The carbon bubble is a hypothesised bubble in the valuation of companies dependent on fossil-fuel-based energy production, because the true costs of carbon dioxide (CO2) in intensifying global warming are not yet taken into account in a company’s stock market valuation.
The world economy is riding on a financial bubble that dwarfs the subprime crisis — a $22 trillion carbon bubble. On our existing pathway, humankind is expected to burn through proven fossil fuel reserves by 2050. That will make global warming higher than 5°C (9°F) likely and catastrophic civilisational effects irreversible. Eighty per cent of proven reserves need to stay unburned to have an 80% chance of keeping warming below 2°C. The current estimated value of these civilisation-threatening reserves is roughly $22 trillion.
BBC News reports that the world’s economy could be heading for another downturn if there is a collapse in demand for fossil fuel, which is known as the bursting of the “carbon bubble.”
Research published in Nature Climate Change foretells that oil firms’ reserves will become “stranded assets” before 2035. That is due to been devalued by a swift shift to electric cars and green energy. The researchers state that the resulting fall in fossil fuel prices could wipe one trillion dollars off the global economy, which is larger than the financial crash in 2008. If no new developments to limit warming to below 2°C is taken. They estimate that this could rise to $4 trillion “if new policies to restrict emissions further are set”. The Guardian highlights that “crucially, the findings hint that a rapid slump in fossil fuel demand is no longer dependent on more effective policies and actions from governments around the world”.
Prof Jorge Viñuales, the co-author of the study, told the BBC: “You do not need to have anything for the stranding to happen, because what has already been done in the past is driving this phenomenon”. Dr Jean-François Mercure, the study’s lead author, told the Guardian: “This is happening already – we have observed the data and made projections from there. This would happen faster with more policies from governments. But without substantial [climate] policies, it is already happening. To some degree, at least you cannot stop it. But if people stop investing funds now in fossil fuels, they may at least limit their losses.” The BBC explains that despite the growing movement for divesting from shares in fossil fuel firms in recent times, the sector still accounts for 12% in the UK and 6% of global stock markets.
Hence, other publications centred on a green energy angle, with the Times leading with: “Green energy predicted to wipe trillions from global economy”, and the Independent leading with “Green technology to burst ‘carbon bubble’ in catastrophe for fossil-fuel economies, new research predicts”. The Times writes that: “British economy could profit overall from the collapse because of its growing offshore wind and electric car industries”. Canada and the US would be the most consequential losers.
The study’s lead author explained to the Times: “When people realise that maybe their investments are not secure and they decide to put their money away this can lead to crowd effects and [share prices] could change value very quickly… That’s why it is better to deflate the carbon bubble early to have a clean transition.” The researchers discovered that the share of power generation from renewable sources was increasing at a pace of 8% per year, while the share of hybrid and electric vehicle models was growing by upwards of 10% per year.
Is there an answer? Well, Mat Lawrence, Common Wealth’s director, argues that we can’t tackle the climate emergency using markets alone —instead, financial markets must be “actively reshaped by the public sector, with a more ambitious program of public investment anchoring a Green New Deal”.
Unfortunately, our current leaders are unlikely to take the radical steps needed to address the climate emergency. However, the green finance strategy shirting to renewables sooner would not only protect our environment, but also help establish London as the pre-eminent international centre for green finance, and perhaps offer some protection from the carbon bubble. The solutions will be explored in my next article.