The carbon bubble is real and coming soon
There is no single clear trigger that will cause the carbon bubble to pop, but the Paris Agreement is likely to be a key tipping point.
- 565 billion tons: The total amount of CO2 that can be emitted by 2050, and still limit a global temperature rise to 2 degrees
- $5 trillion: How much money had been earmarked to be divested from fossil fuels by the end of 2016
- $100 trillion: the potential value of fossil fuel stranded assets post Paris Agreement
Back in 2011 the term ‘carbon bubble’ was coined by the Carbon Tracker Initiative and it has been steadily gaining traction ever since. The term refers to the way in which fossil fuel companies include the value of fossil fuel reserves in their share price, under the assumption that these fuel reserves will be sold and burned at some point in the future. What the valuation doesn’t take into account is that there will be limits placed on the amount of fossil fuels that can be burned in order to restrict carbon emissions and keep the global rise in temperature to a maximum of two degrees. In this way, the vast majority of the fossil fuel reserves are rendered unburnable, meaning the share prices are in fact wholly overvalued. People continuing to invest into fossil fuels are investing into an unsustainable bubble, and it’s one that is on verge of bursting.
There is no single clear trigger that will cause the carbon bubble to pop, but the Paris Agreement is likely to be a key tipping point. Kicking in in 2020, the agreement will enforce limitations on the amount of carbon that can be burned by the participating countries. The total amount of carbon dioxide that can be produced by 2050 before global warming increases by two degrees is 565 billion tons. This figure, known as the carbon budget, accounts for just 20% of the total amount of fossil fuel reserves. That makes 80% of all coal, oil and gas stranded assets, their value locked away permanently as unburnable fuel.
$100 trillion in stranded assets
The problem is that currently there is a huge amount of investment already made in fossil fuels, and people are still pumping money in on the basis that they will see a return in the future. But the truth is that they are most likely throwing investment into stranded assets, and the risk of losing money is huge. The sheer amount of money tied up in fossil fuels is staggering, and if the bubble bursts suddenly then the effects could be even worse than the recent house-market bubble that crippled the world economy. It’s estimated that there could be as much as $100 trillion of stranded assets when countries adhere to the the Paris Agreement.
Awareness of the carbon bubble is on the rise. A consequence of this is that there is an increasing amount of divestment taking place. People and organizations are pulling their money out of fossil fuels. By the end of 2016 total fossil fuel earmarked to be divested had reached a global total of $5 trillion. It’s a trend that isn’t slowing down. Norway’s sovereign wealth fund, which is the world’s largest has just proposed to remove oil and gas companies from its benchmark index in order to protect itself from risks associated to fossil fuel companies. If the proposal goes through, the wealth fund will divest around $37 billion from oil and gas companies. 40 Catholic institutions also recently committed to divesting from fossil fuels. All this divestment contributes to a drop the valuation of fossil fuel companies, which should make it more expensive to access financing and make these companies less attractive. Right now it’s clear that the divestment movement is largely symbolic, while the carbon bubble is a very real topic among professional investors.
There are a host of other factors at play that also contribute to the carbon bubble and hang these stranded assets even further out to dry. Advances in clean technology are reducing the reliance on carbon. Places like Africa are bypassing fossil fuel-based power generation and heading straight for solar. Car manufacturers are halting the production of diesel and petrol vehicles. The list goes on.
The writing’s on the wall for the carbon industry, even if there are some that still have trouble reading it. It’s important to understand that there are huge companies at risk — and they’re likely to fight back. You might recognize some of those names, they’re the 10 publicly traded oil&gas companies with the largest reported reserves: Gazprom, Rosneft, PetroChina, ExxonMobil, Lukoil, BP, Royal Dutch Shell, Petrobras, Chevron, Novatek.
When 80% of those reserves become liabilities, the shareholders of fossil fuel companies are looking at substantial losses. Many of these companies have traditionally established ties to their respective home countries and the consequences of the carbon bubble to international politics should be not be treated lightly. It’s real and already visible.
Further Reading: Related Start Ups and Organizations
- Skyonic (http://skyonic.com green chemistry solutions for profitable carbon management.)
- Clean Energy Collective (http://www.easycleanenergy.com/ developing and managing community-owned, clean energy facilities)
- LP Amina (http://www.lpamina.com start up with focus on sustainable power generation)
- Liquid Light (http://llchemical.com converts carbon dioxide to a wide variety of chemicals, fuels and other compounds)
- Solidia Technologies (http://www.solidiatech.com makes it profitable to use CO₂ for manufacturing construction and industrial products)
- The Carbon Underground 200 is an annually updated listing of the top 100 public coal companies globally and the top 100 public oil and gas companies globally, ranked by the potential carbon emissions content of their reported reserves. https://gofossilfree.org/top-200/
This series of articles has been prepared with the support of our partner Viessmann — they’re celebrating 100 years of their company this year (2017) and are actively involved in positively shaping the next 100 years.