Unburnable Fuel

The Economist came out with a very interesting and insightful article the other day. It pointed out that oil and other fossil fuel companies may be way over-valued. This is because companies are valued based on their reserves and markets treat them as if all their reserves are to be burned. However, this is not compatible with current climate change mitigation goals. Gas and oil companies have many more reserves in the ground than what is needed to warm the planet well beyond 2 degrees celsius, the near universally agreed danger mark. Therefore, in order to avoid the costs of burning this fuel is to leave some in the ground, but the risks of burning are not being calculated into company valuations. The Economist says that government-owned companies would be in the best position to act upon this in order to coordinate climate mitigation goals but they are doing just the opposite and providing a larger share of energy than private companies. It seems like a problem in which poor information among other things means that the market will not create an efficient outcome and for which there is no easy solution (at least that I can see.)

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2 Responses to Unburnable Fuel

  1. Nicky Tynan says:

    This is an excellent article. The government behavior suggests that some governments do expect policy to change and that they are burning fossil fuels now because they expect them to have little value in the future. If the article is correct that this is indeed an error in the valuation of fossil fuel companies, this would give financial support to a call for divestment.

  2. Techbate says:

    Oil reserves, companies dealing with it and governments associated with them has never made information about outcomes easily accessible to people for their own good. Though government owned reserves can take a stand on this but, but I’d say these will be the last authority to do so because of being corrupt, not just for 2% reserve danger mark we have seen government authorities taking literally no action against oil companies for example the BP oil spill and many more incidents that occurred and caused significant damage to environmental .

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