Mark Carney wants business to calculate the fossil fuel future: Don Pittis

No doubt Bank of England governor Mark Carney has personal views on whether or not climate change is a danger to his children's future. Most thoughtful people do.

But when the former Bank of Canada governor spoke to a high-powered audience of insurance executives this week, unlike environmentalists such as Leonardo DiCaprio, he didn't emphasize their moral obligation to future generations. Perhaps after the VW scandal, he realized there was a more direct way to a businessperson's heart.

He appealed to their bottom line.

"Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent," he told the group.

"Longer-term risks could have severe impacts on you and your policyholders."

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When New Democratic Party candidate Linda McQuaig raised some of the same issues in the current federal election campaign, saying part of Canada's fossil fuel resources might have to be left in the ground, it played as a left-right issue.

Dwayne Roy checks an active well site near Lloydminster, Sask., this summer. Bank of England governor Mark Carney says investors must realize oil may have to be left in the ground. (Dan Riedlhuber/Reuters)

"For the hundreds of thousands of people whose jobs are dependent on Canada's energy sector, listen to what you just heard," responded Conservative candidate Michelle Rempel.

Profit and loss, not left and right

But for Carney's audience at a Lloyd's of London black tie dinner, the issue is not a matter of left or right politics, but a matter of profit and loss.

Insurance companies often pay the bills when storms and flooding do their damage. Climate change is likely to make those insurable crises worse.

But perhaps more important, against those potential losses, insurance companies hold trillions of dollars in assets invested in all kinds of stocks and bonds. And Carney said those assets were threatened.

Carney warned that oil, gas and coal companies may be worth far less than their current book value would suggest.

That's because a big part of their assets includes fossil fuel resources discovered but not yet extracted. Fears about climate change could render the vast majority of reserves "stranded," said Carney. In other words, the reserves would be left in the ground and unextractable.

The other part of Carney's warning was the danger that climate change would mean the entire global economy would become less productive, shrinking the future value of certain investment holdings.

"In the fullness of time, climate change will threaten financial resilience and longer-term prosperity," Carney said in his speech. "While there is still time to act, the window of opportunity is finite and shrinking."

But according to analysis from sources such as a group of scientists who call themselves Climate Interactive, we may already be too late.

Slow progress in cutting carbon output means that we are currently heading towards a global temperature rise that the New York Times says "is likely to produce catastrophes ranging from food shortage to widespread extinctions."

Smoke from Indonesia shrouded Singapore last week. So far, market forces have been less than successful in solving cross-border environmental conflicts. (Reuters)

I must admit to being of two minds on whether market forces can solve long-range global crises. When I look back, I see I have argued both sides.

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When Swiss mining giant Glencore shares can fall by 82 per cent from their IPO price just four years ago and oil can fall by half with hardly a word of warning, I am not certain whether investors, even those as smart as those in the insurance industry, really can use their investment clout to steer the ship away from the waterfall.

Oil companies responded to Carney by saying that investors should not worry. In spite of warnings about climate change, they see their market continuing to grow, especially in developing countries.

Indeed, governments have often had a poor track record of putting global concerns ahead of the short-term interests of their own citizens, such as Alberta jobs.

A light in the darkness

And what happens if climate change should become so severe that governments are forced to crack down?

"If we don't get on with making a managed transition away from high emissions, climate change might actually be a reason for a dramatic extension of the state," Oxford climate scientist Myles Allen told me on a previous occasion.

The fact is Carney realizes that the scope of climate change is beyond the horizon of many of our ways of preparing for the future. Politicians just worry about keeping voters happy until the next election. Carney says that traditionally even central banks only worry about financial stability for about 10 years into the future. 

"Once climate change becomes a defining issue for financial stability," Carney said, "it may already be too late."  

The truly long-range thinking of the insurance industry, which, like the pension industry, concerns itself with how much their investments will be worth many decades into the future, could be an exception.

In some ways, insurance companies are giant machines for calculating mathematical risk based on all the details of what we know now and the estimates of how conditions will change. 

Carney hopes that calculating skill "could act as a time machine, shining a light not just on today's risks, but on those that may otherwise lurk in the darkness for years to come."

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​More analysis by Don Pittis