Unburnable carbon is to the notion that the volume of fossil fuels remaining in the ground, specifically that of crude, exceeds humanity’s “budget”, or the carbon emission cap we need to implement to limit temperature rise by 2°C.
This forecast turns a significant (majority) portion of world oil reserves into stranded assets, e.g., assets that are not economically viable as per a change in market condition stemming from technological changes, regulatory shifts, or market transformations. In fact, a 2022 Nature study found that 60% of oil and gas reserves and 90% of known coal reserves would have to remain unused in order to limit global warming to 1.5°C, the Paris Agreement target.
This is an absurdly large number; at current prices of ~$75 per barrel, just the proved oil reserves of OPEC (~1,250 billion) are worth $93 trillion, and that’s excluding the rest of the world, natural gas, and coal.
Given this classic dynamic between profit and environmentalism, markets primarily reacts to the threat of stranded assets in two ways: the green paradox and company devaluation.
The green paradox represents situations in which unburnable carbon moves production forward, since firms choose to produce in the present as opposed to a regulatory and demand-constrained future, and since production increases without a change in demand, prices drop, thus raising consumption and accelerating the scale and negative impact of carbon emissions.
Thus, well-intended policies aimed to cut emissions may accidentally increase them in the present via the green paradox.
The second reaction to the unburnable carbon problem is that of company devaluation, e.g., decreasing the value of oil stocks to reflect the fact that future earnings are limited.
Still, oil stocks have yet to crash because the net present value of earnings means this concern will not seriously impact the companies for a number of years. Additionally, tax remediation (the hope of government compensation in the face of potential regulatory emission caps), carbon capture & sequestration, lack of information about reserves, skepticism about stranded assets and global arming, and non-active equity holders all play into the evident lack of catastrophic decline among oil stocks.
Theoretically, these concepts make it more difficult for the world to move away from crude oil as a source of energy, since emission caps could significantly increase emissions in the near-term and oil stocks would only face severe operational limitations because of a fall in equity prices only in extreme forecasts.
To learn more, consider reading about PADD Districts, the Why WTI and Brent are Crude Oils, and Why There are Price Differences Among Crude Oils, and my Oil & Gas Terms Guide.
Contextual Credit: Robert Kaufmann
