The Carbon Bubble: All we have to do is decide to not commit civilizational suicide – and the markets crash!

The first Carbon Bubble report, released a few years, was a very big deal. It told us that the whole “peak oil” trope was just wrong, that the real name of the problem was Unburnable Carbon. And it led Bill McKibben to publish his fabulous Rolling Stone article. And then came the Do the Math project, and the whole carbon divestment movement. Definitely a very big deal.

And now comes the second Carbon Bubble report, Wasted Capitalwhich was just released. It’s Phase II of the project and, far from being a rehash, it’s proof that the fundamental approach is sound. In fact, it’s huge news. Lord Stern (of the Stern Review) is now fronting. The modeling has been fine tuned, and now shows – among other things – that Carbon Capture and Sequestration is extremely unlikely to save our bacon. There’s an improved geographic analysis which shows just how hard the Carbon Bubble is going to hit the emerging economies of the developing world. There’s a huge amount of evidence that, not just stars like Jeremy Grantham but mainline financial analysts around the world are taking the argument on-board, and in a big way. There’s even a bit of speculation about how this is all going to interact with new round of the climate negotiations, which will reach their (next) crisis in the winter of 2015, six years after Copenhagen.

What’s at stake? Look at it this way. A reasonable person, looking around with open eyes, might well decide that we’re unlikely to free ourselves from the grip of the fossil-fuel cartel. That, to be blunt, we’re likely to commit civilizational suicide. But there’s still a chance that we’ll decide not to. Perhaps not a big chance, but what the hell. If you’re a money manager, you have to take it seriously. You have to take it, in fact, as a risk that you need to hedge your portfolio against. Because you’re probably holding a lot of fossil stocks, and if you’re not doing so consciously, you’re not doing your job. And – this being capitalism – that means that someone else is going to eat your lunch.

Quick background: The Climate Justice movement has been talking forever about the need to “keep the oil in the soil, the coal in the hole.” For maybe 15 years, actually, maybe longer. But until the scientists worked out that the sum of emissions over time (the “carbon budget”) was to a first order the best predictor of global temperature change, they were generally dismissed as naive and ideological. But that was then. Now we know that, literally, we can’t burn all the fossils we have. Not if we intend to stay around. Not even close, actually. And we know it quantitatively. Rigorously even. And we know it while we’re still licking our wounds from the bursting of the last financial bubble.

bubb

The Carbon Tracker Initiative doesn’t come off like a climate-justice project, but its logic is just as implacable. And it has been explaining that logic to analysts on Wall Street and in the City of London, in language that they can understand. In short, Carbon Tracker has been arguing that “governments will limit carbon emissions, so if your business model is based on burning it, you are overvalued and at risk – sitting on a bubble. BAD haircut coming.” And they’re clearly right. This is a “systemic” approach that shows that markets fail, and sometimes spectacularly, and that right now they’re leading investors (and, oh yeah, humanity as a whole) to disaster.

The timing couldn’t be better. The science is getting terrifying. The movement is growing fast. The negotiations are rebooting. The challenge of thinking big – with a sense of the global political and economic challenges that are now on our collective plate – is no longer one that can be put off. Think about it. We’ve got to phase out coal – and then oil and gas. And we’ve got to do it while many of the people on the planet are still dirt poor. How’s that going to work?

In the meanwhile, here’s a roundup of the initial press. Most of it is British. Hopefully, the US press will pick up the story, but you never know these days. So far, there’s just a blog that The Times took from The International Herald Tribune.

New York Times Blog: An Earth Day Debate: Is There a ‘Carbon Bubble’?

Investment Europe: Research calls for regulatory action on carbon valuation risk

The Guardian: Carbon bubble will plunge the world into another financial crisis – report 

The Guardian Environment Blog: How your pension is being used in a $6 trillion climate gamble

BBC: Firms ‘own unburnable fossil fuels’

Bloomberg: Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,’ Study Says

The Daily Telegraph: Carbon bubble could fuel another global economic crisis, report warns

Financial Times: Energy sector seen as threat to stability

The Sydney Morning Herald : Fossil fuel funding ‘grossly inconsistent’ with warming limits

The Engineer : Our climate crisis needs strong leadership now

Business Insurance: Economists warn carbon bubble could lead to global economic crisis

Business Green: Regulators urged to tackle $6tr “carbon bubble”

Green Wise Business: ‘Carbon bubble’ putting trillions of dollars at risk, warn experts 

Blue and Green tomorrow: Report says investing in fossil fuels is a ‘very risky decision’

Responding to Climate Change : Warning $674bn ‘carbon bubble’ will blow 2C climate target

Renew Economy: Carbon bubble: $6 trillion of new investments at risk

Energy Trend Insider : Finding a New Direction in Climate Change Policy

Environment 360: Will Global Coal Boom Go Bust As Climate Concerns Increase?

World Wise Investor: Are Financial Advisers Lemmings? A Stern warning to Investors – passive or active 

Professional Pensions:  Institutional investors ‘must address financial risk of carbon bubble’

City Wire: Global companies ‘risk losing billions’ if emissions targets are hit


UPDATE (mt): Still in blogland in the US media at this moment, but a little more prominently, as Revkin has picked it up.



Bubble image by Justin D Miller is in the Creative Commons (CC by 2.0)

Comments:

  1. One thing about the "Carbon Bubble" analysis is that it seems to focus almost entirely on the *DIRECT* investment exposure to fossil fuel assets. I.e., the potential loss to portfolios if those specific assets become stranded.

    But if there is anything that the financial crisis of 2008-2009 should have taught us is that for some asset classes, there is no such thing as keeping the damage isolated to just those holding the assets. Some mortgages go bad in Cleveland, and next thing you know, companies with essentially no debt at all - Google, Microsoft, etc. - are all dropping faster than Al Roker on a greasy flagpole.

    And it was because everyone was pulling in their horns and the loss of demand rippled through the economy.

    I don't see how shuttering the assets of the world's wealthiest enterprises - effectively deeming 80% of their assets "toxic" - will have any less of a chilling effect on our economies (and, thereby, our capital markets) as a whole. And even if we get our act together, and decide to avoid the trillion tonne budget... if you look at the decline rates we need to decarbonize that fast (c.f. Kevin Anderson), it is hard to see how we achieve this without some sort of economic stall, deliberate or otherwise.

    And I know this is not palatable signalling, but there are times when I think that the "Carbon Bubble" messaging - for all it's forward-thinking - is ultimately, actually a little naive and Pollyanish.

    • It could be "a little naive and Pollyanish."

      Or it could be strategic.

      Ever consider that possibility?

  2. You know that I propose a National Renewable Energy Utility (NREU), and that it should offer electricity at no charge to all users. I am no economics maven, but I fail to see how a NREU would do anything but supercharge the economy.

    All businesses would have a very large portion of their operating costs disappear; all individuals would have sudden ready cash in their pockets. How would this not be a good thing?

    Another point I would like to make is that it seems to me that economic models are not applicable to environmental disasters, which will be completely non linear and catastrophic in a way never seen before.

    For example, if we have business as usual as far as CO2 emissions go, at some point in the latter half of this century, on a Tuesday all will be as it ever was. On Wednesday, increased sea level and a +3 sigma storm surge are going to leave 10 to 20 feet of water throughout Manhattan.

    On 9/11, several buildings went down, and our economy went into free fall for about two weeks. What would happen with 20 feet of water in NYC? I can easily imagine a chain of events leading a sustained global crisis.

    Someone somewhere said we are three days of hunger away from a societal breakdown.I daresay there is truth to that, and I have grave doubts whether any economic model yet devised is capable of modeling such a thing.

  3. OT, but listened today to an interesting radio show (note date: February) on how profits are made by changing communication speed to 13.x microseconds from 15.x microseconds (one way: blasting through a mountain!). Until we put a tax on these transactions, the ability to trade that fast will profit the gamblers and leave the rest of us holding the bag.

    http://www.radiolab.org/2013/feb/05/million-dollar-microsecond/

    As long as this is what's exciting, life doesn't have much of a chance, does it?

  4. I think that the Carbon Tracker work is very valuable for: a) Debunking the idea, still held by some, that Peak Fossil Fuels will somehow protect us from causing dangerous climate change and; b) Reinforcing the mantra "leave the carbon in the ground". It's easy to get lost in complex discussions over carbon taxes, fracking, pipelines, gas vs coal, solar vs nuclear, climate sensitivity, etc and it's useful to stay, well, grounded with a mantra like that. The goal is simple even if the way to get there is not. In some ways this is like how the Hippocratic Oath must be useful for physicians struggling with complex treatment options: first, do no harm.

    But I'm doubtful that the carbon bubble idea is a useful one, tactically, strategically or otherwise.

    Firstly, as I have said here just today on another thread, I am (reluctantly) in agreement with Richard Tol on whether there is a carbon bubble on stock markets. I question how significant it is and, whether in the best case (ie, worst case for the fossil fuel men) such a bubble will not burst but slowly deflate. More importantly, what does the market believe? Judging from the gung-ho antics of the oil-sand promoters, they don't believe it all. http://planet3.org/2013/05/03/open-thread-may-2013/#comment-28169

    Secondly, there are three ways that fossil fuel producers might respond to the threat of climate policies blowing up their businesses. One would be to reduce their exposure by moving capital out of the business; this is presumably the goal of the Climate Tracker initiative, but it does not seem to be happening in practice. Another might be to build resilience into your projects, running economic models to make sure that your investments could survive, say, a carbon tax; there's anecdotal evidence that companies now do this as a matter of routine risk management. The last option would be to mitigate the risk of climate policies by doing everything you can to stop them being enacted. I probably don't need to provide evidence that this is the option the big fossil fuel producers favour and that this approach is working well for them.

    So, even if the "carbon bubble" message is persuasive to some, the capitalists' reaction to it may not be quite what we were looking for.

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  6. "Fossil Tools"
    -- by Horatio Algeranon

    As cities and schools
    Divest from fuels
    Some Big Green fools
    Are fossil tools

    Green i$ green
    But mayn't be clean
    An oily $heen
    Is sometimes seen.

    ////
    "Time for Big Green to Go Fossil Free" (by Naomi Klein)
    "Some mainstream environmental organizations are trying to wean themselves from fossil fuel investments—but some aren’t."

  7. Pingback: The Carbon Bubble: All we have to do is decide to not commit civilizational suicide – and the markets crash? – Stoat

  8. "Don't bother"
    -- by Horatio Algeranon

    Don't bother fighting Keystone
    It really doesn't matter.
    Divesting from the fossil fuels
    Is really like the latter.

    Don't bother doing anything
    Because it will not work.
    You may as well enjoy the ride
    Or you will go berserk.

  9. Pingback: Are Some Alarmists Addressing Reality? | suyts space


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