The Carbon Bubble

In 2010, the Climate Change conference in Cancun adopted an agreement that carbon emissions should be limited so that the rise in global mean temperature should not exceed 2°C.  In addition, it was recognised that this rise might need to be reduced to 1·5°C.  Although the sceptics didn’t notice, that conference accepted the science of Climate Change.  What it didn’t do was to understand the economic implications of restricting temperature rise.  It’s not simply calculating the cost, Nicholas Stern did that, it’s around 2% of global GDP and rising.  We now have to understand the grip carbon assets have on the global economy and find ways of loosening it.

If we are to limit temperature rise to 2°C, the Potsdam Institute has calculated that global carbon emissions in the period 2000 to 2050 will need to be limited to 884Gt CO². In the first eleven years of this century, thanks to the inaction of political, economic and business leaders, the world has emitted 321 GtCO², leaving a carbon budget of 565 GtCO² up to 2050.  At present, despite the global recession, emissions are rising and the 2°C carbon budget will have been ‘spent’ by 2027.  After then, we leave the 2° world and enter 3°+.  At the last Climate Change conference in Durban in January, there was a behind the scenes acceptance that we will have to adapt to 3°C of warming.  That is not a comfortable prospect and millions of people will suffer as a consequence.

The reason why global leaders find it so difficult to implement the policies that will limit temperature rise to less than 2°C is not due to scepticism but because the global economic structure is built on unsustainable practices and resources, notably carbon based fuels.  Limiting temperature rise to 2°C or less requires a switch to sustainable practice, and a switch away from fossil fuels.  We know this, so why isn’t this happening?

A report called Unburnable Carbon, by the Carbon Tracker Initiative showed that the top 200 oil, coal, and gas companies have reserves that will emit 745 GtCO², these reserves represent their market value, and the market naturally assumes that these fuels will be burned.  In addition, these companies continue to prospect aggressively, needing to replace reserves that underpin share price.  Around 50% of the valuation of a fossil fuel company lies in its declared reserves.  When Shell announced a 20% reduction in its reserves its market value fell by £3 billion in a week.  Naturally, these companies try to secure new finds as a buffer to maintain their value, profits and dividends.  In the oil and gas sector, this now means ‘unconventional’ sources like tar sands and shale gas.  To finance these explorations, investors continue to pour money in to the carbon sector, assuming that this investment will yield burnable reserves that will secure a return on their investments.

Exactly how much carbon, and therefore warming potential, private companies have on their books is difficult to estimate because of confidentiality.  Further, the private sector accounts for only about one third of global carbon stocks, add in state enterprises and total reserves would yield 2,795 gigatonnes. Steve Waygood of Aviva Investors has estimated that if all proven and probable oil and gas reserves are burned, CO² levels will rise beyond 700ppm, leading to 3.5°C to 5°C of warming.  Add in the proven coal stocks and the planet becomes uninhabitable.

The problem lies not with science but with economics, and all the human failings that are associated with it. The world economic system is built on carbon.  This is not simply our reliance on carbon fuels to drive economic activity; global assets are built on the value of fossil fuel companies.  Between 20% and 30% of the value of the London Stock Exchange is based on fossil fuel.  Fund managers invest heavily in fossil fuel companies, seeing them as a safe haven for investment with above average returns in the short term.  The funds invested in fossil fuel assets include pensions, life assurance schemes, and personal savings plans.  A majority of people in the western world have their future security tied to the fortunes of these carbon rich companies.  We are indeed all in this together.

If we are to restrict the rise in average global temperature to less than 2°C, the rate of burning of fossil fuel will have to be restricted.  Sequestration technology is not going to be ready in time.  To achieve this target, only 20% of known reserves can be burned over the next 40 years, and this might have to be reduced further if feedback loops begin to kick in.  That means that 80% of the assets of fossil fuel companies are un-burnable.  None of the unproven and unconventional reserves that are now being prospected for at great expanse can be burned.  There can be no return on the investment in 80% of reserves and in all new prospecting. This is the carbon bubble.  Depletion of fossil reserves isn’t the issue, it’s the fact that they can not be used.  The wealth of some of the worlds biggest and most powerful companies, and therefore of stock exchanges, is based on an unusable asset.  If these companies had to devalue their reserves by 80% the carbon bubble would burst – remember what happened to Shell with a mere 20% downgrade.

The heavy investment in carbon assets also explains the reluctance of governments to back renewable energy.  Renewables coupled with efficiency measures can replace fossil fuels, and without nuclear power.  With a range of technologies like wave power waiting in the wings, existing technologies can more than cope with efficient demand.  But if governments promoted these technologies, the value of carbon rich companies would decline.  It isn’t just scepticism that stops the deployment of renewables, or that stops agreements to limit temperature rise, it’s vested interests and their control over the political process.  We can suppose that those who profess scepticism, like many MP’s of the ruling Coalition, have heavy investments in carbon rich assets.

Denial of climate change is a smokescreen that hides the real denial that lies at the heart of global economics: the denial of long-term consequences.  Economics does not think in the long term, profit today is the mantra, tomorrow is somebody else’s problem.  Greens keep focusing on the scientific argument, refining their arguments with ever more facts, trying to convince the so-called sceptics with the sheer weight of the evidence.  Apart from the lunatic fringe, most of these sceptics may well accept the science, however, they are not interested in science and statistics, what they are interested in is how they maintain their position of wealth and privilege in a warming world.

There are ways to break out of this carbon strangle hold.  To do so we need:

  • political action to require long-term accounting.
  • investors to take the decision to begin the switch to low carbon assets.
  • everyone who can afford it, to accept lower returns in order to secure the only long-term investment that matters: the future health of our planet and all who live on her.

The Governor of the Bank of England, Mervyn King has responded to the concern expressed by Carbon Tracker and others and is considering whether over exposure to carbon assets represents a risk to market stability.  A small step and it remains to be seen whether investors will similarly take note.  However, a globalised economy needs international agreement to require climate change to be factored into market valuation.  The markets will not do this until it is too late.  A strong political lead is required.  We can help this process by being informed about the dangers of another asset bubble bursting, by being aware of our own exposure to this danger, and by demanding effective preventative action.  We can also work to help the Greens promote a new, low carbon and sustainable economy.

Mike Shipley


3 responses to “The Carbon Bubble

  1. An outstanding article, and one that should have as wide a circulation as possible.

  2. Pingback: Renewables in Derbyshire | Derbyshire Green Party

  3. Pingback: Post Carbon – where will the smart money go? | Derbyshire Green Party

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