Posted by Gena Gibson, Consultant: Energy and Climate Change on 1 March 2012
The signs of a bubble are that an asset is overpriced and there is a widespread belief in its price. The dot.com boom and housing are classic examples because they were both overvalued at the time, but it was never questioned until too late – it was unthinkable not to own a house, or not to be investing in tech stocks.
What is the next candidate? If we look for something that is overpriced and unquestioned, we see there is a contradiction between long-term climate policy goals and the way fossil fuels are valued. Enter the carbon bubble.
If we are to meet the 2-degree warming target, the remaining carbon budget between 2010 and 2050 is around 500-1,200GtCO2. According to the Carbon Tracker Initiative that would mean we would have to leave 50-80% of the world’s proven reserves unburned. There are more fossil fuels listed on the world’s stock markets than we can afford to use, but these companies are still priced as if all of their reserves are going to be exploited.
This is a worry for the UK, as our stock market is overweight on fossil fuels; around 20-30% of our market capitalisation is connected to them. These reserves cannot be developed if we are to tackle climate change. This “unburnable carbon” could pose a severe risk to fossil fuel companies, energy-intensive industries and to wider financial stability. Concerned investors have urged the Bank of England and the European Central Bank to investigate the systemic risks of our exposure to high-carbon assets. Viable CCS could provide some extra headroom in the medium term; however, the entire oil-based transport system would be left unmitigated.
The other option would be to assume that pledges to reduce emissions will not be met. If this happens we could be on a path to warming of 6-degrees or more. There are more fossil fuels listed on the world’s stock markets than we can afford to burn, but can our financial systems afford to leave them unburned?