The Carbon Debate

There seems to be a global consensus that the temperature increase caused by global warming must not exceed 2 degrees Celsius.

Decades of scientific evidence suggest a prime contributor to global warming is the burning of fossil fuels, which in turn release carbon dioxide into the atmosphere.  What we are seeing today is a teetering seesaw between increased demand for fossil fuels and a potential climate crisis.  Not surprisingly, the global financial markets lie at the heart of the issue.  Financial players such as investment managers, asset owners, traders, corporate finance advisors, and fossil fuel extraction companies are supplying capital for further exploration and development of reserves.  The risk transpires if there are more fossil fuels listed on the world’s capital markets than we can afford to burn.  The market tends to avoid or ignore issues until faced with abrupt crisis.  Emotional reaction overwhelms rational response; people ignore potential long-term crisis for fear of missing out on short-term gain.

Valuations of the oil and gas sectors largely assume that listed reserves will be exploited and burnt.  The Carbon Tracker Initiative has conducted extensive research in which they conclude that governments and global markets are treating reserves equivalent to nearly five times the carbon budget for the next 40 years, as assets on the balance sheet.

Not surprisingly, our friends in politics are vigorously debating whether to act now or delay implementing policies. Democrats contend that carbon emission must be reduced, as delaying action will prove to be extremely costly.  “These costs will take the form of either greater damages from climate change or higher costs associated with implementing more rapid reductions in greenhouse gas emissions”.  The Environmental Protection Agency (EPA)’s Clean Power Plan Rule proposes, by 2030, a decrease in carbon pollution from power plants by 20% from 2005 levels.  The plan allocates a different target to each state, allowing a huge amount of flexibility based on local economy and energy sources.  Among the loudest critics are Republicans and coal-state lawmakers from both parties, asserting the Clean Power Plan is a “job-killer”.  Governor Mike Pence of Indiana quotes, “These proposed regulations will be devastating for Hoosier workers and families…they will cost us in higher electricity rates, lost jobs, and in lost business growth due to a lack of affordable, reliable electricity.  Indiana will oppose these regulations using every means available.”

And the debate endures: Is the impact of carbon emission significant enough for action?

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