What is the Carbon Bubble, and What Happens When it Bursts?

You might have seenárecent headlines alluding to a so-called “carbon bubble” and warning that, when it bursts, a financial crisis could loom.

For example, the Guardian reports, “Plunging prices for renewable energy and rapidly increasing investment in low-carbon technologies could leave fossil fuel companies with trillions in stranded assets and spark a global financial crisis.”

This rather scary paragraph is just one of several findings from a recent study published in the science journal “Nature Climate Change“. Other headlines haveáechoed the claim that the collapse of the carbon bubble could result in trillions of losses.

But how do we know this isn’t just a scare story? To understand that, we have to dig a bit deeper into what is being talked about here.

What is the Carbon Bubble?

Fossil fuels have led to industrial booms across the world and continue to be part of the economic growth of many nations, including rising super powers China and India.

At the same time though, the world has finally acknowledged that the high carbon economy has come at a massive cost: we have produced so manyágreenhouse gasses that weáare causing a warming effect that could dramatically and devastatingly change the global climate.

As a result, we have started to look toward a low-carbon future where greener energy sources like solar power and wind power, perhaps as well as newer biofuels, become our leading sources of energy generation.

This of course will be critical for meeting our global climate change goals, which most recently were set out under the Paris Agreement.

It will shock no one that businesses that have invested heavily in fossil fuels, or that fossil fuel companies have attempted to frustrate this transition and have encouraged political powers to keep investing in high-carbon assets.

Some nations, like the United States under the Trump administration and Canada under the Trudeau government, are continuing to invest in fossil fuels and oil pipelinesádespiteáknowing that the global economy is shifting.

And it is shifting at a significant pace. Renewables are now at a point, despite many world governments heavily subsidizing fossil fuels, where they are competingáwith or in some cases out-competing fossil fuels.

What’s more, this is something that is not dependent on government action.áIt’s a change driven by innovative businessesáandáby consumers who are only too keen to use their spending power to drive the world away from a climate crisis.

This, however, creates a problem.áIt’s undeniable that fossil fuels are still a big player in the global economy, as they make up a sizable chunk of global assets. When looking at their future prospects, though, their current value may be seriously overinflated — and that matters.

As more and more governments and businesses get on board the climate change reductionátrain and switch to low-carbon economies, the gap between what fossil fuels are actually worth and what they are valued at will grow.

This is the so-called “carbon bubble”, which is created by the mismatch between value of high-carbon assets in the long term, and the value they are being marked at now. When that bubble bursts, the shortfall could threaten global economic stability. And that’s where this latest research comes in.

Averting a Carbon Bubble Financial Crisis

Investors have known about theácarbon bubble for some time, and other studies have warned about so-called “stranded assets“: assets that are no longer worth what projections said would be their value.

This latest study, conducted by researchers from Radboud and Cambridge universities, looked to create detailed simulations to chart the demand, and by extension the value, on assets if low carbon technologies, electrification of transport and greater efficiency in fuel use, continues.

This is quite apart from any extra action, like steps countries will take to reacháthe Paris Agreement’s goals. The researchers also flagged the predicted rapid sell-off of assets as those prices fall and countries want to get rid of what are no longer good investments.

The researchers found that fossil fuel assets could see an abrupt shift before 2035, far earlier than investors were hoping for.

For some nations, this won’t be as much of a problem. Japan, China and many in the EU currently have to importámost of their fossil fuels. They are innovating low-carbon technologies which in turn would boost their own economies when the carbon bubble bursts. At the very least, many EU nations would no longer have to spend as much on fossil fuels, if the cost falls.

But for the fossil fuel energy exporters like Canada, the US and Russia, this could be a major problem. Indeed, it could lead to the collapse of their fossil fuel industries, and this will only be made worse if current administrations fail to embrace renewables.

Analysts have often rebuffed claims of a carbon bubble, saying that it is based on politicians artificially changing the markets through aggressive policies. The researchers in this case say that the facts speak for themselves, and that the reality is that the shift to a low-carbon economy is already happening.

“You don’t need to have anything for the stranding to happen, because what has already been done in the past is driving this phenomenon,” Prof Jorge Vi˝uales tells BBC news. “Many investors don’t take the carbon bubble seriously, they say that climate policies won’t be adopted, and if they are adopted they won’t be tough and even if they are tough they won’t be adopted anytime soon – what we are saying is, that doesn’t matter.”

There is some good news in all this. Globally, losses from the high-carbon economy will likely be offset by countries like China andátheirárenewable energy growth.

If vulnerableánations want toáprotect their economies from the carbon bubble, they have to start embracing renewables and scaling back high carbon assets.

If they don’t, countries like the US could face sharing a part in a trillion dollar loss in the markets. While that can and will be absorbed to an extent, it would translate to job losses and financial hardships worse than the 2008 financial crisis.

The political fallout from that collapse would also be substantial and the upheaval could cause serious civil and human rights problems. Again though, if we act now, this may be something we can avert.

Essentially, the study authors say that the bursting of the carbon bubble isn’t a doomsday prediction, it is now looking like an inevitability, and one that is much closer than we thought. Our governments must act — the question is, will they?

Photo credit: Thinkstock.

39 comments

Lisa M
Lisa Mabout a month ago

Noted.

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Lisa M
Lisa Mabout a month ago

Noted.

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Lisa M
Lisa Mabout a month ago

Noted.

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Lisa M
Lisa Mabout a month ago

Noted.

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RONALD Walker
RONALD Walker2 months ago

This is nothing new to our world. When we change from whale oil to crude oil. There lost of job in whaling. Yet whaling is still being done today. (That whole other problem) Only to hear that the Rockefellers say they save the whales. Thet did! Then the Rockefellers started hurting when Electricity was cheaper than kerosene. Then cars started taking over of horses. Then the Rockefellers were even richer. As solar power starting to take over and moving away from coal. Yet few people don't this yet coal is being taken to make Carbon fiber. Now, Carbon fiber is 10 times stronger than steel and weighs less than steel by 500%. All airplanes are now made of Carbon fiber. Causing a problem with Aluminum companies. There is talk about building the very frist carbon fiber building. As for mini brian, trump can't see what is going on and a businessman (mini brain trump can see 2 seconds ahead) should be putting money into new technology and making billions more money.

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Angela J
Angela J2 months ago

Thanks

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ANA MARIJA R
ANA MARIJA R2 months ago

well said, Loredana V

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Loredana V
Loredana V2 months ago

It's not a question of "if", but "when?". It's inevitable.

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Winn A
Winn Adams2 months ago

Thanks

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Greta L
Greta L2 months ago

thanks

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