A New Climate Could Destroy Even the Biggest Energy Stocks

For the first time ever, carbon dioxide sensors in Hawaii reported that the average daily reading of carbon dioxide concentration surpassed 400 parts per million. This number comes as no surprise, as we've been heading toward it for decades. In fact, the limit of a two-degree Celsius increase in global temperatures that world governments agreed upon in 2009 can be reached with carbon dioxide at 450 parts per million.

So, if such a reading is not a surprise and is still less than the proposed goal, why does it matter?

Because the closer we come to that carbon limit, the more pressure will be placed on traditional energy companies and the greater the chance that regulation increases and that energy stocks are overvalued.

Carbon limits
Over the past 30 years, carbon dioxide has increased from around 330 parts per million to 400:

Source: NOAA.

To achieve only a two-degree Celsius increase and carbon dioxide at 450 parts per million, a PwC report states the world would need an average annual rate of decarbonization of more than 5% through 2050. Even for a six-degree rise, where carbon would rise to 1,200 parts per million, the world would need to decarbonize 1.6% each year through 2050. Unfortunately, the world hasn't reached a 5% decarbonization rate since World War II, and averaged less than 1% of annual decarbonization from 2000 to 2011.

Regulation and stranded assets
In 2005, the European Union started the Emissions Trading System, which set up a cap and trade market for carbon dioxide and other greenhouse gas emissions. And while due to the European recession, the price per ton of carbon emissions fell from 25 euros in 2008 to around 2.50 euros in April, this type of regulation is spreading and will increase costs for all companies that emit pollution. Last November, California held its first auction of greenhouse gas credits at a price of a little more than $10 per ton, raising $290 million for the state, and the entire North American market is expected to reach a value of $2.5 billion this year.

In its "World Energy Outlook," the International Energy Association states, "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 degree Celsius goal." So, in addition to pollution credit costs, energy companies' values could be harmed by the current overestimation of their proven and probable reserves if regulation reduces demand for fossil fuels and lowers prices. HSBC calculated just how such a scenario could affect the market value of several European energy companies:

Company Estimated Percent of Unburnable Reserves Negative Effect on Market Capitalization
Shell  (NYSE: RDS-A  ) <10% 40-45%
BP  (NYSE: BP  ) 25-30% 45-50%
Total  (NYSE: TOT  ) 10-15% 40-45%
Statoil  (NYSE: STO  ) 15% 60%
Eni  (NYSE: E  ) 10-15% 50-55%

Source: "Oil & Carbon Revisited," HSBC Global Research.

With roughly half of these companies' current values at risk if demand and prices for fossil fuels fall, and a regulation push to make both of those conditions a reality, investors should remain cautious for the long-term future of these energy companies. While a transition to alternative energy will be slow, the realization of any overvaluation could be sudden, and as milestones like 400 parts per million of carbon dioxide are reached, the calls for further regulation will be louder.

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Read/Post Comments (22) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2013, at 9:55 AM, amvet wrote:

    An important missed point is that while oil use in the developed world is decreasing oil use in the developing world is increasing faster.

    If the rich countries tell the poorer countries to use less oil, the result will be nil.

  • Report this Comment On May 18, 2013, at 11:55 AM, ProdigalPotter wrote:

    "For the first time ever .. " begins this piece with a complete fallacy without the words, " .. in human history," after it, which sums up the absurdity of this headline. Today CO2 levels are at/approaching the 400ppm level, from about 235ppm three centuries ago. The majority of Earth's climate history though has experienced thousands of ppm, along with the truth that for most of our 4.5/5 billion years there's been no cold, no snow, and no ice anywhere (such as the dinosaur ages). What we call optimal today is atypical to the usual behaviour of Earth's climate, hence the term inter-glacial for our current period, and the complete lack of any mention of these climatological facts shows how imbalanced this piece. While this website appreciates certain a level of courtesy, it's time to take Mr T's advice from the A-Team if you're not going to properly research your pieces.

  • Report this Comment On May 18, 2013, at 12:29 PM, tigerade wrote:

    @ProdigalPotter - It seems that you are insinuating that the change in CO2 levels from 235ppm to 400pm is: 1. Not a big deal 2. won't impact life on earth or 3. won't impact humans. If that is what you are trying to argue, I'd like to ask what substantiates such a claim. Current CO2 levels have stayed under 300ppm for the past 500k years or so, in which all present life on earth evolved including us. A rapid increase in CO2 will increase the planet's heat content as well as increasingly acidify the ocean. Impact on life and extinctions should not be a surprise. While there is virtually no debate that climate change is happening, there is still debate over how severe it will be and what the effects will be. My argument is that why would you even want to run the experiment? We only have one planet, not a second one. If the experiment goes awry, then we won't have a second chance.

  • Report this Comment On May 18, 2013, at 12:58 PM, 3rdRxSteward wrote:

    I'm really not in agreement with what is here and this is why. The input into the atmosphere of CO2, particulates, SO2, and many other climate changing pollutants is not input steadily. Every so often, randomly but with some yearly frequency (in that order of randomness) we have volcanic activity, range fires, methane gas surges from methane hydrates trapped in the soft sediment off the continental shelves gasifying, etc. These inputs far exceed in intensity over the short term in many orders of magnitude what man in a steady way inputs. Nature can find it hard to compensate for these large natural input surges. Even if man cuts back to zero the amount of industrial emissions put into the atmosphere, these natural events will still occur and climates may be altered. So for the sake of hundreds of trillions of dollars and billions of lives lost because we did not heat homes or feed the population or generate value wealth to the economy, we will have bought ourselves very little in terms of obverting climate change. I know this goes against the purist's view on controlling man made emissions, but it is a pragmatic view for a very populated planet. I am in agreement that poisons should be scrubbed from flu stacks and rivers should not be dumped into. Polluting is wrong and should be stopped! But what constitutes a poison? CO2 is not! As H2O is not! And neither is CH4! These are natural constituents that our planet buffers reasonably well, except during these times of surges that I mentioned above. We see that the climate is changing continuously from the geologic rock record and the ice record. These changes were sometimes abrupt and happened without the influence of man. So how did I reach my opinion on this issue? I am not a climatologist. I am a geoscientist that maps paleo-environments from the rock record. I map the course of ancient rivers and shorelines. I map ancient reefs. All these deposits are dependent on climate and sea level rises and falls. Our planet has had a very dynamic climate throughout the Paleozoic to recent. There is no reason in my way of thinking that the planet is not just behaving as it always has.

  • Report this Comment On May 18, 2013, at 1:03 PM, dd9999 wrote:

    But the earth hasn't warmed in 17 years. Somebody is lying about global warming which simply adds another scandal to the Obama Legacy.

  • Report this Comment On May 18, 2013, at 1:09 PM, mapsguy wrote:

    Nobody is saying that the planet isn't behaving the way it has throughout history, just that we are influencing it and making these changes faster, which ultimately means that increases in extinctions will be faster. What isn't fast right now is American stupidity and arrogance, which is running about as fast as it has for the last 40 years.

  • Report this Comment On May 18, 2013, at 1:11 PM, tigerade wrote:

    @dd9999 - That is not the correct talking point. The talking point is that the "world hasn't warmed since 1998", so that is only 15 years, not 17. If you are going to lie, at least lie correctly.

    Anyway, the study "An observationally based energy balance for the Earth since 1950" flies in the face of the "hasn't warmed since 1998" myth. Let's put aside the fact that the hottest 12-month period ever recorded was from June 2009 to May 2010. (Deniers don't keep up with this stuff very well). Global heat content is what counts. A lion's share of the warming has been in the ocean. The warming land and atmosphere is only a small fraction of the world's heat content, although it is warming too.

  • Report this Comment On May 18, 2013, at 1:14 PM, Muchamiel wrote:

    Perhaps I am being stupid but it seems to me that if the ambient temperature suffers a slight rise, the amount of fossil fuel used for heating will be reduced thus, to a small extent, alleviating the situation. i.e. the effect is partially self regulating.

  • Report this Comment On May 18, 2013, at 1:27 PM, 3rdRxSteward wrote:

    @Mapsguy, I don't know about that. Seems like the climate can change pretty rapidly and has in the past. There are a lot of sharp regional rock contacts in the rock record which would indicate sudden changes in sea level. There are pretty rapid changes in the fossil record too. I would imagine that there is something much bigger than man at work on the jet stream and ocean temperatures. I would imagine it's tectonic in nature and perhaps solar in nature too.

  • Report this Comment On May 18, 2013, at 1:32 PM, tigerade wrote:

    " I would imagine it's tectonic in nature and perhaps solar in nature too."

    @3rdRxSteward - and is there any observation or evidence to suggest that's indeed what's happening? See "Solar activity & climate: is the sun causing global warming?" and "What is causing the increase in atmospheric CO2?"

  • Report this Comment On May 18, 2013, at 1:38 PM, jaimajenna1 wrote:

    I planted two new maple trees in my yard this spring (grew them from seeds). Hope this helps.

  • Report this Comment On May 18, 2013, at 2:30 PM, AllenElliott wrote:

    China puts out more then half the carbon yet they are a country that signed the kyoto treaty

  • Report this Comment On May 18, 2013, at 2:59 PM, 3rdRxSteward wrote:

    There is an enormous range fire that can be seen from space on the Australian continent. Volcanic eruptions too put a great deal of CO2 into the atmosphere and we have some of those going on right now. Ocean temperatures too are greatly affected by pillow lavas and ocean floor volcanic activity. The question we should be asking ourselves is: “Is CO2 that effective in harmful climate change compared to all the other things that can have an effect?” I look at the Carboniferous age, it was a time of extreme atmospheric CO2 from massive volcanic activity, and the results were an unprecedented global greening. Worse things can happen to our planet than greening from greenhouse gases such as CO2 and water. Maybe a much worse thing would be man's intervention of something he knows very little of. Have a little faith in the planet and natures means of adapting. I ask myself why this is suddenly an issue.

  • Report this Comment On May 18, 2013, at 3:12 PM, Lexloeb wrote:

    Stupid bean counters! 400 parts per billion is the threshold of a stupid pseudo science theory nothing more. Google "Lex Loeb Carbon Quiz" and take the quiz to find out what you really know or don't know about carbon in the atmosphere. What you think you know you might not really know. Yes carbon dioxide is toxic to humans and animals but at much higher levels 400 parts per million is actually very diffuse and because the atmosphere is not a closed cell system but an open expandable atmosphere it has no real effects on atmospheric temperatures unless or until it affects atmospheric pressure. Thanks to the universal gas laws you skipped learning about In high school you might be dumb enough to fall for the earth first version of climate science. Unfortunately global warming and climate change issues are nothing more than giant media platforms for propaganda. We need a lot more co2 in the atmosphere for it to become toxic and we need enough new gases in the atmosphere to cause greenhouse effect. Find out how much more dense the atmosphere is, how much more pressure it exerts and what it consists of on Venus to know what is not happening on earth regardless of what we humans do. Then look at geological history and realize that those layers and layers of limestone around the earth are built up of co2 that used to be in the atmosphere and they are not coming out of the ground anytime soon.

  • Report this Comment On May 18, 2013, at 3:15 PM, 3rdRxSteward wrote:

    Could it be that the measurements made recently that have all the climatologists in uproar on the Hawaiian Islands is due to the Australian range fires? I do not have all the answers. I just think that if we try to lower CO2 in the atmosphere by changing the pH or chemistry of the deep oceans as was being talked about, we are likely to set in motion trouble that we could not possibly imagine from our poor understanding of the interrelations of all the systems. Doing nothing is probably the best course we should follow right now.

  • Report this Comment On May 18, 2013, at 3:19 PM, 3rdRxSteward wrote:

    @Lexloeb - You are correct in every way! A little more passionate than me, but correct.

  • Report this Comment On May 18, 2013, at 3:33 PM, tigerade wrote:

    @Lexloeb - Pseudoscience is not real science because it cheats the scientific method. With pseudoscience, someone can just spout of claims and ideas without actually testing their ideas in the real world to see if it's true or not. They also tend to have confirmation bias and don't give others a chance to refute or review their claims. Although, I think people are slowly but surely getting better at spotting pseudoscience.

  • Report this Comment On May 18, 2013, at 4:11 PM, greybuscat wrote:

    I love when someone tries to point out that the Earth was warmer when the Dinosaurs were around, and it worked fine for them.

    News flash people, we weren't alive back than. We don't even know if we could grow food in that environment.

    We live now, so it would probably behoove us to not needlessly tamper with what we've adapted to.

    Hey, it's not our problem, though. The really scary stuff wouldn't happen until closer to the next century. We're just the last people that have a chance of slowing it down, and we just piss that away.

    Our descendants are going to love us.

  • Report this Comment On May 18, 2013, at 5:48 PM, WatcherOfFools wrote:

    I'm new at posting comments here, and I like the common sense I see. Here are some adders for the intelligent. Since the oceans of the world act like a buffer system for dissolving CO2 in water, if we really want to understand the trends of atmospheric CO2, one must study the oceans too. Also, methane, CH4 (natural gas) is about 23 times more potent of a Greenhouse Gas (GHG) than CO2 is, so if man is really interested in curbing GHG, we should be more careful about fugitive emissions of CH4 than anything else. The comment about Venus is true, Look what methane has done to the surface temp there, and realize it is NOT just because Venus is closer to the sun!! Most recent studies have flown over Fracking sites and documented increased methane concentrations which should be very alarming. Of all man release pollutants, Mother Nature has her methane releases too, but our natural gas industry and the cattle industry are the major sources we create. CO2 is not a toxin… it is essential for life and photosynthesis on this planet. The O2 / CO2 pendulum has swung back-n-forth as the geological record shows, and as good stewards of the planet, we should not be trying to skew it. Just be prudent with controlling combustion, and stop decimating the rain forests would be a good start. My apologies though to the political that are just trying to find a way to make money (Cap-n-Trade) off of CO2 releases. Let me see the bill for the next volcano please.

  • Report this Comment On May 18, 2013, at 5:58 PM, WatcherOfFools wrote:

    I'd like to know what makes the perfect zig-zag pattern of CO2 ppms in the chart from 1974 to present. Changes of those magnitudes (if world wide) show a significant mechanism involved. Man's contribution would be a slow steady adder, but I doubt it is 1.5 ppm per year as the general trend suggests. Is so, the oceans would be showing this too.

  • Report this Comment On May 18, 2013, at 6:31 PM, tigerade wrote:

    "Let me see the bill for the next volcano please."

    Humans emit 100 times more CO2 than volcanoes. About 569,000,000,000 metric tons since the start of the Industrial Revolution. How do we know? Well simple accounting for one. Just record all the fossil fuels that have been burned and it up to a nice number. We know exactly how much CO2 is released when fossil fuels are burned, it can be measured. But hey, if counting isn't your style... identify the isotopic fingerprints of the carbon dioxide and you'll get an idea of where the CO2 comes from.

  • Report this Comment On May 09, 2014, at 10:48 PM, Lexloeb wrote:

    That does sound like a lot of carbon dioxide........It if funny that some people think they can actually carbon date pre-historic coal that was burned to say it was just added to the atmosphere by human activity ... or by the act of burning. That may or may not be so. What is not added to the analysis is the huge amount of charcoal burned in places like India instead of cleaner natural gas use of electric power from dams on rivers. carbon carbon everywhere from many sources . OK. But Just how much Carbon is in the atmosphere and what else is there? You can suffocate in a closed closet from the carbon dioxide you exhale. Do you know what percentage of the gas in the air that would be? How about the amount of carbon in the atmosphere of Venus that causes what is often said to be enhanced greenhouse warming there? http://voices.yahoo.com/take-atmospheric-carbon-quiz-see-sma...

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