London (Platts)--6Mar2014/549 am EST/1049 GMT

World stock markets may be over-valuing companies with fossil fuel assets that may be unburnable, UK lawmakers warned Thursday.

The UK's Environmental Audit Committee released a report warning that over-priced fossil fuel assets pose a systemic risk to global markets.

"The UK government and Bank of England must not be complacent about the risks of carbon exposure in the world economy," said committee chair and member of parliament Joan Walley.

"Financial stability could be threatened if shares in fossil fuel companies turn out to be over-valued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilizing the climate," she said.

"The record-breaking extreme weather events causing chaos across the globe should be a wake-up call," said Walley.

"The transition to a low carbon economy will be much more painful if we wait until there is a climate crisis before recognizing that more than half the world's fossil fuel reserves will have to remain in the ground," she said.

While individual investors and companies take investment decisions at their own risk, the share of the equity markets made up by fossil fuel assets is large enough to warrant coordinated action to protect the UK economy, according to the report.

In particular, individuals' pensions could be at risk because of an inadequate evaluation of the risks posed by unburnable carbon, it said.

The Bank of England's Financial Policy Committee should seek advice from the independent Committee on Climate Change to help it monitor the "systemic risk to financial stability associated with a carbon bubble," the report said.

The BoE's Financial Policy Committee was established in 2011 to take action if it believes banks and other financial institutions are taking too much risk.

"The government should also ensure that company reporting requirements provide investors with the information required to assess carbon exposure," the committee said.

STRANDED ASSETS

The UK parliamentary committee is not the first to warn of risks posed to the financial system from assets that may become stranded in future.

The Carbon Tracker Initiative -- a non-profit company that seeks to align capital markets with climate protection measures -- warned in 2012 that global financial markets carry risks from unburnable fossil fuel assets.

By 2011, the world had used over a third of its 50-year carbon budget of 886 gigatons [billion mt] of CO2, leaving 565 Gt, based on the amount that can be released to stay within safe limits, it said.

"All of the proven reserves owned by private and public companies and governments are equivalent to 2,795 GtCO2," said Carbon Tracker.

"Fossil fuel reserves owned by the top 100 listed coal and top 100 listed oil and gas companies represent total emissions of 745 GtCO2. Only 20% of the total reserves can be burned unabated, leaving up to 80% of assets technically unburnable," it said.

Meeting the emission goals currently pledged by countries under the United Nations Framework Convention on Climate Change would still leave the world some 13.7 Gt of CO2 -- or 60% -- above the level needed to remain on track with the agreed goal to limit global warming to 2 degrees Celsius in 2035, according to the International Energy Agency.

"Much additional investment will need to be directed towards lower CO2 technologies, on supply and end-use sides alike. The benefits that society would reap from these measures, beyond avoided climate impacts, would be of an equal if not larger magnitude than the cost to the energy sector," the IEA said.

"Meanwhile, energy policy-makers need to start thinking about the impact of committed climate change on the security of the energy sector," the Paris-based agency said.

David Hone, senior climate change adviser for Shell, said both a rapid growth in renewable energy and early use of carbon capture and storage technology were required to manage emissions this century.

"The reality check for the 'carbon bubble' proponents is that global energy demands still need to be met and that there are limits to the growth rate of fossil energy substitutes, even as climate goals come under pressure," Hone said in a blog post.

--Frank Watson, frank.watson@platts.com
--Edited by Jonathan Dart, jonathan.dart@platts.com

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