Are the World’s Financial Markets Carrying a Carbon Bubble?

There is an alternative to the choice between ecological disaster and economic destruction. But we need efforts that go beyond Corporate social responsibility, an unprecedented commitment and shared sacrifice


by John Fullerton

A $20 trillion “externality” presents civilization with a big choice: economic destruction or ecological destruction, both with chilling global security implications. It’s a big challenge, but one we can solve.

The Carbon Tracker Initiative recently released an illuminating report, Un-burnable carbon – are the world’s financial markets carrying a carbon bubble? It addresses the role that the value of corporate managed oil, gas, and coal reserves will play on the climate crisis and visa versa.

What the report does not make explicit is the apparent big choice: either we must absorb a $20tn write-off into our already stressed global economy over the next decade, or we will implicitly accept civilization-transforming climate change.

The report details three salient facts: in order to reduce the risk of exceeding two degrees Celsius warming to a 20% chance, our carbon-burning budget for the next 40 years is 565 GtC02. Total proved fossil fuel reserves are estimated at 2795 GtC02, nearly five times the remaining budget, implying 80% of these reserves should be left in the ground. Seventy-four percent of these reserves are state owned, while 26% is owned by the 100 largest listed coal companies and 100 largest listed oil and gas companies.

From the market value of the public companies, we can extrapolate the total estimated market value of these reserves to be $27tn.

A cap on carbon emissions designed to limit warming to two degrees will mean sovereign states and public corporations must strand 80% of their $27tn of proved reserves and related assets, a loss exceeding $20tn.

If we incur a write-off of this magnitude, the risk that our fragile and interconnected global economy would collapse is high.

[JR:  I disagree with this particular conclusion, see below.]

Fossil fuel intensive economies and investors would be severely damaged, triggering a deep and prolonged recession. Some nations, like Saudi Arabia where energy represents 75% of government revenues, and Venezuela (50% of government revenues), would face economic devastation leading to widespread social unrest.

The markets are ignoring this risk today, as the Carbon Tracker report makes clear. They have been given no reason to do otherwise — the US House of Representatives recently defeated a resolution which simply said “climate change is occurring, is caused largely by human activities, and poses significant risks for public health and welfare.” It is no wonder that American Electric Power announced that it is shelving plans for the nation’s most prominent coal-plant-directed carbon sequestration initiative until economic and policy conditions create a viable path forward.

Rising fossil fuel stock prices indicate that the markets assume we will blow past the 2 degree warming limit without blinking, while scientists estimate that three billion people will lose access to fresh water at four degrees warming. Were private and government investment in sequestration technologies of a scale that mattered and tangible signs of revolutionary progress in those technologies evident, one could conclude the market is not predicting ecological destruction.

However, neither is the case, and in fact the promise of carbon sequestration technology fix is diminishing as reality sets in.

There is an alternative to the big choice between ecological destruction and economic destruction, but it is not simply hopeful corporate social responsibility programs and growing the green economy. A viable plan will entail real costs, unprecedented commitment, and shared sacrifice.

Many economic models seek to estimate the cost of climate change mitigation, often concluding the costs are trivial in comparison to the costs of inaction. If such models focus on aggressively limiting carbon to 350 parts per million as the science now demands without presuming carbon sequestration will solve the stranded asset problem entirely, the predictable costs get quite scary.

The portion of the $20tn cost potential that will be written off depends upon unknowable developments in carbon sequestration technology. Prudence suggests that we should plan on incurring at least half of this potential loss, and get serious about developing and implementing policies to limit carbon pollution. The choice of burning Russian sovereign coal or Exxon shareholder oil presents complex political, financial, social, and security challenges.

Mitigating the unpleasant consequences boils down to a macro capital allocation decision. We must of course invest aggressively in clean technologies of all kinds. At the same time, we must accelerate and scale up the tremendous potential of low technology paths — like avoided deforestation and grassland restoration — to sequester carbon.

We must also, though, remove subsides and divest from our destructive fossil fuel based energy, transportation, and industrial agriculture systems, and from the destabilizing and counterproductive speculation of the Wall Street financial system. We must choose to scale back our Cold War military infrastructure and wasteful government “bridges to nowhere”. The energy system transition demands a truly unprecedented, focused commitment of private and public investment resources and public policy that supports it.

It’s time for true leadership from the richest half billion people whose consumption and investment decisions will determine the fate of civilization. It’s time we awaken to the burden we bear.

— John Fullerton is founder and president of the Capital Institute

JR:  I don’t see the write-off causing economic collapse for three reasons.  First, the companies and countries with those reserves won’t have to zero them all out overnight.  Second, there may be some compensation.  Third, the 2-degree target will require more than $40 trillion in investment by 2050, a great spur to the global economy.

Finally, I agree we are in a carbon bubble, but the stranding of fossil fuel investment is inevitable — and so is economic collapse if we do not take swift action (see “Is the global economy a Ponzi scheme?).  It is delay that is economically untenable, as the International Energy Agency explained earlier this month:

“On planned policies, rising fossil energy use will lead to irreversible and potentially catastrophic climate change.”“… we are on an even more dangerous track to an increase of 6°C [11°F]….  Delaying action is a false economy: for every $1 of investment in cleaner technology that is avoided in the power sector before 2020, an additional $4.30 would need to be spent after 2020 to compensate for the increased emissions.”

29 Responses to Are the World’s Financial Markets Carrying a Carbon Bubble?

  1. Roger says:

    This is, in my opinion, a straw-man argument. It presumes that the governments and the corporations have all predicated their future survival on monetizing the un-mined carbon. It also assumes that the market value of the corporations has been carefully set baseed on the future value of the un-mined carbon they control.

    We know that the markets are fickle, and are at best the murkiest of crystal balls when it comes to anticipating the future value of a corporation’s assets.

    Even if one buys into the argument that has been made here, the corporate value at risk (using the author’s numbers) is 24% of $20Tn, or $4.8Tn. A big number, but not world-economy-shattering — no more than the real estate market collapse here in te U.S.

  2. Mike Roddy says:

    This is a false choice: spend $20 trillion, or take our chances with climate change. As for the sequestration “fix”, that has always been a fantasy.

    Joe’s point is correct, too- economic activity will shift and be displaced, not necessarily be truncated. People used to say that we couldn’t afford to cut our defense budget because the economy would suffer- but when we actually did it,under Clinton, the opposite occurred.

    The Stern Report holds up well: it put the cost of mitigation at 2% of global GNP, compared to a 20% cost (if memory serves) of doing nothing. The economic justification for getting off fossil fuels is almost as strong as the survival element.

  3. Matter says:

    I don’t understand the logic for claiming a $20 trillion loss through ‘stranded assets’!

    Solar electricity potential is equivalent to $trillions/day. Is our failure to use that a cost of $trillions/day?

    The way I see it, the only way you can compare is through loss of assets ALREADY INVESTED to develop these resources: idle oil rigs for example. I’d be surprised if we’ve already bought all of the equipment to dig up every ton of coal and oil.

    Oh, and opportunity costs of course. If solar does become cheaper than coal, then choosing to dig up the coal rather than use the solar is actually a net cost on society.

    I don’t see how the $20 trillion figure makes sense in the ‘real’ economy, but I do see that markets are expecting governments to fail or CCS to work…

  4. Matter says:

    I add that my economics is not very strong. I’m not aggressively arguing my point, just thinking through so people can point out flaws.

  5. Raul M. says:

    helping people to see that sustainability was chosen for the word to describe a change to renewable energy use happened for reasons to do with what it is rather than what we might like it to be.
    If the energy companies can see weather plays a part in their economics plans then maybe things will work out better for them.

  6. dick smith says:

    Will getting off carbon really require “sacrifice”, or will the jobs and investment process of transitioning to alternatives create economic growth to say, 2050 (just not quite as much as might have occurred without the transition)?

    Aren’t the arguments that “it costs too much” or “it requires too much sacrifice” to transition off carbon part of standard fossil-fuel industry’s propaganda?

  7. Jeff Huggins says:

    I doubt — very much — that this sort of analysis is the best way (or even an accurate one) to understand the matter, and it’s certainly not the best way to help us understand what should be done, that is, the best ways to get from where we are today, to where we need to be.

    I’m not disagreeing, of course, with the need for urgency, the immensity of the issue, or other such things. Many, or at least some, of those sorts of conclusions in the post, I’d agree with.

    But there are too many ways to misunderstand matters, and indeed fool ourselves, when we try to look at things like this in conventional economic terms. Far too many embedded assumptions, incorrect or incomplete paradigms, blind spots, and so forth. And those block us from seeing the sorts of things that we could, and should, do.

    The best way to look at the problem, I think, is to begin at the deep roots with an understanding of what people need (food, shelter, clothes, health, friends, meaning, and etc.), what work IS, the task in front of us (including the work that needs to get done in order to transition us from where we are today, to an economy that can live and sustainably flourish within a safe and responsible carbon budget), and a couple other basics. In order to think clearly, try to eliminate (at first) the role of money, assets held and denominated in strictly financial terms, debt, and etc. To be clear, those are not entirely unreal, of course, but they are one or two or three steps removed from where the real action is, in terms of how to understand and approach the REAL problem. Put another way, we need to think in terms of “hard” things: actual people, actual needs of life, the actual work that needs to get done, and so forth. THEN, and only then, after we understand the problem in those very real terms, can we begin to figure out the best ways to solve the problem; and then figure out how to work within, or (if necessary) change, our one-step-removed economic contrivances to motivate and reward sensible actions fairly and in a way that folks can flourish.

    In my view, it might be the case that too many economists weren’t taught, or didn’t go, deeply enough — to get the deep basics. (This is NOT a comment relating to the present post or author; just a general comment regarding many, though not all, economists.) Some of them don’t actually seem to understand the differences between the REAL things and the things, concepts, contrivances, and so forth that we use (far from perfectly) to represent, finance, and allocate those real things.

    As a simple example: Suppose I owe you one hundred thousand dollars. Suppose that the two of us face an actual life-threatening challenge together: If we don’t cooperate to meet the challenge, we’re both done-for, so to speak. Suppose also that all it takes in order for us to meet the challenge is for me to do a lot of work, and for you to do some work and shift the way you do it. This is no problem, because (suppose also) that I’m available to do work. And there is enough food, thanks to other people, and other necessities. In sum: we face a big challenge; a great deal of work needs to get done in order to meet it; the people-labor exists, and would be available, in order to do the work; and so forth. But suppose that the one thing “blocking” this is the fact that I owe you one hundred thousand dollars. Suppose that this singular fact is what — all else equal — prevents you from changing your ways, prevents me from changing mine, and prevents us from actually entering a situation in which my labor is matched up to the task at hand, that is, to doing what needs to be done in order for us both to make it out alive.

    This little illustration isn’t meant to suggest anything specific. Instead, it’s meant to illustrate, imperfectly, how we must understand the nature of the problem and not let changeable things, or even contrived things, get in the way of solving immense on-coming problems. For example, among the many possible outcomes of the situation I just described, are these: One is that we don’t “get it”, we don’t do the necessary work to address the challenge, and the challenge puts an end to us. In that case, we’ll both be in our graves, and the only difference will be that you’ll be holding a rather useless “I owe you” note, from me, for a hundred thousand dollars, six feet beneath the ground. In contrast, another possible outcome is this: We “get it”, we change our arrangements so that I’m able and motivated to do the work that needs doing, and you’re able and motivated to shift the way you do work, and the work gets done, and the challenge is thus addressed, and nobody ends up six feet under.

    This is, of course, a very simplistic example, and by no means does it illustrate many of the ways in which our conventional economic thinking can (unnecessarily) get in the way of real possible solutions.

    Be Well,


  8. What about the climate damage “externality”?

    Or the untapped profits from clean energy?

    Sure there will be huge losers, just like with any financial bubble. But there will be huge winners that bet right on the multi-trillion dollar replacement industries.

    Computers and the internet destroyed massive amounts of traditional industries profits and jobs. They also created fabulous wealth and opportunities to more than replace it.

    If you invested big in real estate in the years before the housing bubble popped you lost big. Same will be true for people with dollars invested that require fossil fuel growth long term.

    This is just what IEA said recently: if you build more fossil fuel infrastructure you are going to have to strand it.

    Buyer beware.

  9. The thing about a bubble as it hyper-inflates towards the end is that the short-term profits are huge. Until they aren’t.

    Like moths to a flame, people pig pile onto the “too good to be true” gravy train. Let’s call it “irrational exuberance”.

    Right now Big Carbon stocks are booming, just like Dot Bombs and Credit Default Swaps.

    Oddly, Exxon seems to understand the coming bubble. They’ve been plowing billions of their cash into buying back shares rather than pouring it into long-term oil bets. They are reducing the percentage of profit and income they are putting into exploration and have been steadily for years now. They are heading for the cash out exit from the carbon marketplace.

  10. Leif says:

    … “every $1 of investment in cleaner technology that is avoided in the power sector before 2020, an additional $4.30 would need to be spent after 2020…” To carry this one step further, my $25,000 investment this last summer in Solar PV will have a $100,000+ value to society by 2020. I defy you to match that on Wall Street. (Unless an inside trader.) In addition ~80% of my original investment will be payed back to my personal coffers that I get to spend on the other segment of society. Real value in early Green investment IMO.

  11. “Some nations, like Saudi Arabia where energy represents 75% of government revenues, and Venezuela (50% of government revenues), would face economic devastation leading to widespread social unrest.”

    So we have to spend trillions of dollars on carbon sequestration so we can keep buying Saudi and Venezuelan oil, in order to bail out those two countries financially? We have to spend that money on carbon sequestration to guarantee that they get to pump all of their proven reserves out of the ground?

    It is like someone one hundred years ago saying that we need to keep using horses and buggies, because the economy would collapse if there were no business for the horse-raising industry.

  12. fj says:

    The Sergio Leone spaghetti western trilogy had great names:

    “Fist Full of Dollars,”

    “A Few Dollars More,” and

    “The Good, The Bad, and The Ugly.”

    Perhaps optimistically, we’re at the tail end of “A Few Dollars More” before we start mitigating accelerating climate change at wartime speed; to watch “The Good, The Bad, and The Ugly” make even more out of the crisis situation.

  13. this is a very important post–it demonstrates why the fossil fuel industry will fight so hard to avoid acknowledging climate change. their valuations rest on carbon that can’t be safely burned; the world may be able to absorb the economic damage, but clearly these companies couldn’t. and of course the biggest of these companies are actually quasi-governmental. many thanks to john fullerton for a very incisive new way of looking at things, and to joe for spreading the word.

  14. Jay Alt says:

    I see the size of investments in energy generation or conversion as a better gauge of stranded capital than reserves. Fossil fuel reserves are dumb luck, accidents of geology. What if their value declines as investors realize they won’t be used? Similar things happen all the time already. It’s part of an economy based on short-sighted Lockean thinking, as ours is. -> Nature and land have value only when we use them.

    The carbon bubble story line has great potential to influence investors and those who fret over the next financial bubble. Let’s not waste it.

  15. José M. Sousa says:

    «economic destruction or(?) ecological destruction» ?

    Well, ecological destruction has no consequence on the economy?

  16. Mulga Mumblebrain says:

    Well, Stern was bollocks, in my opinion. The cost of doing nothing will be 100% of our precious GPP, not 20%, because we will see our global economic, social and cultural systems devastated. The deliberate downplaying of the risks (which are still derided by the mendacious denialists as ‘alarmist’)has been some sort of tactic of the powers that be for some time. Perhaps their PR advisors have told them that bearing bad news is bad for the opinion polls. We saw another example here yesterday, with a Government Report declaring that without action, by 2100 18,000 people would die because of climate destabilisation. The time-frame, ludicrously extended far into the future, therefore making it absolutely irrelevant as far as most people are concerned, was stupid enough, but the preposterously low, and ridiculously precise, figure for deaths, was even more dumbfounding. Not 17,000 not 19,000, but 18,000, right on the button. The truth, that runaway climate destabilisation will produce billions of premature deaths by 2100 was denied by implication. So even the Government’s own climate bodies, headed by worthies, produces preposterous quasi-denialist sludge. It’s enough to make you cry.

  17. Mulga Mumblebrain says:

    That’s twenty trillion in the hands of the ruling 0.01% of global plutocrats. To them that is more precious than life itself, certainly than the lives of billions of untermenschen who they fear and despise, or of frogs or trees or other non-human life forms. Sure they could liquidate their positions and invest in renewables, but their egos will not allow it. They absolutely refuse to allow a scruffy bunch of green ‘watermelons’ or some unbought scientists, or a rabble of serfs blubbering about their children, to interfere with their divine right to ‘call the shots’.

  18. Mulga Mumblebrain says:

    Dick, what matters to the pluto-kleptocrats of the 0.01% is that the ‘sacrifices’ be made only by the ‘little people’, the 99.9% who they so despise. If it is a choice between twenty trillion in loot, and a few billion ‘useless eaters’ they will always choose, and have already chosen, to throw the billions into the climate inferno.

  19. Mulga Mumblebrain says:

    ‘Economics’ is generally a complete fraud, a pseudo-science on a par with phrenology. It sets out to give a veneer to a process that is rooted in the psychopathology of the economic elite, whose prime motivating forces are greed, egomania and intense misanthropy. The economics of the neo-liberal, market fundamentalist schools, (which have driven out of academia the political economics that derived from classical economics via Marx, and which placed economics inside a political and sociological context), are pure charlatanism. They set out to ‘prove’ pre-ordained conclusions,eg that you must not impede the concentration of wealth, that profits must grow, that you ‘incentivise’ the already rich by giving them more, and encourage the poor by further immiserating them. This cult is richly endowed by the parasite class to produce propaganda, which is then peddled by the Rightwing MSM. Allow one real scientist of integrity to examine their ritualistic incantations and secret languages, and the whole edifice of mambo-jambo collapse into excrement. A famous instance was that of Benoit Mandelbrot who demolished the market theories of the market absolutists, the ludicrous Efficient Markets Hypothesis (treated as divine law, not hypothesis, by the grifters) and various other canards, simply by dint of mathematical rigour. The whole rotten superstructure of neo-liberal economics was a sham, a camouflage to hide the real intent, to immiserate the very many to the benefit of the very few, in which nihilistic and destructive enterprise they have been staggeringly and destructively successful, to the detriment of all.

  20. Mulga Mumblebrain says:

    As far as the parasite elites, and the various grifters who are attached to them like remora, are concerned, the rest of humanity, the natural world and all that occurs after their death are externalities with no value.

  21. Mulga Mumblebrain says:

    Good Market! Leif-you said ‘society’, you Commo you! Don’t you remember St Margaret of Finchley declaring that ‘There is no such thing as society..’ And people thought that she was joking. They’re not laughing in England, now, as her bastard offspring destroy society with undisguised relish and absolute contempt for the victims. One-sided class war is almost as jolly a jape as pheasant shooting, don’t you know!

  22. Mulga Mumblebrain says:

    The central problem is the refusal of the 0.01% to countenance a global redistribution of wealth. While the vast bulk of humanity lives in want, no poor world regime is going to agree to leave their people in that condition to rot. The preferred model is for a tiny kleptocratic elite to rule, while pillaging the country and investing the loot in US Treasuries and Western real estate, while keeping the rabble in line with Western technical assistance. You know, the Egypt, Congo, Bahrain, Yemen, Tunisia, Mexico model.Now the greedy and misanthropic West has determined to use the issue of climate destabilisation as a mechanism to set the relative poverty of the poor world in stone, and maintain their global dominance. The Kyoto process is finished, and the West, led by the rejectionists and now joined by the EU, itself led by Poland, whose ruling Rightwing regime is infested by Vaclav Klaus-like denialists, is intent on forcing the poor world to pay the price for decades of Western emissions. Meanwhile the various ‘mechanisms’ whereby money was to be transferred to the poor world in order to aid them in the transition to low carbon pollution regimes, is, as I confidently expected, being reneged on by the rich world, led by bully-boy in chief, the ‘exceptional’ USA. This is a replay of WTO and GATT negotiations, and UN deliberations. Rampant bullying, intimidation and threats from the West, sometimes accompanied by promises, which are then abrogated later without the batting of an eyelid.

  23. Mulga Mumblebrain says:

    These corporations are not just ‘quasi-governmental’-they own the Government process. They do this through political ‘contributions’, the promise of lucrative sinecures upon retirement for co-operative politicians and total dominance of the MSM through direct ownership and the network of interlocking corporate interests. Corporatism plus state power was, if I recall correctly, Mussolini’s definition of fascism, and he was a leader enthusiastically supported and admired by Western business interests between the wars.

  24. Mulga Mumblebrain says:

    Jose, sufferers from dementia capitalistica really see the economy as a superior category to the environment. They are suffused with magical thinking based on extreme egomania, that makes them able to imagine themselves as being greater that mere ‘reality’, and capable of any feat their fevered imaginations can confect. That’s why they are techno-optimists, cornutopians or (a lower type) ‘rational optimists’-their egomania, and the fear hence hatred of the natural order, particularly death, makes them despise nature and those who would defend it against the depredations of a ‘higher type’-themselves.

  25. Leif says:

    I love you MM.

  26. Mike#22 says:

    Impeccable reasoning. (I conclude that) The need for a process to buy out the owners of stranded assets is long past. Spread out over 20 or 30 years, the cost is around 1% of the global economy. Just do it. Let’s get on with things.

  27. Mulga Mumblebrain says:

    Sorry, Leif, but I’m spoken for. You know, as Oscar Wilde said, ‘The birth of self-love is the beginning of a lifelong romance’.

  28. fj says:

    We must delve deeply into the deathly stranglehold that the fossil fuel industry has on human civilization; its deathly direct and indirect structural violence where 3300 people are killed daily in road accidents with 1.3 injured killed and 50 million are gravely injured every year and its cause of climate change casting a deathly pall far beyond this far into the future.

  29. Joe: Thanks for posting. In response to your three reasons a $20 Trillion write off should not cause economic collapse, my intent was not to make a prediction, but rather to raise our collective awareness of the economic implications of the transition ahead which I believe are misunderstood. I offer some thoughts on your three points:

    1. “Will not happen all at once”: yes but markets will discount future events very quickly if they become likely or certain due to policy changes. So the 24% of these assets held by public companies will trigger a drop in their stock prices quickly (one research report), not over time, and the social and financing challenges inside countries who are dependent upon producing these reserves will also emerge quite quickly (although I agree this will happen more slowly). But even if this all happens over 10 years, absorbing $2T per year of lost economic value for a decade is unheard of and makes the subprime crisis seem like a walk in the park. And it comes at a bad time, to say the least.
    2. “There may be some compensation” – you know more than me on this, but I find it hard to imagine who will compensate BP, Exxon, Russia, or Saudi for such losses. Their economic losses (and associated social implications) will ripple through the interconnected global economy and impact global security in ways we have not yet processed.
    3. “The $40 Trillion Investment Opportunity will provide tremendous wealth creation opportunities offsetting the losses” – fully agree, and this is my point, we need to get going as I state at the end of the piece. But the disruption of a shift this large is totally unprecedented in human civilization, and is occurring at a time when economies are all interconnected, countries in the developed world are in the least resilient condition they have been since WW II, and policy makers aren’t even focused on the issue. Replacing fossil fuel assets with “free solar energy” is a massive benefit to society, but our economy is capitalized in a way that only values what we can’t use, so the externality that threatens us will suddenly get “marked to market” in wall street speak. We need to substitute a new energy collection and transportation system for the old one, but no one will put the value of solar energy on their balance sheets to replace the stranded fossil fuel energy assets. (My $20 T estimate actually ignored all the pipeline and refining infrastructure to be more conservative, so I’ve understated the issue). But your point is more about swapping drill rigs and pipelines for solar panels and electricity grids than it is about the underlying fossil fuel reserves.

    My (quick) reading of the Stern Report regarding projected economic costs of addressing climate change omits this $20T + issue by appearing to presume Carbon Sequestration technology will work. This one critical assumption appears quite suspect today. We therefore must focus much more attention on regenerating the earth’s natural carbon sinks, which is the thinking behind our work on the grasslands with the Savory Institute (see our website).