FORTUNE – Many who worry about climate change have long been puzzled by the hundreds of billions of dollars that coal, oil, and gas companies routinely spend on developing their reserves, and finding and developing new reserves. These investments seem unstoppable, despite countless warnings that carbon emissions damage the global environment and economy.
Recently, however, key investors have pulled back on investments in coal and oil — an unfolding trend that could potentially help negotiators working to curb climate change at the long-running United Nations climate talks. Ironically enough, the investment dropoff has less to do with fear of climate change and more to do with worries over wasteful spending.
Most experts believe that limiting warming to 2 degrees Celsius above pre-industrial times will help the environment and economy avoid further harm, a measure that climate scientists say requires leaving most unburned fossil fuels underground. How much should be left buried ranges depending whom you ask, but published estimates range between 60% to 80%.
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Given that carbon-fuel companies aspire to add substantially to that stock of unburnable carbon, we can think of it as a kind of market bubble. This is wasteful spending and it could be thought of as an ever-expanding mountain of supposed assets that might one day end up unusable — stranded by policymakers who finally begin doing some of what they have said they will do for years now.
The world’s 200 biggest gas and oil companies currently spend more than $600 billion a year on expanding and developing their reserves, according to estimates of Carbon Tracker, a London-based financial think tank that I chair, published in April 2013. Over the next 10 years, accordingly, spending could exceed $6 trillion. Most of that is at some level of risk of ending up wasted.
During 2013, however, key investors curbed their investments in coal and oil, recognizing the risk that assets might end up stranded by climate policy. As I describe in my new book, The Energy of Nations, HSBC’s lead oil and gas analyst, Paul Spedding, told investors and media at the launch of Carbon Tracker’s 2013 report in Bloomberg’s London headquarters that he would be recommending that his bank’s clients stop wasting their money on capital expenditure in the search for new reserves and give it back to investors as dividends. The annual $126 billion of dividends, he pointed out, compare rather unfavorably to the $675 billion in capital expenditures given the industry’s recent profitability record.
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Since then, pressure on oil companies has built steadily, culminating in oil giant Royal Dutch Shell’s (RDSA) recent decision to stop funding its Arctic exploration in 2014, and increase its dividend payment to investors instead.
In July, Norway-based financial services company, Storebrand, said it would pull out of 19 coal and tar sands investments in light of Carbon Tracker’s analysis.
About three months later, one of the five Swedish governments’ state pension funds said it would withdraw from all fossil fuel investments, for fear of assets being stranded. In November, after a Carbon Tracker briefing in Oslo, a majority emerged in the Norwegian parliament favoring withdrawal of the $800 billion state pension fund — the biggest sovereign wealth fund in the world — from coal.
Two other factors are reducing coal investments: China is developing legislation to clean up the air in their cities by banning coal. As a result, this has put pressure on Australian coal investments, which routinely assume a growing Chinese coal market.
Meanwhile, many oil and gas companies are ploughing an increasingly unprofitable furrow as their capital costs spiral, notwithstanding high oil prices. From 2005 to 2012, capital outlays rose 90% across the oil industry while prices haven’t kept up, rising only 75%. In the period 2011-2013 capital expenditures rose a further 20%, while oil prices have actually dropped slightly. And the recent set of results shows a stark picture of capital expenditure soaring yet discoveries actually declining.
If these trends continue into 2014 and beyond, climate policymakers may find it easier than they thought to deliver on their promises.
Jeremy Leggett is Chairman of Carbon Tracker, and author of The Energy of Nations: Risk Blindness and The Road To Renaissance (Routledge, 2013).
