Carbon bubble will plunge the world into another financial crisis – report
Trillions of dollars at risk as stock markets inflate value of fossil fuels that may have to remain buried forever, experts warn
Global stock markets
are betting on countries failing to adhere to legally binding carbon
emission targets. Photograph: Robert Nickelsberg/Getty Images
The world could be heading for a major economic crisis as stock markets
inflate an investment bubble in fossil fuels
to the tune of trillions of dollars, according to leading economists.
"The financial crisis
has shown what happens when risks accumulate unnoticed," said Lord
(Nicholas) Stern, a professor at the London School of Economics. He said
the risk was "very big indeed" and that almost all investors and
regulators were failing to address it.
The so-called "carbon bubble
" is the result of an over-valuation of oil
reserves held by fossil fuel companies. According to a report published
on Friday, at least two-thirds of these reserves will have to remain
underground if the world is to meet existing internationally agreed targets
to avoid the threshold for "dangerous" climate change
. If the agreements hold
these reserves will be in effect unburnable and so worthless – leading
to massive market losses. But the stock markets are betting on
countries' inaction on climate change.
said that far from reducing efforts to develop fossil fuels, the top
200 companies spent $674bn (£441bn) in 2012 to find and exploit even
more new resources, a sum equivalent to 1% of global GDP, which could
end up as "stranded" or valueless assets. Stern's landmark 2006 report
on the economic impact of climate change – commissioned by the then chancellor, Gordon Brown – concluded that spending 1% of GDP would pay for a transition
to a clean and sustainable economy.
world's governments have agreed to restrict the global temperature rise
to 2C, beyond which the impacts become severe and unpredictable. But
Stern said the investors clearly did not believe action to curb climate
change was going to be taken. "They can't believe that and also believe
that the markets are sensibly valued now."
"They only believe environmental regulation when they see it," said James Leaton, from Carbon Tracker
and a former PwC consultant. He said short-termism in financial markets
was the other major reason for the carbon bubble. "Analysts say you
should ride the train until just before it goes off the cliff. Each
thinks they are smart enough to get off in time, but not everyone can
get out of the door at the same time. That is why you get bubbles and
Paul Spedding, an oil and gas analyst at HSBC, said:
"The scale of 'listed' unburnable carbon revealed in this report is
astonishing. This report makes it clear that 'business as usual' is not a
viable option for the fossil fuel industry in the long term. [The
market] is assuming it will get early warning, but my worry is that
things often happen suddenly in the oil and gas sector."
HSBC warned that 40-60% of the market capitalisation of oil and gas companies
was at risk from the carbon bubble, with the top 200 fossil fuel
companies alone having a current value of $4tn, along with $1.5tn debt.
who chaired the Commons Treasury select committee for a decade, said:
"Despite its devastating scale, the banking crisis was at its heart an
avoidable crisis: the threat of significant carbon writedown has the
unmistakable characteristics of the same endemic problems."
report calculates that the world's currently indicated fossil fuel
reserves equate to 2,860bn tonnes of carbon dioxide, but that just 31%
could be burned for an 80% chance of keeping below a 2C temperature
rise. For a 50% chance of 2C or less, just 38% could be burned.
Carbon capture and storage
technology, which buries emissions underground, can play a role in the
future, but even an optimistic scenario which sees 3,800 commercial
projects worldwide would allow only an extra 4% of fossil fuel reserves
to be burned. There are currently no commercial projects up and running.
The normally conservative International Energy Agency
has also concluded that a major part of fossil fuel reserves is unburnable.
bank warned investors in Australia's vast coal industry that little
could be done to avoid the future loss of value in the face of action on
climate change. "If the unburnable carbon scenario does occur, it is
difficult to see how the value of fossil fuel reserves can be
maintained, so we see few options for risk mitigation."
agencies have expressed concerns, with Standard and Poor's concluding
that the risk could lead to the downgrading of the credit ratings of oil
companies within a few years.
Steven Oman, senior vice-president
at Moody's, said: "It behoves us as investors and as a society to know
the true cost of something so that intelligent and constructive policy
and investment decisions can be made. Too often the true costs are
treated as unquantifiable or even ignored."
Jens Peers, who
manages €4bn (£3bn) for Mirova, part of €300bn asset managers Natixis,
said: "It is shocking to see the report's numbers, as they are worse
than people realise. The risk is massive, but a lot of asset managers
think they have a lot of time. I think they are wrong." He said a key
moment will come in 2015, the date when the world's governments have
pledged to strike a global deal to limit carbon emissions
. But he said that fund managers need to move now. If they wait till 2015, "it will be too late for them to take action."
funds are also concerned. "Every pension fund manager needs to ask
themselves have we incorporated climate change and carbon risk into our
investment strategy? If the answer is no, they need to start to now,"
said Howard Pearce, head of pension fund management at the Environment
Agency, which holds £2bn in assets.
Stern and Leaton both point to
China as evidence that carbon cuts are likely to be delivered. China's
leaders have said its coal use will peak in the next five years, said
Leaton, but this has not been priced in. "I don't know why the market
does not believe China," he said. "When it says it is going to do
something, it usually does." He said the US and Australia were banking
on selling coal to China but that this "doesn't add up".
Jeremy Grantham, a billionaire fund manager who oversees $106bn of assets, said his company was on the verge of pulling out of all coal and unconventional fossil fuels
such as oil from tar sands. "The probability of them running into
trouble is too high for me to take that risk as an investor." He said:
"If we mean to burn all the coal and any appreciable percentage of the
tar sands, or other unconventional oil and gas then we're cooked. [There
are] terrible consequences that we will lay at the door of our
Fossil fuels and vested interests: a society in denial
We need to get used to the idea that we can't burn most of what we already have
Almost all the fossil
fuel reserves will have to be written off to provide a decent chance of
keeping the planet safe. Photograph: Shawn Baldwin/Corbis
The report released by Lord Stern and thinktank Carbon Tracker
paints a picture of society in denial. It shows we're pumping almost
$700bn (£458bn) of hard-earned savings and pensions annually into
finding new reserves of fossil fuels
even though it's clear that almost all of those reserves will have to
be written off to provide a decent chance of keeping the planet safe.
The ever-inflating "carbon bubble
is only part of the bigger picture, because most of the world's fuel –
around three-quarters in total and almost all the oil and gas – is owned
not by listed companies but by governments. And we don't need only to
stop expanding the world's fossil fuel reserves; we also need to get
used to the idea that we can't burn most of what we already have.
is a much trickier problem, because with Carbon Tracker's detailed
analysis and growing awareness of the carbon bubble, investors will
surely soon start waking up to the madness of putting capital into
expanding fuel reserves. But there's little self-interest – only
planetary interest – in leaving existing fuel assets in the ground.
need to write off existing reserves shines a revealing light on global
climate politics, because when you map out the world's fossil fuel
reserves, a striking correlation emerges between the amount of carbon a
country has in the ground and its keenness for – or resistance to – a
global climate deal.
Take Britain. Sure, there's lots wrong with
our green policies but nonetheless the UK's climate laws are
world-leading. Why? Partly because we have good campaigners, perhaps.
But also perhaps because we have virtually no fossil fuels – and
therefore nothing much to lose. According to BP, the UK's proven
economically viable reserves would run out at current production rates
in just seven years for oil, four years for gas and 12 years for coal.
is true for Europe as a whole and indeed Africa. So it's perhaps no
surprise that these two continents – along with the low-lying island
nations – have pushed hardest for a global climate deal. They
collectively own less than a tenth of the carbon. Even if you factor in
all the nations involved in the Cartagena Dialogue
– a loose-knit body of countries proactively engaging in efforts to
push for a global deal – you get to only a fifth of the total.
contrast, those countries with the biggest fossil fuel reserves – such
as the US, China, Saudi Arabia and Canada – tend to be much more
recalcitrant when it comes to climate politics. The US has 18% of the
total and therefore plenty of assets that might need to be written off
if the world agreed to tackle climate change
And it's surely no coincidence that of all the South American nations
it was oil-rich Venezuela that did its best to block the last-minute
progress at the 2011 talks in Durban.
Why can't we quit fossil fuels?
Despite the clean technology of the past decade, we continue to extract and burn fossil fuels more than ever before
A coal-fired power
station in Gelsenkirchen, Germany dwarfs a wind turbine in the
foreground. Photograph: Image Broker/Rex Features
We have far more oil, coal
and gas than we can safely burn. For all the millions of words written about climate change
the challenge really comes down to this: fuel is enormously useful,
massively valuable and hugely important geopolitically, but tackling
global warming means leaving most of it in the ground – by choice.
Although we often hear more about green technology
, consumption levels
or population growth
, leaving fuel in the ground is the crux of the issue. After all, the climate doesn't know or care how much renewable or nuclear energy
we've got, how efficient our cars and homes are
, how many people there are, or even how we run the economy. It only cares how much globe-warming pollution we emit
– and that may be curiously immune to the measures we usually assume will help.
The Burning Question: We can’t burn half the world’s oil, coal and gas. So how do we quit?
Duncan Clark, Mike Berners-Lee
- Tell us what you think: Star-rate and review this book
Impact of climate change: flooding in India. Photograph: Gideon Mendel/Corbis for Actionaid
Four degrees might not sound much but at the
planetary level it is. It is about the same as the temperature increase
observed since the ice age's "last glacial maximum"
when much of the northern hemisphere was trapped under ice as thick as
the world's five tallest skyscrapers stacked on top of each other. It is
impossible to say what changes another three or four degrees would
bring, but the impacts could very plausibly include a collapse in global food production
catastrophic droughts and floods, heatwaves and the beginning of
ice-sheet melt that could eventually raise the sea level enough to wipe
out many of the world's great cities.
Sceptics argue that this doomsday scenario might not come to pass –
and they are right. If we are lucky, the impact of burning all that oil,
coal and gas could turn out to be at the less severe end of the
plausible spectrum. But that is hardly reassuring: it's akin to saying
that it is fine to walk blindfolded into a main road since you can't be
sure there are any cars coming. After less than 1C of temperature
increase so far, we are already seeing some profound changes, including a collapse in Arctic sea ice coverage more severe than even the most pessimistic predictions from just a few years ago
(Brits secretly hoping for a hotter future, be warned: that collapsing
sea ice may have caused the freakish jet stream behaviour that made 2012
the wettest English year on record and obliterated this year's spring,
both mere amuse-bouche for the feast of climate impacts expected in
coming decades, even from the carbon we've emitted so far.)
what is at stake, it is no wonder that governments agree global warming
must be stopped. But that is where the common sense ends and the
cognitive dissonance begins. Because to have a decent chance of not
exceeding the already risky global target, we need to start phasing out fossil fuels
now at a fast enough rate to bring down emissions globally by a few percent a year, and continue doing so for decades to come.
CO2 emissions since 1850 (red); exponential growth (blue); cuts to hit climate target (dashed). Photograph: guardian.co.uk
compare that with what is actually happening. As with the climate, to
understand the situation properly it is necessary to zoom right out to
see the long-term trend. Doing so reveals something fascinating,
worrying and oddly overlooked. As scientists from Lancaster University pointed out last year
, if you plot a graph showing all the carbon emissions
that humans have pumped into the air, the result is a remarkably clear
exponential curve stretching all the way back to the mid-19th century.
Zoom back in on the past decade and it is clear that for all the
mounting scientific concern, the political rhetoric and the clean
technology, nothing has made a jot of difference to the long-term trend
at the global level – the system level. The growth rate in total carbon
emissions in the past decade, at around 2% a year, was the same as that
of the 1850s.
That might sound hard to believe. After all, thanks to green policies and technologies, emissions have been falling in Europe
, the US
and many other countries. Wind turbines and solar panels are ever-more
common, not just in the west but in fast-growing China. And the energy
efficiency of cars, light bulbs, homes and whole economies has been
improving globally for decades. So why isn't the carbon curve showing
any let up? Some might instinctively want to blame the growing
population but that doesn't stack up. The rate of population growth has dropped like a stone since the 1960s and is no longer exponential
but the carbon curve doesn't appear to have noticed that any more than
it has noticed the Kyoto protocol or whether you cycled to work this
morning. For whatever reason, cutting carbon has so far been like
squeezing a balloon: gains made in one place have been cancelled out by
To understand what is going wrong, it is
necessary to consider the nature of exponential growth. This type of
accelerating trend crops up when there is a feedback loop at work. For
example, a credit card debt grows exponentially because interest gets
applied to ever more interest. The number of algae in a jar grows in the
same way: as long as there is food and air, there will be more algae
and so they can breed faster.The fact that our carbon emissions have
followed the same accelerating trend suggests that our use of energy is
driven by a similar kind of feedback loop which is cancelling out
apparent green gains.
That certainly fits with history. The
industrial revolution that kick-started the human impact on the climate
was driven by just such a feedback. The steam engine enabled us to drain
coal mines, providing access to more coal that could power more steam
engines capable of extracting yet more coal. That led to better
technologies and materials that eventually helped ramp up production of
oil as well. But oil didn't displace coal, it helped us mine it more
effectively and stimulated more technologies that raised energy demand
overall. So coal use kept rising too – and oil use in turn kept
increasing as cleaner gas, nuclear and hydro came on stream, helping
power the digital age, which unlocked more advanced technologies capable
of opening up harder-to-read fossil-fuel reserves.
Seen as a
technology-driven feedback loop, it is not surprising that nothing has
yet tamed the global emissions curve, because so far nothing has cut off
its food supply: fossil fuels. Indeed, though our governments now
subsidise clean-power sources and efficient cars and buildings – and
encourage us all to use less energy – they are continuing to undermine
all that by ripping as much oil, coal and gas out of the ground as
possible. And if their own green policies mean there isn't a market for
these fuels at home, then no matter: they can just be exported instead.
Impact of climate change: ice melt in Antarctica. Photograph: Peter McBride/Barcroft Media
is not just governments that are in near-universal denial about what
needs to happen to the fossil fuel sector. Blithely ignoring the fact
that there is already far more accessible fuel than can be safely
burned, pension fund managers and other investors are allowing listed
fossil fuel companies to spend the best part of $1tn a year
(comparable to the US defence budget, or more than $100 for every person on the planet) to find and develop yet more reserves.
and when we emerge from this insanity, the carbon bubble will burst and
those investments will turn out to have been as toxic as sub-prime
mortgages. Don't take my word for it. HSBC analysts recently concluded
that oil giants such as BP – beloved of UK pension funds – could have their value cut in half
if the world decides to tackle climate change
Coal companies can expect an even rougher ride, and yet our financial
regulators still allow them to float on stock markets without mentioning
in their share prospectuses that their assets may soon need to be
But for now, the fuel is still flowing freely. And
for as long as that continues, the global energy feedback loop will
ensure that many of the things we assume will help may be ineffective –
or even counterproductive. More efficient engines may simply enable more
people to drive more cars over greater distances, triggering more road building, more trade and indeed more big suburban houses that take more energy to heat
New renewable or nuclear power sources might just lead to more economic
activity, increasing demand and supply of all energy sources, including
fossil fuels. And local carbon cuts caused by green choices, population
decline or even new economic models may simply free up more fuel for
Of course, oil, coal and gas use will level off eventually no matter what we do. Fossil fuels are a finite resource and each year they get more expensive relative to renewables and nuclear
But given the continued acceleration not just in fossil fuel extraction
but in the production of cars, boilers, furnaces and power plants that
need oil, coal and gas to function, there is zero prospect of that
happening of its own accord any time soon. Forget peak oil caused by dwindling supplies
. At least until we've cracked cheap carbon capture, we need to bring about peak fossil fuels. Voluntarily. And soon.
We know how to do it
A properly designed global cap and trade scheme is one option. Stiff
taxes on the production or sale of carbon-based fuels is another. Or we
could simply oblige companies taking carbon out of the ground to arrange
for a rising share of what they extract to be buried again. Any of
these models could bring down global emissions and stimulate an
explosion of investment and innovation in clean and efficient energy
systems. But there is no avoiding the unpalatable side-effects:
spiralling fuel and energy prices; a write-off of fuel reserves worth many trillions of dollars
; and a fierce global squabble about how to share out the fuels we do decide to burn.
Globally, the vast majority of people want climate change dealt withThis article is
based on the book The Burning Question by Mike Berners-Lee and Duncan
Clark, which is published on 20 April by Profile Books, price £9.99. To
order a copy for £7.99 with free UK p&p, go to guardian.co.uk/bookshop or call [masked]
But can we bring ourselves to prioritise a safe planet over cheap
fuels, flights, power and goods? Can we face calling on our leaders to
end the double-think and constrain oil, coal and gas supplies on our
behalf? Can humanity muster the restraint and cooperation needed to
leave assets worth trillions in the ground?