5 Investor Strategies for the Carbon Bubble: Chevron Corporation (CVX), TransCanada Corporation (TRP)

Page 1 of 2

Two developments in the last week are turning the heat up on oil companies: HSBC released an analysis finding oil majors at significant risk from “unburnable” reserves, and a pension fund has agreed to consider divestment from fossil-fuel companies in response to NGO pressure. This signals growing concern among conventional investors that climate change could be creating a “carbon bubble” in equity markets.

Climate change scenarios
Chevron (CVX) Set to Win Lithuanian Shale Gas LicenseConcerns around carbon dioxide emissions are growing as climate science grows ever firmer on CO2′s contribution to climate change. International research bodies – including the International Energy Agency, or IEA – model three possible scenarios for the future in terms of the number of degrees Celsius of average global warming by 2050.

The six-degree scenario, or 6DS, is basically Armageddon. 6DS is the scenario we are expected to see if we continue on our current trajectory. The four-degree scenario, or 4DS, is certainly better, but the World Bank released a report in November 2012 emphasizing that 4DS must also be avoided. The bank projects “unprecedented heat waves, severe drought, and major floods in many regions, with serious impacts on human systems, ecosystems, and associated services.” These effects would lead to spreading tropical diseases, crop failure, inundation of island nations, and more.

World governments and institutions have repeatedly committed to staying below the two-degree scenario, or 2DS. To be clear, scientists still warn that a two-degree Celsius increase is the level at which atmospheric feedback loops could trigger dangerous climate change. Therefore, it is this scenario that HSBC used as the basis for its study.

Unburnable reserves
To achieve 2DS, the IEA calculates that no more than about 1,440 gigatons of carbon can be emitted globally by 2050. Emissions have already reached 400 gigatons, which leaves only around 1,000 gigatons – or just a third of current proven reserves – to be burned.

HSBC’s analysis looked at European oil majors. Norway’s Statoil ASA (NYSE:STO) is the worst affected, with approximately 17% of its market capitalization at risk. HSBC also calculated that 6% of BP plc (NYSE:BP)‘s reserves are at risk, along with 5% of Total S.A. (NYSE:TOT)‘s and 2% of Shell‘s . However, HSBC finds that a bigger threat to the sector’s value comes in the form of reduced demand, which could lead to lower oil and gas prices. In that event, the potential value at risk for leading fossil fuel players could increase to 40%-60% of current market capitalization. The analysts think investors have not priced in this risk, probably because it seems so far off.

But is it so far off? The IEA said in 2011 that on its current trajectory, the world could exhaust its carbon budget by 2017. In 2012, the IEA said that energy efficiency improvements could offer a further five-year reprieve. Even then, the next decade is likely to be when the excrement hits the fan. HSBC projects that a decrease in demand for high-carbon projects could lead to project cancellation, especially for controversial and high-cost projects.

Divestment
Meanwhile, the Financial Times is reporting on the 350.org campaign to divest from fossil-fuel companies. The campaign enjoyed a major victory this past week when the Seattle City Employees’ Retirement System, or SCERS, agreed to discuss the Seattle mayor’s request that it sell its shares of Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) , among others. 350.org urges universities, governments, and churches to divest from what founder Bill McKibben calls “outlaw companies,” whose hydrocarbon assets cannot be burned without serious consequences for climate change.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!