Report: oil company carbon liabilities are huge risk for investors

BP’s £11 billion loss is only part of the financial damage facing oil companies, according to a report published by the WWF and the Co-operative Financial Services (CFS).

Oil companies such as BP and Shell could be facing billions of pounds in future carbon liabilities as the cost of carbon rises, says the report, but lack of carbon reporting means many investors are unaware of these liabilities and the risk they pose.

Carbon liabilities, currently undisclosed, could become the sub-prime toxic assets of the future, says the report.

Consequently the WWF and CFS have joined the growing chorus of voices calling on the government to push through mandatory carbon reporting. Yesterday, the Aldersgate Group, an alliance of MPs and business interests, wrote an open letter to government ministers also urging for mandatory carbon reporting for large businesses.

The WWF/CFS report, Toxic fuels: toxic investments, shows how oil companies are increasing the carbon emissions of their fuels by developing unconventional fossil fuels such as tar sands.

Even at the current carbon price of £12 per tonne, BP’s total carbon liabilities would hit £7bn. At £75 per tonne the figure rises to £42bn for its proved oil reserves. Shell’s liability could range between £6bn and £36bn, says the report.

Colin Butfield, WWF’s head of campaigns, said: “While oil prices remain stable at a high level and the cost of emitting carbon remains low, these carbon-intensive fuels remain profitable. However, these conditions are subject to serious doubts. The price of carbon is set to rise and with as much as £35.5bn of pension assets invested in UK oil and gas stocks, the government must implement mandatory greenhouse gas reporting as soon as possible.”

The 2008 Climate Change Act set 1 December 2010 as a deadline for the government to report back to parliament whether it is going to introduce mandatory carbon reporting regulations for companies. It must make regulations by 2012 or explain why not if it is going to settle for just voluntary guidance. Some 86% of fund managers also want to see mandatory reporting introduced.

Paul Monaghan, head of social goals and sustainability at CFS, said: "Only once comprehensive and robust greenhouse gas monitoring and reporting methods are in place will investors be able to adequately assess the risk emissions pose to their investments.

"In the meantime, investors will continue to back carbon-intensive projects such as the Canadian tar sands, which could be regarded in the future as 'sub-prime' toxic assets. That represents a huge threat to savings, pensions and investments and diverts finance away from the low-carbon alternatives that urgently require investment.”

The report uses a range of indicative prices per tonne of CO2e: £12 (the market price of carbon in the EU ETS in early 2009); £57 (the full social cost of carbon as identified in the 2006 Stern Review); and £75 (one of the prices calculated in the UK Government’s guidelines for using carbon prices in economic appraisal, based on the cost of climate change mitigation). The estimated carbon liabilities data illustrate a range of carbon costs the companies would pay under a range of plausible carbon prices if they had to pay for all their direct emissions.