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The Pension Fund’s Carbon Bubble

The Norwegian Government Pension Fund – Global has shares in 90 of the world’s 100 largest oil companies listed on stock exchanges and in 67 of the 100 largest coal companies. Altogether NKR 241 billion are invested in companies that own more carbon than what we can use if the world is to fulfil the 2ºC goal. This is shown by a calculation made by The Future in Our Hands.
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The Norwegian Government Pension Fund – Global has shares in 90 of the world’s 100 largest oil companies listed on stock exchanges and in 67 of the 100 largest coal companies. Altogether NKR 241 billion are invested in companies that own more carbon than what we can use if the world is to fulfil the 2ºC goal. This is shown by a calculation made by The Future in Our Hands.

The Norwegian Government Pension Fund – Global, known as the Pension Fund, is sitting on a carbon bubble that a may inflict large losses on the Fund and simultaneously inflict great damage on the climate. If the coal and oil companies in the Fund extract all their reserves, we will not be able to keep the climate changes within a 2ºC temperature increase. The world’s largest coal and oil companies own enormous amounts of carbon in the shape of coal, oil and gas, far more than the planet can tolerate that we use. The companies’ value and share prices are based on these resources being extracted and burned up in the course of the next decades.

The Future in Our Hands has investigated the Pension Fund’s investments in the world’s largest stock-exchange-listed oil, gas and coal companies, measured on the basis of the size of the carbon resources the companies have rights to. Our investigations show that the Pension Fund owns shares in 90 of the world’s 100 largest stock-exchange-listed oil companies and in 67 of the 100 largest coal companies. Altogether NKR 241 billion are invested in coal, gas and oil companies, with over NKR 49 billion in the 67 largest coal companies and more than NKR 191 billion in the 90 largest gas and oil companies. The list of the largest stock-exchange-listed oil, gas and coal companies and their carbon reserves is derived from Carbon Tracker Initiative.

Risky Investments

The investigation shows simultaneously that the Pension Fund is sitting on very risky investments; the companies in which the Fund has invested NKR 241 billion own or have the rights to extract carbon resources that altogether will give 679 gigatonnes (Gt) of CO2 when used. The limit for what how much CO2 from fossil energy the planet can tolerate lies at 565 Gt of CO2 (see below). If we extract and burn up more carbon than this, we pass the threshold of a 2ºC temperature increase, which there is global political consensus to avoid.

The Pension Fund’s investments in oil and coal constitute both an environmental and a financial risk that so far has received little attention. The companies that the Pension Fund has invested in own, in other words, more resources than they can extract. This places the Pension Fund and the Ministry of Finance in a distressing dilemma:

•    If the companies extract all they own, as expected by shareholders such as the Pension Fund, the environment will suffer greatly. The so-called 2ºC goal is a threshold for the climate, and if this is passed, it is feared that there will occur great and irreversible climate changes with very serious consequences.
•    If the world leaders set up a climate agreement and set emission goals that correspond to the political goal of a 2ºC temperature increase, these companies must accept great financial losses for oil and coal reserves that they will not be able to extract and use. This will thus, in financial terms, constitute a great loss for the Pension Fund.

Competition from State Companies

The problem for the stock-exchange-listed companies increases when the competition from companies that are not stock-exchange-listed is calculated. The largest carbon reserves are owned by various countries and national coal and oil companies in countries like Venezuela, Iran, China and many others.

The total amount of coal, oil and gas that is publicly known today will constitute 2795 Gt of CO2 when used up. The 200 largest stock-exchange-listed companies own only 27% of this, although still enough to damage the climate.     

If we limit the emissions of CO2 so that the 2ºC goal is maintained, then we can not permit emissions that increase the CO2 level in the atmosphere beyond 450 ppm. The total emissions from fossil energy, from all countries in the world, must then be kept below 565 Gt of CO2 until 2050. That constitutes 20% of the known carbon reserves, which corresponds to 2796 Gt of CO2, if extracted and burned up.  
If, or when, the world’s leaders agree on a ceiling for emissions, it will mean that the stock-exchange-listed companies will receive hard competition from the many state companies for permission to extract a limited amount of carbon. The thought of competing with national companies in countries like Saudi Arabia and Russia, countries that have functioned as hindrances in the international climate negotiations, should make both politicians and investors worry about how sustainable the investments really are.  

The above numbers concern known and publicised reserved as of the end of 2010. New finds of oil, coal and gas in 2011 and 2012 and future years will increase the sum of known reserves but will not change the sum of carbon that may be extracted and used up.

A Tight Carbon Budget

The limit of 565 Gt of CO2 is a concretisation of how little we have to go on before we surpass the limit for global climate changes. During the international climate negotiations the emission cuts in percentage have dominated the debate. The situation becomes even more disquieting when we instead analyse how much – or how little – we may use before the limit is reached. In addition to Carbon Tracker Initiative, which has been used as the point of departure for our calculations, the International Energy Agency (IEA), the OECD’s energy bureau, takes up the same problem in the two last editions of World Energy Outlook:

“What matters for a given climate goal is not the particular choice of policy measures, nor the investment cost – nor even the specific emission profile […] – but the cumulative level of emissions over a certain period. One way of viewing this is to regard the world as having a total emissions budget. At what rate this budget is used up does not matter from a climate change viewpoint. What matters is that the budget is not exceeded. A budget of a cumulative 1 000 Gt of CO2 emitted between 2000 and 2049, if respected, gives a 75% chance of keeping the global average temperature increase to 2ºC or less (Meinshausen et al., 2009) (Source).

The IEA writes further that 264 Gt of CO2 already have been emitted between 2000 and 2009, giving a remaining carbon budget of 736 Gt of CO2. This figure is higher than the limit of 565 Gt of CO2 used by Carbon Tracker Initiative: The latter has based its budget on a 80% chance of achieving the 2 degrees goal, IEAs budget only gives a 50% chance of success, according to Carbon Tracker.

Different Calculation Methods but Same Concern

The point of departure for the calculations is the international consensus among researchers that a CO2 level of 450 ppm CO2 in the atmosphere will bring the global average temperature to 2ºC higher than in the preindustrial period. These two degrees are considered a threshold; if we exceed two degrees, the chances are great that irreversible changes, such as the melting of the Greenland ice and the Antarctic or increased emissions from the tundra in Siberia, will start. This will in turn have new and more serious consequences.

Before the industrial revolution the CO2 level in the atmosphere was 280 ppm. Today we have passed 390 ppm, and this year, for the first time, more than 400 ppm has been registered at some measuring stations. A long series of poor and vulnerable countries have during climate negotiations spoken up for setting the limit for future climate changes at 1.5ºC for the global temperature increase, which would correspond to 350 ppm in the atmosphere.   
There are some different calculations – or budgets – for what would be the limit for how much can be emitted when using slightly different figures. One reason that the figures differ somewhat is which emission sources are included, as shown above. Another reason is how great a risk one can accept that the 2ºC goal is not exceeded. Should we accept a budget in which the risk of exceeding 2ºC is zero? Or 20%? In the above figures Carbon Tracker Initiative sets a limit with a risk of 20%, whereas the IEA limit entails a 25% risk that the goal can not be kept.

It is noteworthy that 2050 is set as the final date for when the “carbon budget” has been used up. This is because the time calculation from the international climate negotiations has 2050 as a goal for when the emissions have to be reduced to a sustainable level.  
Even though most countries recognise 2050 as the time point for when we have to have stopped the global climate changes before they reach the 2ºC temperature increase, there are so far few countries that are preparing for what will happen after this date. After this, we will in theory not be able to emit any more CO2 from fossil sources, since that would cause the temperature to increase far more than 2ºC.

The only known possibility for using fossil carbon will then be with carbon capture and storage, which will capture and store CO2 from gas or coal power stations. This technology is at present still uncertain. So far there exist no real possibilities for capturing CO2 emitted from small individual sources such as from transportation (cars, boats, airplanes).

The Pension Fund’s investments in coal, oil and gas constitute in themselves a great environmental risk, since these companies contribute to the maintenance of the consumption of fossil carbon (like the Norwegian oil production, for that matter). But, as shown by this investigation, the Pension Fund’s investments also constitute a financial risk, inasmuch as the companies that the Pension Fund has invested in own more carbon resources than may be extracted.

The Carbon Bubble in Numbers

The left column shows the world’s collected reserves of gas (top), oil (middle) and coal (bottom), which on combustion will release altogether 2795 Gt of CO2. Most of the world’s carbon resources are owned and controlled by state-owned stock-exchange-listed companies. The Pension Fund has invested in 90 of the 100 largest oil companies and in 67 of the 100 largest coal companies, measured on the basis of the companies’ carbon reserves. The right column shows that the Pension Fund has shares in companies with altogether 679 Gt of CO2 on combustion.

The limit for what may be burned if we are to avoid that the 2ºC goal is passed lies at 565 Gt of CO2. The bottom red line shows how small a part the stock-exchange-listed companies may extract and emit if all the companies cut their production equally, by 80%.