The $20 Trillion Carbon Bubble: Interview With John Fullerton, Part One

John Fullerton, the founder and president of the Capital Institute, sees the global economy facing the possibility of a crash that would dwarf the subprime crisis and the Great Depression. He also envisions a future where the economy is based not on consumption and competition for resources but on personal well-being. An essential finding that drives his work is what he calls the “stranded asset problem.” In an interview with ThinkProgress Green about this big choice, Fullerton explains the extraordinary challenge of the $20 trillion carbon bubble.

Randy Wray has described the current state of the commodities market as the biggest speculative bubble of all time, but the carbon bubble is even greater. In order to avoid catastrophic global warming, the Carbon Tracker Initiative found, we need to keep 80 percent of known carbon reserves buried in the ground.

By Fullerton’s estimates, this unburnable carbon is valued at $20 trillion:

There’s way more carbon in the ground than there is carbon budget left. If we choose not to trash the planet, we have the get fossil-fuel companies to leave the oil and coal in the ground. Only 24 percent of proved reserves are held by public companies. If you add the reserves owned by state-owned companies — Saudi, Venezuela, Russia, China — if we’re to keep that Potsdam budget, we need to keep 80 percent of reserves in the ground. If you add up that 80 percent at current market value it’s $20 trillion. If you’re Exxon, your stock prices reflects the value of your reserves. If you’re Saudi Arabia, your entire fiscal solvency is dependent on producing those reserves.

Fullerton is a former JP Morgan executive who began his career as an oil and gas banker before rising to manage global capital markets. In 2001, he left JP Morgan and, in the shadow of the 9/11 disaster, investigated the intersection of global economic growth, global sustainability, and human welfare. The Capital Institute is part of a growing movement in alternative economics that includes think tanks like the New Economics Foundation, Demos, and the Institute for New Economic Thinking.


In a telephone interview with ThinkProgress Green, Fullerton described how alternative-economics thinking reflects the fact that the real world — governed by the laws of physics and with finite material wealth — must eventually constrain the monetary world, which has been operating under the assumption that the flow of material inputs and outputs is unbounded:

The central premise of our work is that there is a fundamental disconnect between the world of economics and finance which sees the economy largely as a monetary phenomenon and the physical aspect of the economy which is a material phenomenon. Historically, when the economy was relatively small we could convert the physical into money and let the market price inputs and outputs. It worked in a nice theoretical abstraction. Limits to growth force physical reality onto the abstraction. We’ve been thinking about it in the abstract forever. Finance is probably the most extreme example of this problem because it’s inherently an abstraction and thinks only in terms of monetary value. A business is forced to deal with physical reality. In finance it’s all numbers and values.

The cost for civilization of this financial disconnect from reality is extraordinary. When the music stops for the carbon bubble, the financial system will have to reckon with the disappearance of supposed assets ten times the scale of the subprime crisis:

If we’re serious about not trashing the planet, we need to pro-actively decide to take a write-off of $20 trillion. That makes the $2 trillion subprime crisis seem trivial by comparison. The real cost of that crisis was the feedback loop it triggered in the global economy. A $2-trillion asset writeoff triggered a global near-depression. The way the carbon writeoff would be felt is a pensioner that holds BP or Exxon stock watch the stock go down by 80 percent. The state of Russia, China, Venezuela, and frankly the United States, would watch their fiscal situation implode. If we imposed this quota tomorrow morning there’d be a rolling thunder — you’d see Russia’s financial stability implode, then Venezuela, then economic collapse that depresses demand.

“It would be very hard to forecast how it would play out other than it would be very volatile and confused and frightening,” Fullerton said.

It shows you the force of the powers that will fight climate change. There’s $20 trillion of value. Would the senior management of BP be able to have the conversation that they can’t exploit 80 percent of their reserves?

That’s the $20 trillion question.

Fullerton noted that his $20 trillion estimate is conservative. “Many of the biggest companies are integrated — they have oil and gas reserves, and also do refining and marketing. These companies have an expectation that they’ll be going as continuing concerns, so they trade at some multiple of their current value. The $20 trillion ignores all the value of private companies. I didn’t add any value for the infrastructure which becomes worth a lot less if you start reducing volume,” he explained.


Of course, if existing proven reserves of fossil fuels are 80 percent greater than is sustainable, that means that all new exploration should be off limits.

“That would say no one’s allowed to drill for more oil or expand the tar sands.”

Projects like the Keystone XL tar sands pipeline, or Shell Oil’s exploratory drilling in the Arctic Ocean, or the expansion of Western coal mines are reckless — the equivalent of deliberately creating financial instruments designed to explode just for a short-term profit.

Reconfiguring the global financial system to safely devalue the toxic carbon bubble is a tremendous challenge, Fullerton pointed out. In the second part of our interview, coming later this week, he discusses why he has significant hope that we can build a revitalized global economy that values sustainable wealth.