This article originally appeared in Maclean's magazine and is republished here with permission.

It was reported recently that Exxon-Mobil will begin disclosing the degree to which its assets are exposed to future greenhouse gas policies. This risk is at the heart of what has become known as the carbon bubble, a term advanced by UK group Carbon Tracker, which suggests that assets may be over-valued as a result of not accounting for potential future limits on fossil fuel extraction imposed to fight climate change.

The so-called carbon bubble should be a concern to investors in oil sands stocks, and you only need to consider two numbers to understand why: 80 and 320. First, the number 80: oil sands producers and the Alberta government are quick to tell you that up to 80 per cent of the life-cycle emissions from oil sands occur from refining and combustion, not from extraction and upgrading.

That’s comforting, until you consider that this means that most of the carbon policy exposure for these projects comes from emissions-control policies and innovations far beyond the jurisdictions and markets in which oil sands companies operate.

Second, the number 320: when it was leaked that the Alberta government was considering a 40-40 approach (a requirement to reduce emissions intensity by 40 per cent, with a penalty for exceeding this limit of $40/tonne), the oil industry responded that governments acting this aggressively would create significant competitiveness concerns. Shell’s CEO Lorraine Mitchelmore, long a champion for carbon pricing policy, was quoted as saying that, “Alberta needs to be sure that it keeps the industry competitive,” while former Suncor CEO Rick George stated that, “it’s a bad idea to make companies uncompetitive.” 

Here’s the kicker: if an average cost of carbon of $16/tonne on 20 per cent of your emissions raises competitive concerns, it seems that investors should worry a great deal about risks to future returns from oil sands assets. Such a policy boils down to 320 pennies per tonne of life-cycle carbon emissions, hardly aggressive given the magnitude of global emissions reductions which will be required to meet Prime Minister Harper’s commitment to policies which keep global climate change below 2 degrees Celsius.

Reports by Carbon Tracker and others were part of what led me and my colleague Branko Boskovic to ask whether stringent carbon policies, if applied to all emissions associated with oil sands, would render new oil sands investments uneconomic. We started out with a model of an oil sands mine, tabulated the life-cycle emissions (for a mine, production emissions are about 36kg per barrel of bitumen produced, while total, life-cycle emissions are about 535kg per barrel as estimated by Jacobs and others), and applied carbon taxes first to production emissions, and then to the full emissions impact of the oil produced.

Sensitivity of oil sands mine rates of return to upstream and downstream carbon prices.

In the figure above, you can see some of the preliminary results of our analysis. Our base case is a mine with financial attributes similar to Suncor’s recently-approved Fort Hills mine. This project has a rate of return of 12.5 per cent assuming WTI prices of $90, a Canadian dollar exchange rate of 94 US cents, and a $15 differential between light and heavy oil at Edmonton, with Alberta’s existing policy in place.

In the top row of the figure above, you see what happens to those returns on investment as carbon prices on production increase—not so scary, even as carbon prices climb to $100/tonne of CO2. However, it’s when the number 80 starts to play a role that you really see where the risk comes from. Reading down every column, you see what happens to project returns as a greater share of the downstream (combustion and refining) carbon liability is paid for by the producer, most likely indirectly through lower oil prices resulting from demand-side carbon policy.

Even a $50/tonne carbon price presents a serious risk to the economic viability of this investment if, as will have to be the case if global emissions are to be reduced, these policies are applied to combustion emissions and consumers aren’t willing to simply pay the tax. The more consumers react to increased prices with reduced demand, the more detrimental carbon policies become for oil sands investments.

So, if you want to know where the risks to oil sand projects lie, they aren’t from the policies which are being considered for production emissions in Canada. They come from two numbers—the 80 per cent of emissions that occur once the oil is burned, and the concerns that executives appear to have with carbon emissions costs of as little as 320 pennies per tonne.

Image Credit: Alex MacLean via @grossmanmedia, used with permisson

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Canada’s vast resource wealth could become ‘stranded’ as the world’s carbon reserves become increasingly risky to develop.

A coalition of 70 investors managing some $3 trillion in assets launched an initiative last week petitioning the world's top oil producers to "assess the financial risks" of what will happen to their massive oil and gas investments in a carbon constrained world.

Ceres, which advocates for sustainable business practices globally, launched the initiative in tandem with another environmental advocacy group, Carbon Tracker. Carbon Tracker found in a recent report that 200 of the largest publicly traded fossil fuel companies invested $674 billion on developing new oil and gas reserves in 2012, raising the question of how many billions of those dollars would be left unused and stranded in the ground.

These organizations are arguing that after the latest U.N. climate report, oil and gas companies are investing in resources that are better left in the ground. They believe governments and environmentally conscious consumers are going to make these assets uneconomic and an eventual burden for shareholders.

Where does that leave Canada with its vast carbon reserves, most notably in the Alberta oilsands? Some believe Canada is "playing with fire" and could potentially strand massive investments while ignoring opportunities the rest of the world is seizing.

Canadian Prime Minister Stephen Harper has no plan B, as he clearly indicated in his latest throne speech outlining the Conservative government's legislative plan for the coming months. “We must seize this moment,” according to text from the speech. “The window for gaining access to new markets will not remain open indefinitely. Now more than ever, our future prosperity depends on responsible development of these resources.” 

Yet Canada could pay the price when the carbon bubble bursts and Big Oil reduces oilsands investment.

Jeremy Leggett, author of the recently published book "Energy of Nations," told DeSmog that Canada is missing out on new opportunities by throwing all its efforts into expensive oilsands ventures:

"Given the emphasis they are putting on tar sands, they are playing with fire as these are exactly the type of high carbon, high cost assets where investors around the world are already starting to challenge capital expenditure plans or reduce exposure. Indeed, if a carbon-fuel stranded-asset risk debate takes off globally, and people start divesting en masse even ahead of regulation, as has already started to happen with insurance companies and pension funds in Norway, Sweden and Australia, Canada itself could wind up as some kind of stranded asset: a country with both significant actual stranded assets in the tar sands, and lost opportunity-cost potential assets in all those cleantech companies it could have incubated in the suburbs of Vancouver, and never did."

Canada’s commitment to developing its carbon reserves has led to a common petrostate plight: Dutch Disease.

Canada's currency has soared and is at near par with its giant neighbour to the south, the United States. The manufacturing sector has been hollowed out, severely reducing the breadth of Canada’s overall business sector.

"We have an endowment of a resource and we're just trying to spend it as fast as we can which is a pretty irresponsible," Tim Weis, Director of Renewable Energy at Calgary's Pembina Institute said in an interview. "You wouldn't run your personal finances that way."

Canada, once the envy of the world as an open democracy and protected natural spaces seems to be working hard to tarnish its own brand. The Harper government is gagging its scientists, upending environmental protections and missing targets to reduce greenhouse gas emissions, all in the name of keeping oilsands development on track.

"If the world ever takes climate change seriously, Canada will be revealed to all as a pariah nation," Bill McKibben, the author and founder of 350.org, said in an email. "I don't know what damage a bad brand can do to a country, but I fear that Canada (a country where I spent five years of my boyhood and that I love a good deal) is going to find out eventually."

Image Credit: Kris Krug via flickr

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Despite an international agreement to reduce emissions from carbon-intensive sources, oil and coal companies continue to pour hundreds of billions of dollars a year into finding new fossil fuel deposits containing enough carbon to more than double global climate pollution emissions.  

This is the conclusion of a new report finding that $674 billion was spent globally last year alone on the discovery of new fossil fuel deposits that will likely never be used. 

The report, Unburnable Carbon 2013: Wasted Capital and Stranded Assets, authored by researchers at the Carbon Tracker Initiative, Grantham Foundation and the London School of Economics and Politics, describes the idea of a "carbon bubble" that is the result of global fossil fuel reserves that already far exceed the maximum amount we can afford to burn and still avoid the most disastrous effects of climate change.

Despite this growing carbon bubble, and the inevitable movement towards a greatly reduced reliance on carbon intensive fuels in the future, energy companies continue to pour billions of dollars into discovering new fossil fuel reserves. 

If this all plays out as researchers predict, energy companies will end up with a potential $6 trillion in stranded assets that will never be exploited – oil and coal reserves that the world will not need.

According to the report:

"The analysis shows that between 60-80% of coal, oil and gas reserves of publicly listed companies could be classified ‘unburnable’ if the world is to achieve emissions reductions that mean an 80% probability of not exceeding global warming of 2°C."

This conclusion is based on the most optimistic reduction targets resulting in only 2 degrees Celsius of warming, but even at 3 degrees of warming (a totally disastrous scenario), the report concludes that there would still be "significant restraints on our use of fossil fuel reserves between now and 2050. Yet companies in the oil, gas and coal sectors are seeking to develop further resources which could double the level of potential CO2 emissions on the world’s stock exchanges to 1,541 billion tonnes."

These companies are investing billions and billions without taking into account even these most conservative reduction projections.

Professor Lord Nicholas Stern of Brentford, Chair of the Grantham Research Institute on Climate Change and the Environment, said:

“Smart investors can already see that most fossil fuel reserves are essentially unburnable because of the need to reduce emissions in line with the global agreement by governments to avoid global warming of more than 2°C. They can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision. But I hope this report will mean that regulators also take note, because much of the embedded risk from these potentially toxic carbon assets is not openly recognized through current reporting requirements.”

So what about Canada and its tar sands operations?

Are we creating a massive carbon bubble? You bet. I will be exploring this further in the coming days.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.