Image: Earth Chicken. Flickr/Frits Ahlefeldt

Picture the following: a UK investor buys a coal mine in Africa. The coal is shipped to China where it powers factories that produce goods which are shipped to the UK for consumption. Citizens in the UK benefit financially from the coal extraction, and materially from the goods produced.

So who’s responsible for tackling the huge amounts of carbon dioxide dumped into the atmosphere along that supply chain? According to UN rules, it’s not the UK.

Under the Paris Agreement and the Kyoto Protocol before it, countries are only responsible for the greenhouse gases physically emitted within their borders. Unfortunately, this exclusive focus on ‘territorial’ emissions makes little sense in a globalised economy in which capital and goods flow across borders, and results in a completely misleading picture of where responsibility actually lies.

Take the Netherlands as an example. Between 1990 and 2014, the Netherlands reduced its annual domestic emissions by around 15%. That’s not great, and the average emissions for Dutch citizens are still far above the global average. But it’s not a bad direction of travel compared to other countries, and enough for the Dutch to enjoy a reputation of ‘climate leadership’ on the world stage.

Yet dig a little deeper, and you find that in 2014, Dutch investors were sat on interests in oil and gas extraction outside the EU of over $400 billion, and earnt $37 billion from these investments. If realised, Dutch investments in oil and gas would result in carbon dioxide emissions between 6.7 and 9.1 billion tonnes – up to fifty times the Netherlands’ annual domestic emissions. Worse, Dutch investors are still increasing their positions in oil and gas extraction abroad.

Of course this is not solely a Dutch problem. As revealed in a new report published today by the Trade Justice Movement and Transport and Environment, investors in seven wealthy countries including the UK, Norway and Canada, were sat on investments in oil and gas overseas in 2014 worth an eye-watering $1 trillion. This is 250 times greater than the $4 billion the same seven countries allocated in bilateral aid in 2014 to tackle climate change internationally.

So what about all of the money going into renewables? Just last week, the private sector arm of the World Bank, the International Finance Corporation (IFC), released a report championing the huge sums flowing into low carbon industries. But while this is a good thing, it doesn’t matter how many wind and solar farms are installed as long as we continue to burn fossil fuels. It’s like ordering a side salad with a full English breakfast and expecting to lose weight. The IFC, which has been quietly funding a coal boom in Asia, should know this better than anyone.

There are a number of reasons why huge outward foreign direct investment in oil, coal and gas is a bad thing. On a very basic level, it is totally inconsistent with the stated position of almost every developed country Party to the UNFCCC to support low carbon development internationally. Beyond the hypocrisy, there is also a financial risk in allowing investors to pile into fossil fuel reserves that could become ‘stranded assets’ – reserves that will be placed off-limits by regulators in an effort to curb climate change.

But perhaps the bigger risk is that, far from becoming stranded, coal, oil and gas reserves will be extracted precisely because of the value they represent to investors and the wider economies of their home countries – leading to catastrophic climate change. Think again of the English breakfast, and ask how likely a café is to switch to a healthier menu where the owner has just invested in a deep fryer and a decade’s supply of bacon.

That is why wealthy countries should look beyond the border and take action to stop the carbon intense development overseas driven by their own investors.

A first step would be to require all large companies and investors to disclose their interests in coal, oil and gas extraction overseas, and report on the carbon dioxide emissions associated with the fossil fuels extracted each year, as well as the potential carbon dioxide emissions associated with the reserves under their control, if fully exploited. This would be a small step, and an extension of rules that already require large companies to report on the carbon dioxide emissions associated with activities for which they are responsible.

Next, governments could levy a carbon tax on income derived from investments in coal, oil and gas extraction, wherever it takes place. A fixed cost on every tonne of carbon dioxide released would penalise the dirtiest fuels the most, and would also free up resources that could be directed towards clean energy projects that everybody wants to see. As above, such a measure would be an extension of existing laws that already charge large companies for each tonne of carbon dioxide released from their domestic activities. The tax could be increased over time to encourage early divestment.

In the atrophied UN climate change Conference of the Parties (COP) negotiations, which bear an ever more tenuous relationship to the physical universe, it is easy to conclude that climate change is simply too complicated for governments to do anything about (on the agenda this time round is the operationalisation of a financial mechanism with no money, and the adoption of rules for transparent accounting of ‘emissions reductions’ that aren’t happening).

In fact, there are lots of simple, effective measures governments could adopt now. But for that to happen, our governments need take an honest look at the economic interests driving fossil fuel extraction, and not just fall back on the arbitrary accounting principles of the UNFCCC, which are more an exercise in blame absolution than an effort to stop climate change.