"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.”