Carbon bubble

Carbon Bubble according to data by the Carbon Tracker Initiative 2013.

A carbon bubble is the idea that there is a bubble in valuation of companies dependent on fossil-fuel-based energy production. This is because true costs of carbon dioxide in intensifying global warming are not taken into account in a company's stock market valuation.[1][2] Currently the price of fossil fuels companies' shares is calculated under the assumption that all fossil fuel reserves will be consumed. An estimate made by Kepler Chevreux puts the loss in value of the fossil fuel companies due to the impact of the growing renewables industry at US$28 trillion over the next two decades.[3][4] A more recent analysis made by Citi puts that figure at $100 trillion.[5][6]

Analysts in both the petroleum and financial industries are concluding that the "age of oil" has already reached a new stage where the excess supply that appeared in late 2014 may continue to prevail in the future.[7][8] A consensus appears to be emerging that an international agreement will be reached to introduce measures to constrain the combustion of hydrocarbons in an effort to limit global temperature rise to the nominal 2 °C that is consensually predicted to limit environmental harm to tolerable levels.[9]

According to the UK's Committee on Climate Change, overvaluing companies that produce fossil fuels and greenhouse gases poses a serious threat to the economy. The committee warned the British government and Bank of England of the risks of the carbon bubble in 2014.[1] The following year, Mark Carney, the Governor of the Bank of England, in his lecture to Lloyd's of London, warned that limiting global warming to 2°C appears to require that the "vast majority" of fossil fuel reserves be "stranded", or "literally unburnable without expensive carbon-capture technology", resulting in "potentially huge" exposure to investors in that sector. He concluded that "the window of opportunity is finite and shrinking" for responding to the threat that climate change poses to financial resilience and longer-term prosperity, which he called the "tragedy of the horizon".[10] That same month, the Prudential Regulation Authority of the Bank of England issued a report discussing the risks and opportunities that climate change presents to the insurance industry.[11]

In his speech announcing his denial of the proposal to build the Keystone XL oil pipeline, U.S. President Barack Obama gave as one reason for the decision "... ultimately, if we’re going to prevent large parts of this Earth from becoming not only inhospitable but uninhabitable in our lifetimes, we’re going to have to keep some fossil fuels in the ground...".[12] [13][14]

Value

Author Bill McKibben has estimated that to sustain human life in the world, up to $20 trillion worth of fossil fuel reserves will need to remain in the ground.[15] The Stern report in 2006 stated that the benefits of strong, early action to decrease the use of oil, coal and gas considerably outweigh the costs. Fossil fuel contributors, the building industry, and land use practices ignore the responsibility of the external costs and ignore the polluter pays principle according to which climate change costs will be paid by historical climate polluters.

Etymology

The term "Carbon bubble" arose in the early 21st century from the increasing awareness of the impact of fossil fuel combustion on global temperatures. The term appeared in a popular media article by Bill McKibben, published in Rolling Stone magazine in July 2012.[16] It was further popularized by the Carbon Tracker Initiative,[17] which published key reports in July 2011 and April 2013.[18][19] These were followed later in 2013 by a report from the Demos think tank.[20]

Prospects for orderly bubble deflation

A planned and orderly transition away from dependence on fossil fuels could prevent a disruptive "bursting of the carbon bubble". A number of developments are supporting such a transition.

A detailed academic study of the consequences for the producers of the various hydrocarbon fuels concluded in early 2015 that a third of global oil reserves, half of gas reserves and over 80% of current coal reserves should remain underground from 2010 to 2050 in order to meet the target of no more than a 2 °C rise in average global temperature. Hence continued exploration or development of reserves would be extraneous to needs. To meet the 2 °C target, strong measures would be needed to suppress demand, such as a substantial carbon tax leaving a lower price for the producers from a smaller market. The impact on producers would vary widely depending on the cost of production in their areas of operation. For example, the impact in Canada would be far larger than in the U.S. Open-pit mining of bituminous sands in Canada would soon drop to negligible levels after 2020 in all scenarios considered because it is considerably less economic than other methods of production.[21][22][23][24][25]
In mid-2015, the Centre for Science and Policy, University of Cambridge published a report assessing the risks from climate change in order to estimate the amount of resources that should be allocated to address them. The report notes that "standard economic estimates of the global costs of climate change are wildly sensitive both to assumptions about the science, and to judgments about the value of human life. They are also likely to be systematically biased towards underestimation of risk, as they tend to omit a wide range of impacts that are difficult to quantify".[26]
By 2013, there was significant awareness in the financial industry of the risks associated with exposure to companies involved in extraction of fossil fuels.[27] In early 2014, the FTSE Group, BlackRock and the Natural Resources Defense Council collaborated in the creation of a stock market index series that excludes companies linked to exploration, ownership or extraction of carbon-based fossil fuel reserves. These indices are intended to make it easier for investors to steer their investments away from such companies.[28] [29] It has been proposed that companies be required by law to report on their greenhouse gas emissions and assess the risk this could pose to their future financial performance. According to Christiana Figueres, UNFCCC, companies have a duty to shareholders to move to a low-carbon economy, because of the effects of the carbon bubble.[1]
The ongoing fossil fuels divestment campaign in universities, churches[30][31] and pension funds[32] contributes to divestiture from fossil fuel companies.[33][34][35] By late 2015, this divestiture was reported to reach $2.6 trillion.[36]
The price of renewable energy is continually dropping.[37] As of 2014 new wind power is cheaper than new coal and gas power in Australia,[29] China[38] and the United States.[39] Also the electricity produced from a photovoltaic roof system is cheaper than the electricity from the grid in many countries and places in the world.[40]
Fossil fuels are known for their huge negative externalities or hidden costs.[41] Tackling this market failure will make alternative energies more competitive and will reduce the consumption of fossil fuels.[42]
According to the International Monetary Fund, governments around the world gave $523 billion direct subsidies for fossil fuels in 2011.[43] If a carbon tax of $25 per ton of CO2 is included the subsidies total $1.9 trillion only for 2011.[44] Removing fossil fuels subsidies will further reduce their consumption and make the alternative energies even more competitive.
As the penetration of the renewable energy increases so will the wealth of the renewable energy corporations. This and the increasing number of employees in the renewable energy sector will inevitably transform into political lobbying against fossil fuels.[45]
Switching to electricity based transportation like electrical vehicles from fossil fuel based transportation will reduce the demand for fossil fuels particularly petroleum.[37][46] Combining roof photovoltaics with second hand EV batteries will further reduce the dependence on fossil fuels as they will provide the needed grid storage for the times when the intermittent renewable energy sources are not producing electricity.[47]
Increased investments in energy efficiency may lead to less consumed energy[48] even when the economy grows.[49] Without growth in energy usage the prices of fossil fuels will decrease and most of the mega energy projects may be uneconomical.
According to research by U.S. PIRG Education Fund reported in late 2014: "Over the last decade – after 60-plus years of steady increases – the number of miles driven by the average American has been falling. Young Americans have experienced the greatest changes: driving less; taking transit, biking and walking more; and seeking out places to live in cities and walkable communities where driving is an option, not a necessity."[50] Data from the U.S. Energy Information Administration show that U.S. consumption of both coal and petroleum liquids peaked in 2005, and at the end of 2014 had fallen by 21% and 13% respectively. Consumption of natural gas continued to climb, resulting in the rate of total fossil fuel consumption in terms of energy units falling only 6% from its peak in 2007 to a plateau. On the other hand, global consumption of petroleum climbed steadily a total of 32% from 1995 to 2014.[51]

References

  1. 1 2 3 Harvey, Fiona (6 March 2014). "'Carbon bubble' poses serious threat to UK economy, MPs warn". The Guardian. Retrieved 6 March 2014.
  2. ↑ Rubin, Jeff (12 May 2015). The Carbon Bubble. Penguin Random House. ISBN 978-0345814715. Retrieved 9 October 2015.
  3. ↑ Giles Parkinson (28 April 2014). "Fossil fuels face $30 trillion losses from climate, renewables". Renew Economy.
  4. ↑ Lewis, Mark C. (24 April 2014). "Stranded assets, fossilised revenues" (PDF). Kepler Cheuvreux. Archived from the original (PDF) on October 22, 2015.
  5. ↑ Citigroup sees $100 trillion of stranded assets if Paris succeeds, RenewEconomy, 25 August 2015
  6. ↑ "Energy Darwinism II". Citi GPS. 14 August 2015. Retrieved 9 November 2015.
  7. ↑ Dale, Spencer (13 October 2015). New Economics of Oil (PDF) (Report). BP. Retrieved 6 November 2015.
  8. ↑ Shilling, A. Gary (20 August 2015). "A Funny Thing Happened on the Way to $80 Oil". Bloomberg News (Bloomberg L.P.). Retrieved 6 November 2015.
  9. ↑ Kolbert, Elizabeth (24 August 2015). "The Weight of the World". The New Yorker (Condé Nast). Retrieved 6 November 2015.
  10. ↑ Mark Carney (29 September 2015). Breaking the tragedy of the horizon - climate change and financial stability (Report). Bank of England. Retrieved 9 November 2015.
  11. ↑ The impact of climate change on the UK insurance sector (PDF) (Report). Bank of England. September 2015. Retrieved 9 November 2015.
  12. ↑ Barack Obama (6 November 2015). Statement by the President on the Keystone XL Pipeline (Speech). The White House. Retrieved 10 November 2015.
  13. ↑ Bill McKibben (6 November 2015). "Exxon, Keystone, and the turn against fossil fuels". The New Yorker (Condé Nast). Retrieved 10 November 2015.
  14. ↑ Mitchell Beer (10 November 2015). "Keystone XL pundits miss obvious reason why Obama rejected pipeline project". National Observer (Observer Media Group). Retrieved 10 November 2015.
  15. ↑ Bill McKibben (7 February 2012). "Why the Energy-Industrial Elite Has It In for the Planet". TomDispatch.
  16. ↑ "Global Warming's Terrifying New Math". Rolling Stone. 19 July 2012. Retrieved 10 July 2015.
  17. ↑ "Financial specialists making carbon investment risk real today in the capital market". Carbon Tracker Initiative. Retrieved 10 July 2015.
  18. ↑ Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?
  19. ↑ Unburnable carbon 2013: Wasted capital and stranded assets
  20. ↑ McElwee, Sean; Daly, Lew (23 December 2013). Beware of the Carbon Bubble (Report). Demos. Retrieved 6 November 2015.
  21. ↑ Dyer, Evan (Jan 7, 2015). "Climate change study says most of Canada's oil reserves should be left underground". Canadian Broadcasting Corporation. Retrieved 6 November 2015.
  22. ↑ Jacob, Michael; Hilaire, Jérȏme (January 2015). "Unburnable fossil-fuel reserves". Nature (Macmillan Publishers) 517 (7533): 150–2. doi:10.1038/517150a.
  23. ↑ McGlade, Christophe; Ekins, Paul (January 2015). "The geographical distribution of fossil fuels unused when limiting global warming to 2°C". Nature (Macmillan Publishers) 517 (7533): 187–90. doi:10.1038/nature14016.
  24. ↑ Revkin, Andrew C. (2 May 2013). "On ‘Unburnable Carbon’ and the Specter of a ‘Carbon Bubble’". The New York Times.
  25. ↑ Megan, Scott (18 September 2014). "New York: where the carbon bubble threat goes mainstream?". RTCC.
  26. ↑ King, David; Schrag, Daniel; Dadi, Zhou; Ye, Qi; Ghosh, Arunabha (13 July 2015). Climate Change: A Risk Assessment (Report). The Centre for Science and Policy, University of Cambridge. doi:10.1038/517150a.
  27. ↑ Randall, Tom (18 November 2013). "Oil's Future Draws Blood and Gore in Investment Portfolios". Bloomberg.
  28. ↑ Mike Scott (1 May 2014). "Fossil Fuel-Free Index Will Help Investors Manage Climate Risks". Forbes. Retrieved 9 November 2015.
  29. 1 2 Paton, James (7 February 2013). "Australian Wind Energy Now Cheaper Than Coal, Gas, BNEF Says". Bloomberg.
  30. ↑ Church Dropping Fossil Fuel Investments, The New York Times, 3 July 2013
  31. ↑ World Council of Churches Endorses Fossil Fuel Divestment, 350.org, 11 July 2014
  32. ↑ Oral Evidence Taken before the Environmental Audit Committee, House of Commons Environmental Audit Committee, 26 June 2013
  33. ↑ Preventing a carbon bubble crash, ABS, 13 May 2013
  34. ↑ The Economic Case for Divesting from Fossil Fuels, Renewable Energy World, 15 May 2013
  35. ↑ Fossil-free investment portfolios soared 50% in 2013, Responding to Climate Change (RTCC), 15 May 2014
  36. ↑ Martin, Chris (22 September 2015). "Fossil-Fuel Divestment Movement Exceeds $2.6 Trillion". Bloomberg News (Bloomberg L.P.). Retrieved 10 November 2015.
  37. 1 2 Sussams, Luke; Leaton, James; Drew, Tom (21 October 2015). Lost in Transition: How the energy sector is missing potential demand destruction (Report). Carbon Tracker. Retrieved 6 November 2015.
  38. ↑ Parkinson, Giles (21 May 2014). "Solar grid parity – why Australia leads the world". Reneweconomy.
  39. ↑ Chen, Allan (18 August 2014). "New Study Finds Price of Wind Energy in US at an All-Time Low; Competitiveness of Wind Has Improved". Lawrence Berkeley National Laboratory.
  40. ↑ German PV drops to 15 cents max, Renewables International, 2 May 2013
  41. ↑ Malone, Scott (16 February 2011). "Coal's hidden costs top $345 billion in U.S.: study". Reuters.
  42. ↑ Wong, Edward (21 March 2013). "As Pollution Worsens in China, Solutions Succumb to Infighting". The New York Times.
  43. ↑ EWEA Blog: Global fossil fuel subsidies amount to $1.9 trillion – IMF, EWEA, 5 April 2013
  44. ↑ IMF Calls for Global Reform of Energy Subsidies: Sees Major Gains for Economic Growth and the Environment, IMF, 27 March 2013
  45. ↑ Poole, Lauren (9 May 2013). "Beyond the PTC – Wind Energy's Future". Renewable Energy World.
  46. ↑ "Peak Oil" Less A Concern As Alternatives Reduce Demand, Cleantechnica, July 23rd, 2013
  47. ↑ GM, ABB Demonstrate Chevrolet Volt Battery Reuse Unit, General Motors, November 11, 2012
  48. ↑ Energy Intensity: The Secret Revolution, Forbes, 18 July 2014
  49. ↑ "Energy is gradually decoupling from economic growth | FT Alphaville". web.archive.org. 17 January 2014. Retrieved 10 July 2015.
  50. ↑ MILLENNIALS IN MOTION, U.S. PIRG Education Fund, OCTOBER 14, 2014
  51. ↑ Monthly Energy Review— October 2015 (PDF) (Report). U.S. Energy Information Administration. 27 October 2015. Retrieved 9 November 2015.
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