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Gore Likens Carbon to Subprime Debt in Plan to Repair Capitalism

Gore Likens Carbon to Subprime Debt
Factory emissions like this one add to the global atmospheric carbon load. Photograph by Jane Kerrigan

Former U.S. Vice President Al Gore said investors in oil and gas companies who ignore the cost of emitting carbon dioxide and other greenhouse gases are making a mistake similar to those who invested in subprime mortgages.

“The value of the subprime mortgages was based on a false assumption,” Gore said yesterday in an interview. “In almost exactly the same way, the value of all of these carbon fuel reserves is based on a similarly absurd assumption.”

Gore made the analogy as Generation Investment Management LLP, the asset manager he founded with former Goldman Sachs Group Inc. executive David Blood, published a five-point plan titled “Sustainable Capitalism” to reform the investment industry. They want the proposals to help combat climate change and poverty as well as boost profit in the long term.

Gore and Blood recommended investors identify “stranded assets” whose value would change significantly under certain scenarios, such as a price being set for carbon or for water. Second, they said investors should use environmental, social and governance data as well as financial data to value companies. Third, companies should end quarterly earnings guidance to remove pressure for short-term gains. Fourth, companies should reward managers for long-term performance, and fifth, investors should be rewarded for holding shares longer with “loyalty-driven securities,” Gore and Blood said.

“The bitter experience that the subprime mortgages caused should be a reminder that stranded assets have the potential for doing a great deal of damage,” Gore said in a video link between Generation’s New York and London offices. The firm manages about $6.5 billion.

“These subprime carbon assets have an asserted value based on the assumption that it’s perfectly OK to put 90 million tons of global warming pollution into the atmosphere every 24 hours,” he said. “Actually it’s not.”

‘Absurd Assumption’

Gore, a Democrat who won a Nobel Prize in 2007 for his efforts to raise awareness of climate change, said the “absurd assumption” that he sees underpinning energy stocks may collapse in the next decade.

Gore said energy companies also aren’t properly valuing the water resources they use for hydraulic fracturing, or fracking -- technology that releases gas trapped in shale rock by injecting water, sand and chemicals underground.

Gore’s comparison of carbon and subprime debt comes a month after a group of U.K. investors and environmental campaigners wrote to Bank of England Governor Mervyn King urging a probe into whether the U.K.’s holdings of investments in greenhouse gas-emitting industries poses a risk to financial stability.

U.K. Study

“There is clearly scope for further evaluation of these issues,” King wrote in his Feb. 1 reply, posted on the website of Climate Change Capital Ltd. “We will endeavor to include this in the list of topics we regularly discuss with market participants to assess whether or not this is a risk of which they are aware and the extent to which they are taking it into account in their investment decisions.”

The U.K. government in 2006 published a now widely cited study by its top climate economist at the time, Nicholas Stern, which said spending 1 percent of economic output on combating climate change could avert future expenses of between 5 percent and 20 percent of gross domestic product.

Gore and Blood said adoption of their proposals was necessary to restore public faith in capitalism, which they said had been eroded during the financial crisis, in which taxpayer funds were used to bail out banks and insurance companies.

“There are rather glaringly obvious problems with the way capitalism is operating today, in spite of its great virtues,” Gore said. “There are very big problems that should cause all participants in markets to think long and hard about how those problems can be remedied.”

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