Finance:Carbon bubble

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Short description: Hypothesized economic bubble involving fossil-fuel energy producers
Carbon Bubble according to data by the Carbon Tracker Initiative (2013)

The carbon bubble is a hypothesized bubble in the valuation of companies dependent on fossil-fuel-based energy production, resulting from future decreases in value of fossil fuel reserves as they become unusable in order to meet carbon budgets and recognition of negative externalities of carbon fuels which are not yet taken into account in a company's stock market valuation.[1][2]

While most campaigns to reduce the investment, production, and use of fossil fuels has been based on ethical reasons,[3] financial analysts, economists, and financial institutions have increasingly argued in favor of doing so for financial reasons.[4][5][6][7] Thus, properly pricing fossil fuels based on the carbon bubble theory would mean renewable energy would be significantly more attractive to invest in, and therefore speed up the transition towards sustainable energy.[8]

Many investors throughout the world are raising capital for fossil fuel exploration. However, as the current reserves already exceed the carbon budget these new reserves are unlikely to be exploited, meaning the value of those investments will suffer serious decreases.[9][10] However, investors are currently encouraged by quarterly result cycles and current accounting standards to ignore these long-term issues in favor of higher short-term gains.[9] The biggest problem for governments and investors is re-balancing the value of these investments with as little damage to the economy or market as possible.[9] An estimate made by Kepler Cheuvreux puts the loss in value of the fossil fuel companies due to the impact of the growing renewables industry at US$28 trillion over the next two decades.[11][12] A more recent analysis made by Citi puts that figure at $100 trillion.[13][14]

Etymology

The term "carbon bubble" arose in the early 21st century from the increasing awareness of the impact of fossil fuel combustion on global temperatures. "Carbon" refers to the hydrocarbon contained in fossil fuels, while "bubble" refers to economic bubbles, situations where the prices of asset are much higher than the intrinsic value. The term was coined by the Carbon Tracker Initiative which published key reports in July 2011 and April 2013.[15][16] and it was further popularised in the New Scientist magazine in October 2011.[17] A widely shared article by Bill McKibben was published in Rolling Stone magazine in July 2012, bringing the idea to the attention of a popular audience.[18] These were followed later in 2013 by a report from the Demos think tank.[19]

Value of fossil-fuel reserves

Carbon budgets are upper limits on the amount of carbon dioxide emissions that can be released without increasing the global average temperature past a certain point. In 2011, the Carbon Tracker Initiative calculated that at that point the world could only burn 20% of its carbon-based fuel reserves if it wished to stay below a 2°C increase that has been agreed upon by the UNFCCC members.[20] This meant that the remaining 80% could not be burned, and so what governments and investors were treating as low-risk assets were actually very likely to become stranded assets.[20] This could have serious economic implications, as the London Stock Exchange, Sao Paolo Stock Exchange, and Moscow Exchange (among others) had an estimated 20-30% of their market capitalization connected to fossil fuels.[20] In the case of London, for example, the fossil fuel reserves listed in the exchange were ten times its carbon budget from 2011 to 2050. As those assets become "unburnable" and therefore lose most of their value (or became liabilities), this will put the strength of the British economy at stake.[20] This is because the viability of these businesses depends on their ability to extract and sell carbon, rather than past emission-generating operations.[20]

A newer analysis has found, global emissions from fossil fuel reserves would exceed carbon budget by more than seven times.[10] Additionally, companies are continuing to gather more reserves as well as explore unproven reserves, meaning that there is an even larger hidden amount of reserves hidden within capital markets, further increasing the size of the carbon bubble.[20]

Currently, reduction of a company's reserves is seen negatively by investors, even when it is the correct thing in the long-term interests of the company. For example, when Shell reduced its reserves by 20% in January 2004, its share price dropped by 10% in a week.[20]

Author Bill McKibben has estimated that to sustain human life in the world, up to US$20 trillion worth of fossil fuel reserves will need to remain in the ground.[21] In 2021, an analysis has found 90% of coal and 60% of oil and gas reserves could not be extracted if there was to be even a 50% chance of keeping global heating below 1.5C.[22] The Stern report in 2006 stated that the benefits of strong, early action to decrease the use of oil, coal and gas considerably outweigh the costs. Fossil fuel contributors, the building industry, and land use practices ignore the responsibility of the external costs and ignore the polluter pays principle according to which climate change costs will be paid by historical climate polluters.[23]

In 2015, Mark Carney, the Governor of the Bank of England, in his lecture to Lloyd's of London, warned that limiting global warming to 2°C appears to require that the "vast majority" of fossil fuel reserves be "stranded assets", or "literally unburnable without expensive carbon-capture technology", resulting in "potentially huge" exposure to investors in that sector.[7][24]

Prospects for orderly bubble deflation

Inflatable carbon bubble asking the Swiss National Bank to divest from fossil fuels (2019).

A planned and orderly transition away from dependence on fossil fuels could prevent a disruptive "bursting of the carbon bubble". A number of developments are supporting such a transition.

Government action on climate change

A detailed academic study of the consequences for the producers of the various hydrocarbon fuels concluded in early 2015 that a third of global oil reserves, half of gas reserves and over 80% of current coal reserves should remain underground from 2010 to 2050 in order to meet the target of no more than a 2 °C rise in average global temperature. Hence continued exploration or development of reserves would be extraneous to needs. To meet the 2 °C target, strong measures would be needed to suppress demand, such as a substantial carbon tax leaving a lower price for the producers from a smaller market. The impact on producers would vary widely depending on the cost of production in their areas of operation. For example, the impact in Canada would be far larger than in the United States. Open-pit mining of bituminous sands in Canada would soon drop to negligible levels after 2020 in all scenarios considered because it is considerably less economic than other methods of production.[25][26][27][28][29]

In mid-2015, the Centre for Science and Policy, University of Cambridge published a report assessing the risks from climate change in order to estimate the amount of resources that should be allocated to address them. The report notes that "standard economic estimates of the global costs of climate change are wildly sensitive both to assumptions about the science, and to judgments about the value of human life. They are also likely to be systematically biased towards underestimation of risk, as they tend to omit a wide range of impacts that are difficult to quantify".[30]

Awareness in the financial industry

By 2013, there was significant awareness in the financial industry of the risks associated with exposure to companies involved in extraction of fossil fuels.[31] In early 2014, the FTSE Group, BlackRock and the Natural Resources Defense Council collaborated in the creation of a stock market index series that excludes companies linked to exploration, ownership or extraction of carbon-based fossil fuel reserves. These indices are intended to make it easier for investors to steer their investments away from such companies.[32][33] It has been proposed that companies be required by law to report on their greenhouse gas emissions and assess the risk this could pose to their future financial performance. According to Christiana Figueres, UNFCCC, companies have a duty to shareholders to move to a low-carbon economy, because of the effects of the carbon bubble.[5]

Divestment campaigning

The ongoing fossil fuel divestment campaign in universities, churches[34][35] and pension funds[36] contributes to divestiture from fossil fuel companies.[37][38][39] By late 2015, this divestiture was reported to reach $2.6 trillion,[40][41] by September 2019, total divestment commitments had grown to an approximate value of $11.48 trillion.[42]

In September 2019, when the University of California announced, it will divest its $83 billion in endowment and pension funds from the fossil fuel industry, UC officials said, they made it for financial reasons: "We believe hanging on to fossil fuel assets is a financial risk."[43][44]

Jeff Rubin suggested Canada should invest into hydraulic energy and agriculture rather than its oil sands as a way to avoid the effects of the bubble.[45]

Cheaper clean energy

The price of renewable energy is continually dropping.[46][47] As of 2014 new wind power is cheaper than new coal and gas power in Australia,[33] China[48] and the United States.[49] Also the electricity produced from a photovoltaic roof system is cheaper than the electricity from the grid in many countries and places in the world.[50]

Real pollution control

Fossil fuels are known for their huge negative externalities or hidden costs.[51] Tackling this market failure will make alternative energies more competitive and will reduce the consumption of fossil fuels.[52]

Cancellation of government energy subsidies

According to the International Monetary Fund, governments around the world gave $523 billion direct subsidies for fossil fuels in 2011.[53] If a carbon tax of $25 per ton of CO
2 is included the subsidies total $1.9 trillion only for 2011.[54] Removing fossil fuels subsidies will further reduce their consumption and make the alternative energies even more competitive.

Renewable corporations lobbying

As the penetration of the renewable energy increases so will the wealth of the renewable energy corporations. This and the increasing number of employees in the renewable energy sector will inevitably transform into political lobbying against fossil fuels.[55]

Urbanization and Electric transportation

Urbanization combined with increasing availability of convenient, safe and efficient public transport, green buildings and efficient energy distribution, as well as extended product life/use/re-use, increased local recycling and self-sustainability in raw materials drive down energy consumption. Perversely, ready access to travel and luxury, more batteries (energy storage and conversion losses) and proliferation of low cost LED technology, e.g. for advertising and decorative uses, may negate some of the potential energy savings. Switching to renewables sourced, electricity based transportation will reduce the demand for fossil fuels, particularly petroleum.[46][56] Combining roof photovoltaics with second hand EV batteries will further reduce the dependence on fossil fuels as they will provide the needed grid storage for the times when the intermittent renewable energy sources are not producing electricity.[57]

Innovation and Efficiency

Innovations in, for example, information technology, miniaturisation, LEDs, virtual reality, 3D printing, new materials and biotechnology enable energy reduction in the areas of human sustenance and travel, as well as physical product creation and distribution. They also offer new avenues for economic growth and technological leadership, and are thus especially important for sustained wealth creation in the most developed, net-energy importing nations. Energy consumption may be expected to decrease as the service sector of the economy continues to grow whilst heavy industry, construction, manufacturing and agricultural sectors reduce. Increased investments in energy efficiency may lead to less consumed energy[58] even when the economy grows.[59] Without growth in energy usage the prices of fossil fuels will decrease and most of the mega energy projects may be uneconomical.

Demographics and Changes in consumer behavior

A shrinking and ageing, already materially prosperous, satisfied and individualistic society may be less motivated towards additional, energy consuming material goods and new construction.[original research?] On the other hand, longer life expectancy and increasing leisure and travel time will increase total energy use over an individual's lifetime.[original research?] According to research by U.S. PIRG Education Fund reported in late 2014: "Over the last decade – after 60-plus years of steady increases – the number of miles driven by the average American has been falling. Young Americans have experienced the greatest changes: driving less; taking public transport, biking and walking more; and seeking out places to live in cities and walkable communities where driving is an option, not a necessity."[60] Data from the U.S. Energy Information Administration show that U.S. consumption of both coal and petroleum liquids peaked in 2005, and at the end of 2014 had fallen by 21% and 13% respectively. Consumption of natural gas continued to climb, resulting in the rate of total fossil fuel consumption in terms of energy units falling only 6% from its peak in 2007 to a plateau. On the other hand, global consumption of petroleum climbed steadily a total of 32% from 1995 to 2014.[61]

See also

References

  1. ↑ Harvey, Fiona (6 March 2014). "'Carbon bubble' poses serious threat to UK economy, MPs warn". The Guardian. https://www.theguardian.com/environment/2014/mar/06/carbon-bubble-threat-uk-economy-fossil-fuels-mps. 
  2. ↑ Rubin, Jeff (12 May 2015). The Carbon Bubble. Penguin Random House. ISBN 978-0345814715. http://www.penguinrandomhouse.com/books/240901/the-carbon-bubble-by-jeff-rubin/. Retrieved 9 October 2015. 
  3. ↑ Barack Obama (6 November 2015). Statement by the President on the Keystone XL Pipeline (Speech). whitehouse.gov. Archived from the original on 15 September 2021. Retrieved 10 November 2015 – via National Archives.
  4. ↑ Ritchie, Justin; Dowlatabadi, Hadi (2015). "Divest from the Carbon Bubble? Reviewing the Implications and Limitations of Fossil Fuel Divestment for Institutional Investors". Review of Economics & Finance 5: 59–80. https://econpapers.repec.org/article/bapjournl/150205.htm. 
  5. ↑ 5.0 5.1 Harvey, Fiona (6 March 2014). "'Carbon bubble' poses serious threat to UK economy, MPs warn". The Guardian. https://www.theguardian.com/environment/2014/mar/06/carbon-bubble-threat-uk-economy-fossil-fuels-mps. 
  6. ↑ The impact of climate change on the UK insurance sector (Report). Bank of England. September 2015. http://www.bankofengland.co.uk/pra/Documents/supervision/activities/pradefra0915.pdf. Retrieved 9 November 2015. 
  7. ↑ 7.0 7.1 Carrington, Damian (2019-10-13). "Firms ignoring climate crisis will go bankrupt, says Mark Carney" (in en-GB). The Guardian. ISSN 0261-3077. https://www.theguardian.com/environment/2019/oct/13/firms-ignoring-climate-crisis-bankrupt-mark-carney-bank-england-governor. 
  8. ↑ "Unburnable Carbon – Are the world's financial markets carrying a carbon bubble?". Archived from the original on 18 August 2013. https://web.archive.org/web/20130818040622/http://www.carbontracker.org/carbonbubble. 
  9. ↑ 9.0 9.1 9.2 "Unburnable Carbon – Are the world's financial markets carrying a carbon bubble?". Archived from the original on 18 August 2013. https://web.archive.org/web/20130818040622/http://www.carbontracker.org/carbonbubble. 
  10. ↑ 10.0 10.1 Milman, Oliver (2022-09-19). "Burning world's fossil fuel reserves could emit 3.5tn tons of greenhouse gas" (in en). https://www.theguardian.com/environment/2022/sep/19/world-fossil-fuel-reserve-greenhouse-gas-emissions. 
  11. ↑ Giles Parkinson (28 April 2014). "Fossil fuels face $30 trillion losses from climate, renewables". Renew Economy. http://reneweconomy.com.au/2014/28-trillion-11465. 
  12. ↑ Lewis, Mark C. (24 April 2014). "Stranded assets, fossilised revenues". Kepler Cheuvreux. https://www.keplercheuvreux.com/pdf/research/EG_EG_253208.pdf. 
  13. ↑ Citigroup sees $100 trillion of stranded assets if Paris succeeds, RenewEconomy, 25 August 2015
  14. ↑ "Energy Darwinism II". Citi GPS. 14 August 2015. https://ir.citi.com/E8%2B83ZXr1vd%2Fqyim0DizLrUxw2FvuAQ2jOlmkGzr4ffw4YJCK8s0q2W58AkV%2FypGoKD74zHfji8%3D. 
  15. ↑ "Unburnable Carbon – Are the world's financial markets carrying a carbon bubble?". Archived from the original on 18 August 2013. https://web.archive.org/web/20130818040622/http://www.carbontracker.org/carbonbubble. 
  16. ↑ "Unburnable carbon 2013: Wasted capital and stranded assets". Archived from the original on 30 July 2013. https://web.archive.org/web/20130730162257/http://www.carbontracker.org/wastedcapital. 
  17. ↑ "Carbon Bubble Could Threaten Markets". New Scientist. 11 October 2011. https://www.newscientist.com/article/dn21031-carbon-bubble-could-threaten-markets-maybe/. 
  18. ↑ "Global Warming's Terrifying New Math". Rolling Stone. 11 October 2011. https://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719. 
  19. ↑ McElwee, Sean; Daly, Lew (23 December 2013). Beware of the Carbon Bubble (Report). Demos. http://www.demos.org/news/beware-carbon-bubble. Retrieved 6 November 2015. 
  20. ↑ 20.0 20.1 20.2 20.3 20.4 20.5 20.6 "Unburnable Carbon – Are the world's financial markets carrying a carbon bubble?". Archived from the original on 18 August 2013. https://web.archive.org/web/20130818040622/http://www.carbontracker.org/carbonbubble. 
  21. ↑ Bill McKibben (7 February 2012). "Why the Energy-Industrial Elite Has It In for the Planet". TomDispatch. http://www.tomdispatch.com/archive/175499/. 
  22. ↑ Carrington, Damian (2021-09-08). "How much of the world's oil needs to stay in the ground?" (in en). https://www.theguardian.com/environment/2021/sep/08/climate-crisis-fossil-fuels-ground. 
  23. ↑ Stern, Nicholas (2006). "Stern Review final report". https://webarchive.nationalarchives.gov.uk/ukgwa/20100407172811/http://www.hm-treasury.gov.uk/stern_review_report.htm. 
  24. ↑ Mark Carney (29 September 2015). Breaking the tragedy of the horizon - climate change and financial stability (Report). Bank of England. http://www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx. Retrieved 9 November 2015. 
  25. ↑ Dyer, Evan (7 January 2015). "Climate change study says most of Canada's oil reserves should be left underground". Canadian Broadcasting Corporation. http://www.cbc.ca/news/politics/climate-change-study-says-most-of-canada-s-oil-reserves-should-be-left-underground-1.2893013. 
  26. ↑ Jacob, Michael; Hilaire, Jérȏme (January 2015). "Unburnable fossil-fuel reserves". Nature (Macmillan Publishers) 517 (7533): 150–2. doi:10.1038/517150a. PMID 25567276. Bibcode: 2015Natur.517..150J. 
  27. ↑ McGlade, Christophe; Ekins, Paul (January 2015). "The geographical distribution of fossil fuels unused when limiting global warming to 2°C". Nature (Macmillan Publishers) 517 (7533): 187–90. doi:10.1038/nature14016. PMID 25567285. Bibcode: 2015Natur.517..187M. http://discovery.ucl.ac.uk/1473878/7/McGladeNatureCM5.pdf. Retrieved 1 September 2019. 
  28. ↑ Revkin, Andrew C. (2 May 2013). "On 'Unburnable Carbon' and the Specter of a 'Carbon Bubble'". The New York Times. http://dotearth.blogs.nytimes.com/2013/05/03/on-unburnable-carbon-and-the-specter-of-a-carbon-bubble/. 
  29. ↑ Megan, Scott (18 September 2014). "New York: where the carbon bubble threat goes mainstream?". RTCC. http://www.rtcc.org/2014/09/18/new-york-where-the-carbon-bubble-threat-goes-mainstream/. 
  30. ↑ King, David; Schrag, Daniel; Dadi, Zhou; Ye, Qi; Ghosh, Arunabha (13 July 2015). Climate Change: A Risk Assessment (Report). The Centre for Science and Policy, University of Cambridge. doi:10.1038/517150a. http://www.csap.cam.ac.uk/projects/climate-change-risk-assessment/. Retrieved 10 November 2015. 
  31. ↑ Randall, Tom (18 November 2013). "Oil's Future Draws Blood and Gore in Investment Portfolios". Bloomberg. https://www.bloomberg.com/news/2013-11-18/oil-s-future-draws-blood-and-gore-in-investment-portfolios.html. 
  32. ↑ Mike Scott (1 May 2014). "Fossil Fuel-Free Index Will Help Investors Manage Climate Risks". Forbes. https://www.forbes.com/sites/mikescott/2014/05/01/fossil-fuel-free-index-will-help-investors-manage-climate-risks/. 
  33. ↑ 33.0 33.1 Paton, James (7 February 2013). "Australian Wind Energy Now Cheaper Than Coal, Gas, BNEF Says". Bloomberg. https://www.bloomberg.com/news/2013-02-06/australia-wind-energy-cheaper-than-coal-natural-gas-bnef-says.html. 
  34. ↑ Church Dropping Fossil Fuel Investments , The New York Times, 3 July 2013.
  35. ↑ World Council of Churches Endorses Fossil Fuel Divestment , 350.org, 11 July 2014
  36. ↑ Oral Evidence Taken before the Environmental Audit Committee , House of Commons Environmental Audit Committee, 26 June 2013
  37. ↑ Preventing a carbon bubble crash , ABS, 13 May 2013
  38. ↑ The Economic Case for Divesting from Fossil Fuels , Renewable Energy World, 15 May 2013
  39. ↑ Fossil-free investment portfolios soared 50% in 2013 , Responding to Climate Change (RTCC), 15 May 2014
  40. ↑ Martin, Chris (22 September 2015). "Fossil-Fuel Divestment Movement Exceeds $2.6 Trillion". Bloomberg News (Bloomberg L.P.). https://www.bloomberg.com/news/articles/2015-09-22/fossil-fuel-divestment-movement-exceeds-2-6-trillion. 
  41. ↑ "Profitability: Deflating the carbon bubble" (in en). https://www.boell.de/en/2015/11/09/profitability-deflating-carbon-bubble. 
  42. ↑ "Divestment Commitments" (in en-US). https://gofossilfree.org/divestment/commitments/. 
  43. ↑ Mello, Felicia (2019-09-18). "Citing 'financial risk,' UC pledges to divest from fossil fuels" (in en-US). https://calmatters.org/education/higher-education/2019/09/uc-divests-fossil-fuels-citing-finance-renewable-energy-climate-change/. 
  44. ↑ Sherman, Richard; Singh Bachher, Jagdeep (2019-09-17). "Opinion: UC investments are going fossil free. But not exactly for the reasons you may think" (in en-US). https://www.latimes.com/opinion/story/2019-09-16/divestment-fossil-fuel-university-of-california-climate-change. 
  45. ↑ ALTER, LLOYD (2015). "When the carbon bubble bursts". Corporate Knights 14 (4): 23. ISSN 1703-2016. https://www.jstor.org/stable/44149896. 
  46. ↑ 46.0 46.1 Sussams, Luke; Leaton, James; Drew, Tom (21 October 2015). Lost in Transition: How the energy sector is missing potential demand destruction (Report). Carbon Tracker. http://www.carbontracker.org/report/lost_in_transition/. Retrieved 6 November 2015. 
  47. ↑ Ambrose, Jillian (2019-10-14). "Rise of renewables may see off oil firms decades earlier than they think" (in en-GB). The Guardian. ISSN 0261-3077. https://www.theguardian.com/environment/2019/oct/14/rise-renewables-oil-firms-decades-earlier-think. 
  48. ↑ Parkinson, Giles (21 May 2014). "Solar grid parity – why Australia leads the world". Reneweconomy. http://reneweconomy.com.au/2014/solar-grid-parity-why-australia-leads-the-world-80853. 
  49. ↑ Chen, Allan (18 August 2014). "New Study Finds Price of Wind Energy in US at an All-Time Low; Competitiveness of Wind Has Improved". Lawrence Berkeley National Laboratory. http://newscenter.lbl.gov/2014/08/18/new-study-finds-price-of-wind-energy-in-us-at-an-all-time-low-competitiveness-of-wind-has-improved/. 
  50. ↑ German PV drops to 15 cents max , Renewables International, 2 May 2013
  51. ↑ Malone, Scott (16 February 2011). "Coal's hidden costs top $345 billion in U.S.: study". Reuters. https://www.reuters.com/article/us-usa-coal-study-idUSTRE71F4X820110216. 
  52. ↑ Wong, Edward (21 March 2013). "As Pollution Worsens in China, Solutions Succumb to Infighting". The New York Times. https://www.nytimes.com/2013/03/22/world/asia/as-chinas-environmental-woes-worsen-infighting-emerges-as-biggest-obstacle.html?pagewanted=all&_r=0. 
  53. ↑ EWEA Blog: Global fossil fuel subsidies amount to $1.9 trillion – IMF , EWEA, 5 April 2013
  54. ↑ IMF Calls for Global Reform of Energy Subsidies: Sees Major Gains for Economic Growth and the Environment , IMF, 27 March 2013
  55. ↑ Poole, Lauren (9 May 2013). "Beyond the PTC – Wind Energy's Future". Renewable Energy World. http://www.renewableenergyworld.com/rea/news/article/2013/05/beyond-the-ptc-wind-energys-future. 
  56. ↑ "Peak Oil" Less A Concern As Alternatives Reduce Demand , Cleantechnica, 23 July 2013
  57. ↑ GM, ABB Demonstrate Chevrolet Volt Battery Reuse Unit , General Motors, 11 November 2012
  58. ↑ Energy Intensity: The Secret Revolution , Forbes, 18 July 2014
  59. ↑ "Energy is gradually decoupling from economic growth | FT Alphaville". 17 January 2014. http://ftalphaville.ft.com/2014/01/17/1745542/energy-is-gradually-decoupling-from-economic-growth/. 
  60. ↑ MILLENNIALS IN MOTION , U.S. PIRG Education Fund, 14 October 2014
  61. ↑ Monthly Energy Review— October 2015 (Report). U.S. Energy Information Administration. 27 October 2015. http://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf. Retrieved 9 November 2015. 



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