For years, climate hawks have been talking about a “carbon bubble.” The basic idea is simple. If the world is serious about its common climate target — holding global average temperatures to less than 2 degrees Celsius above preindustrial levels — then there’s only so much carbon it can throw up into the atmosphere. That amount of carbon is our collective “carbon budget.”

Here’s the thing: If we are to stay within our carbon budget, about two-thirds of known fossil fuel reserves will have to remain in the ground. We can’t even burn all of our currently developed reserves.

Nonetheless, those reserves currently have enormous value on the balance sheets of fossil fuel companies. Their books are full of “unburnable carbon.”

Are they at risk? Is unburnable carbon the climate equivalent of subprime mortgages?

It depends.

If the world doesn’t take ambitious steps to phase out fossil fuels, and if technological competitors to fossil fuels don’t develop faster than expected, then no, unburnable carbon poses no financial risk. It’s only a risk if there’s some real chance that we won’t burn it.

But if the world does take climate seriously, and cleantech does develop more quickly than expected … well, then the carbon bubble starts leaking.

A new report from Carbon Tracker and Principles of Responsible Investment (PRI) breaks down, for the first time, just how much each oil and gas company is at risk.

There’s a whole separate paper on methodology, but the gist of it is that they calculate each company’s exposure to risk in a 2-degree (2D) scenario — how much capital it has tied up in potential projects that it wouldn’t be able to build in that scenario.

First they use carbon supply curves to determine which projects would be canceled in a 2D scenario. They then determine, for each company, how much of its capital spending (“capex”) is committed to those potential projects. That is the amount of a company’s exposure.

Here’s the big picture (see chart here).

Around $2.3 trillion of oil and gas capex through 2025 should not be deployed if we want even a 50/50 chance of staying beneath 2 degrees. That’s around a third of all projected capital expenditures under business-as-usual.

Which companies have the most capex tied up in projects that lie outside the 2D budget? Here’s a snapshot of the top 20 (see chart here).

As you can see, Exxon comes in at 13 overall, and first among the oil giants, with 40 to 50 percent of its total capex through 2025 going to projects outside the 2D budget.

That’s a lot of exposure and a lot of risk.

And Carbon Tracker has done a terrific job that is being recognized by more and more people (as Donald Trump might say). Shareholders and the general public are starting to pay attention to corporate climate risk.

In a May 2017 shareholder resolution, 62 percent of Exxon shareholders (up from 38 percent last year) voted for a resolution calling on the company to do, in the New York Times’ words, “more open and detailed analyses of the risks posed to its business by policies aimed at stemming climate change.”

Specifically, shareholders want to know what will happen to Exxon if world governments get serious about the 2D target. That’s a question Exxon has long resisted answering. (The resolution is non-binding, but CEO Darren Woods “said the board would consider the result because it reflected the view of the majority of shareholders.”)

In short, oil and gas giants are under increasing pressure to take the 2D target seriously — and taking it seriously would mean an immediate halt in growth and the beginning of a long, steady decline.

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