Research Methodology

How to use carbon budgets

For any particular rise in temperature there is a budget for emissions of greenhouses gases (GHGs) which cannot be exceeded in order to avoid breaking this temperature threshold. As carbon dioxide (CO2) is by far the most prevalent GHG, studies tend to focus on CO2 only –referred to as carbon budgets.

Carbon Tracker have been using this approach since its first report in 2011. Since this release, the Intergovernmental Panel on Climate Change and the International Energy Agency have each conducted carbon budget analyses.

These carbon budgets are not the same however, varying in terms of their time periods, the probability of keeping within the stated temperature threshold and the background assumptions of the impacts of aerosols, methane and other non-CO2 greenhouse gases.

This guide outlines the differences between these budgets, allowing users to choose which is most useful for their application and determine when we might blow each budget depending on our emissions trajectory.

Read the full guide here (published October 2013).


Below are submissions Carbon Tracker has made to relevant Government processes, consultations and calls for evidence:


Addressing climate-related risks to financial disclosure: the FSB Task Force (paper produced for distribution at PRI in Person conference and Climate Week, September 2016) Download

Response to DEFRA consultation on draft regulations for quoted companies (October 2012)

ASX Reserves and Resources Disclosure Rules for Mining and Oil & Gas Companies (January 2012) Download

International Integrated Reporting Committee Consultation (December 2011) Download

UK Department of Business Industry and Skills Consultation on Narrative Reporting (November 2011) Download

UK Kay Review of Equity Markets (November 2011) Download

UK Environmental Audit Committee Enquiry into a Green Economy (August 2011) link

South Africa Discussion Paper on Integrated Reporting (April 2011)

CT Eye

The Carbon Tracker Eye (‘CT Eye’) service filters down the world of online news into just those stories most relevant to the themes of Carbon Tracker’s work. Users can then apply their own filters to this news to receive just those stories that most interest them. The options available include:

  • Searching by company: Select those coal, oil and gas companies that you want to track;
  • Searching by category: A number of categories have been created including climate science, climate policy, capital markets, renewable energy as well as Carbon Tracker’s vocabulary which users can follow.

Finally, add your selected companies and categories to a watchlist to have the relevant news stories sent directly into your inbox at a time of your choosing.  You can also create customised reports based on the above filters saved to your own personalised login.

Note that this subscription service is free but does require you to request a login.

Unburnable Carbon

Unburnable Carbon refers to fossil fuel energy sources which cannot be burnt if the world is to adhere to a given carbon budget. Some aspects to consider:

  • Some fossil fuels may be used for other purposes which do not involve combustion, eg as petrochemical feedstocks. Hence we use the term unburnable rather than unusable.
  • Different organisations may apply a range of carbon budgets, meaning the precise amount of unburnable carbon cited varies. However there is a consensus that there is a clear overhang, and the level of potential carbon emissions exceeds any reasonable carbon budgets

CTI says: CTI has produced a series of reports themed on Unburnable Carbon which have prompted a new debate around the future of energy and investment. This has prompted organisations ranging from the IEA, oil companies, NGOs, accountants, investors, OECD and investment banks to consider the issue. Given that the IEA has both confirmed that burning all known fossil fuels would result in more than 2°C of warming, we feel there is reasonable consensus around this issue. Our latest research – carbon cost curves is a response to demand from investors to understand which projects are less likely to be developed, given they are both high cost, and excess carbon.

Useful links:

IEA: “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 °C goal, unless carbon capture and storage (CCS) technology is widely deployed.”

Shell:The issue of the bubble arises because the combined proven oil, gas and coal reserves currently on the books of fossil fuel companies (and governments in the case of NOCs) will produce far more than this amount of CO2 when consumed.

BP:  “We agree that burning all known reserves would probably cause global temperatures to rise by more than 2°C – and that addressing this issue will require the efforts of governments, industry and individuals. However, we believe that the unburnable carbon approach to assessing the impact of potential climate regulation on a company’s value oversimplifies the complexity of the issue and overstates the potential financial impact.

Carbon Budgets

As the world’s governments agreed under the Cancun Accord to limit global warming to 2 degrees, this acts as a reference point for delineating a carbon budget. The nature of climate science means that the probabilistic scenarios used produce a range of budgets depending on the parameters of the models and the likelihood of the outcome. In selecting / using a budget, people should be aware of:

  • What the probability of the outcome is: 50%, 66%, 80%? The more likely the outcome, the smaller the carbon budget will be.
  • What climate variables are used – eg climate sensitivity?
  • Does the budget cover just energy-related emissions, or also other industrial, agricultural, landuse change, etc emissions as well?
  • Is the budget for CO2 only or all greenhouse gases. Some budget are just for carbon or carbon dioxide (check the units); others cover all 6 greenhouse gases and are expressed in CO2e (equivalent).
  • Does a CO2 only budget assume a high or low effort to reduce other greenhouse gases? If significant progress is assumed on methane emissions for example, a higher CO2 only budget may result, which overall equates to the same amount of warming from all greenhouse gases.

CTI says: Our first analysis applied the Meinhausen et al paper (Potsdam Instititute) published in Nature which was peer reviewed research comparing a carbon budget based on a synthesis of the latest climate models available at the time. In response to feedback, our second analysis included some updated carbon budgets developed by the Grantham School of Climate Change and the Environment at LSE, led by Lord Stern. These provided some budgets which varied some of the factors in the bullet points above for different levels of global warming (1.5 – 3°C). CTI believes these budgets provide useful reference points for discussing where the world needs to get to. Our new approach of carbon cost curves means that users of the information can vary how they apportion a budget to each fuel – coal, oil and gas.

Read the full guide here (published October 2013).

Find here a methodological infographic on  Carbon Tracker’s approach to carbon budget analysis:

The Devil is in the Details

Useful links

Meinhausen et al, 2009, Potsdam Institute

IPCC, 2013, AR5

Hansen et al, 2013, NASA GISS

Carbon Bubble

In our first report we asked the question whether the world’s capital markets were carrying a carbon bubble? This related to the fact that there is unburnable carbon and some of that is owned by listed companies. In terms of carbon there is a clear overhang of fossil fuels; there is a lively debate about whether that is an appropriate term to use in a financial context. Some of the issues that have arisen include:

  • Are there assets which are being valued in a manner inconsistent with the expected future scenario?
  • Does the short-term bias of valuation models mean that the impact of peak demand is largely discounted out at present?
  • Is the market capable of pricing in the complex set of factors which could affect demand and price?
  • Do large diversified companies (eg mining stocks or oil majors) dilute the impact of a reduction in coal or oil revenues?
  • Do current accounting rules capture the value and any potential impairment of assets in a consistent and useful manner, (eg compare mining vs oil; contrast IFRS and US GAAP)?
  • If capital expenditure continues to be used to replace reserves could this lead to the inflation of a carbon bubble which would have to be corrected in a scenario of sudden drastic action to prevent dangerous climate change?

CTI says: CTI has seen some initial sell-side research which addresses these issues. For example HSBC’s low oil price scenario where it is the reduced price that impacts revenues significantly for oil majors, rather than a major reduction in volume. In contrast Citi did not find significant impact for the big Australian diversified mining companies as they only had 10-15% of revenues due from coal. This reflects that exposure will vary and some companies will be better positioned to withstand peak demand on these commodities than others. We encourage further research in this area to ensure that the market understands the different scenarios and prevents a carbon bubble being inflated.

Useful links

BoE letter

BoE response

Impaired US shale assets

(Sell-side research is not publicly available)

Stranded Assets

CTI introduced the concept of stranded assets to get people thinking about the implications of not adjusting investment in line with the emissions trajectories required to limit global warming. There have been a number of interpretations, including:

  • Regulatory stranding – due to a change in policy of legislation
  • Economic stranding – due to a change in relative costs / prices
  • Physical stranding – due to distance / flood / drought

The concept has warranted a new programme at the Smith School of Oxford University which considers stranded assets across a range of sectors from an academic perspective. From a financial perspective, accountants have measures to deal with the impairment of assets (eg IAS 16) which seeks to ensure that an entity’s assets are not carried at more than their recoverable amount.

Our research aims to prevent stranded assets by identifying where capital expenditure may be allocated to investments which may not yield the expected returns in a low demand, low price scenario. This is why we are focusing on the stewardship of capital to prevent it being wasted. This has already been taken up by investors, for example CERES have co-ordinated the efforts of their investor members to engage with companies. This has prompted responses from companies; including a paper published by Exxon Mobil as part of an agreement to withdraw a shareholder resolution.

CTI says: Stranded assets are fossil fuel energy and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy.

Useful links

CERES / CTI Carbon Asset Risk initiative

Exxon Mobil response


Reserves, Resources and Potential Production.

One essential element of our approach is to look at future potential emissions, which there is still an opportunity to influence. This complements the wealth of effort capturing historic emissions and annual performance. We see this as looking at the ‘stock’ of carbon, rather than the annual ‘flows’.

Our approach to date has been guided by a number of factors:

  • Trying to combine coal, oil and gas together in one analysis
  • Seeking data sources with global coverage
  • Our primary purpose of comparing stocks of fossil fuels with a carbon budget to 2050

The term ‘reserves’ is applied in many different ways and has different definitions for coal than it does for oil. This is exemplified by the number of different regional standards for reporting reserves which would produce different numbers when applied to the same geological location.

We have always expressed our numbers as estimates, and do not claim to know more about the reserves than the companies themselves. One challenge has been trying to extrapolate oil reserves and resources data to get an idea of exposure out to 2050. This has led to CTI numbers being higher than the strictest reserves numbers reported to the SEC, for example.

However the companies that are identified are likely to be very similar, in terms of who has the largest interests going forward, no matter what definition of reserves you use. For example some organisations have used SEC disclosures to identify companies to be excluded from fossil free indices/portfolios, or to try and establish potential liabilities for future emissions. The largest players in extracting fossil fuels do not vary hugely, with most differences due to M&A activity over time.

CTI says: The most important thing is to use numbers that suit the purpose. For us that is being able to look forwards at where future emissions might come from and identify the capital expenditure decisions that will determine that outcome. We believe we have evolved our approach to achieve that end. CTI has now used Rystad Energy data on potential production which uses their industry knowledge to project future production and capital investment. Rystad use a definition of ‘Estimated Ultimate Recovery’, which is also the basis for many IEA projections.

Useful links

ACCA paper on Accounting Standards for Reserves

Rystad definitions

GHG Protocol

Carbon Reporting

There have been a number of relevant initiatives developing methodologies and frameworks for corporate carbon reporting, and its use by the investment community.

The Greenhouse Gas (GHG) Protocol developed by the World Resources Institute and the WBCSD has achieved recognition as an international standard for reporting emissions. The core methodology has been further developed with specific initiatives improving the Scope 3 methodology (which includes emissions from product use) and reporting by specific sectors, including the financial sector. Read more…

CDP, formerly Carbon Disclosure Project, is an international, not-for-profit organization providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information. CDP works with market forces, including 767 institutional investors with assets of US$92 trillion, to motivate companies to disclose their impacts on the environment and natural resources and take action to reduce them. CDP now holds the largest collection globally of primary climate change, water and forest risk commodities information and puts these insights at the heart of strategic business, investment and policy decisions. Read more…

The IIGCC, CERES and the IIGC have produced a Global Climate Disclosure Framework for the Oil & Gas sector, which has been integrated into CDP. This clearly expresses the demand from investors to know about carbon emissions through the lifecycle of fossil fuels, including during combustion of products. The paper notes that given 50% of an oil & gas company’s value is based on its reserves, “analysis of the prospective carbon liabilities associated with those future productive reserves is vital to understanding the extent of value at risk through climate and policy related change in coming years.” Read more…

The Climate Institute in Australia has prepared Best Practice Methodology for managing climate change risk and opportunity in investment portfolios. This refers to the potential risk from fossil fuel reserves, stating “there are currently sufficient proven fossil fuel reserves to comfortably exceed a 450ppm target, assuming existing technology trends. As such, there is strong argument that exploration assets may be the first to be devalued in the event of rapid regulation of emissions.”

In 2003, BP reported the greenhouse gas emissions that resulted from combustion of its products, which it calculated contributed 5% of the total world emissions. This can be found on p22 of its 2003 Sustainability Report. Read more… The figure was reported for a further two years but then dropped from the report. Shell acknowledged its products were responsible for 3.6% of global emissions in its 2004 Sustainability Report (p9).  BP and Shell therefore demonstrated such reporting was possible years ago taking a leadership approach, but then took a backward step, not continuing to provide data on emissions relating to their products.

Credit Ratings

Having started our research in equities we are now looking at other assets classes, with bonds being a particular area of interest. Bonds are given credit ratings which reflect the probability of default (ie the borrower will not be able to make its payments). Credit ratings are relative rather than absolute and the market is dominated by three main ratings agencies (Standard & Poors, Moody’s and Fitch). The rating determines the interest rates and conditions attached to the lending. For a full explanation of ratings see here.

Corporate bonds are debt facilities which allow the companies to borrow capital over a fixed period in return for paying interest (coupons). We are researching bonds and sectors where the company’s ability to repay and service the debt is reliant on continuing to exploit fossil fuel reserves – ie there is a still sufficient market for fuels which emit greenhouse gases. Bonds may not mature for over 10 or 20 years which means that there is more scope to consider long term risks such as climate change.

The business model for extractives companies is reflected in the criteria used for credit ratings methodologies. It also reflects our focus on reserves as material assets for the companies. For example three of the four main criteria oil majors are assessed on are:

– their assets (ie their reserves)

– the degree of leverage against those assets

– the amount they are reinvesting in replacing reserves

See Moody’s Sector methodology for more detail.

There is also research ongoing at present into how to integrate ESG factors into Sovereign bonds issued by states. This presents a different dynamic with regard to our research as the majority of oil rich states do not need to borrow significantly in this way. On the flip side of this it means that those states that are heavily in debt are also the most exposed to commodity price rises as they do not have their own resources. Carbon Tracker is on the advisory group of a UNEPFI Project looking at these issues.