43 billion in foreign equities, as of the end
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.
However, there has been a general failure to account for climate
risks, and a tendency to view any screening for environmental purposes
to be detrimental to financial performance. Our analysis turns this on
its head: by not accounting for climate risk, large amounts of
invested capital are vulnerable to the carbon bubble.
There is an important inter-generational equity argument built into
the management of pension funds. While pension funds have to generate
maximum current return value for existing (and soon-to-be) pensioners,
at the same time they are legally obligated to ensure the long-term
sustainability of the fund. That is, funds must equally represent the
interests of young workers for their eventual retirements.
Deflating the Carbon Bubble
Pension funds and other institutional investors need to be part of the
solution. Other private savings vehicles, such as RRSPs, and public
investments through the Canada Pension Plan, are also in need of a
“managed retreat” from fossil fuel investments. We recommend the
following to green Canada’s financial markets.
• Establish a National Carbon Budget — In order to do their job
properly, and contribute to achieving a zero-carbon Canada (and
world), financial markets need a clear and credible long-run climate
action commitment that provides investment security and certainty. In
addition to credible emission targets, Canada needs to establish a
national carbon budget to manage its fossil fuel resources for
wind-down. A corollary to this is that the federal government must
acknowledge that a large share of proven and potential reserves is
indeed “unburnable carbon.” These reserves should be effectively taken
out of circulation, leaving only Canada’s fair share of the remaining
global carbon budget.
• Make Market Prices Tell the Truth about Carbon — Shifting the
terrain towards clean or renewable sources of energy from fossil fuels
requires policies that make sure the costs of greenhouse gas emissions
are reflected in market prices. Broad framework policies to level the
playing field for clean energy alternatives and internalize costs
include: carbon pricing; removal of subsidies to fossil fuel
producers; regulations and standards; and public investments.
• Develop Green Bonds — Pension funds and other investors divesting
from fossil fuel companies need an alternative place to put their
money, and one major transitional support could be the development of
a national green bonds program (along with complementary provincial
programs). The long-run investment horizons of pension funds align
nicely with long-term bond issues, and the need to invest in public
infrastructure for climate action. While carbon taxes are an ideal
source for funding climate action it will take time for those revenues
to ramp up with a rising carbon tax. Green bonds can bridge this gap
by essentially borrowing against future carbon tax revenues.
• Public Sector Leadership —The government of Canada should direct the
Canada Pension Plan Investment Board to divest from fossil fuel
companies. If pension plans on behalf of public sector retirees and
employees (or their relevant investment management boards) join this
effort, this would provide a powerful signal to other pension funds.
Outside of pensions, divestment is broadly applicable to other related
investment funds, such as university endowments or investments held by
municipalities and Crown corporations. The federal government should
also make changes to private savings vehicles, such as Registered
Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA)
by restricting preferential tax treatment to funds or investments that
meet certain green economy criteria.
• Mandate Carbon Stress Tests — Canadian financial markets need a
mandatory system of climate stress tests for new financing commitments
and for outstanding portfolios. Disclosure of climate change
information must be standardized to provide high-quality and
comparable information (ideally, internationally comparable) about
climate change policies and assessment of risks. The federal
government could lead in developing selection criteria to be used in
the screening of investment opportunities, and in requiring ratings
agencies to report on climate risk and the implications of unburnable
carbon in their evaluations. Securities and accounting oversight
bodies should be involved in developing a harmonized Canadian approach
to climate risk.
Our suggested reforms would go a long way to providing the foundation
necessary for taking Canada’s economy towards a cleaner future. A
coherent and credible action plan led by the federal government that
includes action to better regulate financial markets will make it much
easier for investors to account for climate change in their
risk-return assessments. Our hope is that these actions can steadily
reduce the exposure of Canadian pension funds and other investors, and
the Canadian economy as a whole, by deflating the carbon bubble.
Until such time as our governments take decisive action, we should
rightly see an expansion of divestment efforts by civil society groups
— on campuses, within churches, by credit unions, and by other
community-based organizations seeking to influence the investment
choices of major institutions. Such efforts are encouraging — they
signal an early understanding that a managed retreat is preferable to
a financial meltdown.