Bursting the Carbon Bubble
Fresh predictions of a worldwide economic collapse are beginning to gather pace, with warnings voiced that up to $6trn could be tied up in stranded carbon assets if the globe sticks to the 2050 carbon budget it has set of 886 GtC02, designated to the years between 2000 and 2050.
22nd April 2013 | Peter Rolton: Chairman, Rolton Group
This figure represents the upper limit of allowable emissions if the possibility of Earth’s temperature rising by more than 2˚C is to be kept below 20%. As a reference point, over a third of this allowance has already been used, leaving 565 GtCO2 to see us through the next four decades.
With the fast development of renewable technologies, the world has seen some heartening progress towards meeting this budget and making it through to the other side relatively unscathed in terms of temperature disturbance. What has not been discussed in as much depth is what happens to all the fossil fuels left unexploited as emissions are capped and reduced. These reserves provide a considerable portion of the world’s wealth, an estimated 30%, and any shifts in their use consequently need to be treated with caution.
As emissions are curbed and the world gets ‘greener’, disincentives and restrictions can be expected to appear more regularly, nudging companies across the world to engage in cleaner energy. There will come a point when fossil fuels at large will be made redundant in the final toss-up between carbon-intensive energy and keeping the planet at an acceptable temperature. At this point they will become ‘unburnable’ and therefore essentially worthless. Even with the rolling out of carbon capture and storage (CCS), the energy industry only buys itself fractionally more time to address its fundamental emission issues, forcing companies to leave their assets underground.
With this knowledge circulating, and surfacing uncomfortably close to the horizon, it would be logical to expect a slowdown in investment towards the exploration and development of carbon heavy energy sources. The opposite seems to be true. Instead, it appears that current business models are assuming a ‘zero risk’ policy when it comes to traditional energy, and that it is business as usual going forward. Indeed, the International Environment Agency (IEA) has predicted that the full carbon budget will be met within 16 years if consumption continues at its current rate, and the Carbon Tracker’s ‘Unburnable Carbon’ report calculates therefore that between 60 and 80% of current supplies will become untouchable if targets are kept to, equalling up to $6 trillion.
The wider implications of a loss of this size could be devastating: ‘This carbon bubble is so big, it's going to make the housing bubble look like chump change,’ said Andrew Behar, CEO of As You Sow. The UK is a world hub for fossil fuel ownership, and is not in a position to take another economic hit of this size. With no money, there can be no innovation either, and this can only spell trouble in the transition to a more sustainable future. Professor Nicholas Stern, author of the acclaimed ‘Stern Review’ in 2006 has contributed to the discussion brewing on the topic: ‘Smart investors can already see... that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision.’
It is of the highest order of importance that investors begin to respond to the situation in front of them, which demands that either they point their business acumen in another direction or else go blindly forward hoping that the carbon budget is only a passing concern, and this is not just extremely unlikely, but extremely risky.
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