In the past few months increasing attention has been given to the notion of a carbon bubble. The idea is that to keep gobal temperatures from rising past a specified number you are limited to burnng a certain amount of carbon based fuels - a cap exists. But if you look at the development of carbon resources by compannies and countries, the amount is much greater than any reasonable cap - large amounts of money are being spent for nothing. At some point you have a huge inventory of stranded assets. But how can a market possibly be wrong? After all, it is impossible for a home mortgage bubble or a banking crises to exist isn't it?
There may be some very serious investment risks and ruined economies down the pike. Perhaps another externality of a carbon based economy as it tries to avert disaster. Of course there is always the possibility that we will figure diaster is ok.
One of many papers on the subject - this one has the following forward by Lord Stern:
This report shows very clearly the gross inconsistency
between current valuations of fossil fuel assets and
the path governments have committed to take in
order to manage the huge risks of climate change.
If we burn all current reserves of fossil fuels, we will
emit enough CO2 to create a prehistoric climate,
with Earth’s temperature elevated to levels not
experienced for millions of years. Such a world would
be radically different from today, with changes in the
intensity and frequency of extreme events, such as
floods and droughts, higher sea levels re-drawing the
coastlines of the world, and desertification re-defining
where people can live. These impacts could lead to
mass migrations, with the potential for widespread
conflict, threatening economic growth and stability.
Governments have started to recognise the scale
of the risks posed by unmanaged climate change
and have already agreed to reduce annual global
emissions to avoid global warming of more than 2°C.
In late 2015, governments are expected to gather
in Paris at the annual United Nations climate change
summit to sign a treaty that will commit everyone
to action that will achieve this aim.
Carbon capture and storage technology could, in
theory, allow fossil fuels to be burned in a way that
is consistent with the aim of reducing emissions.
However, this report shows that even a scenario for
its deployment that is currently considered optimistic
would only make a marginal difference to the amount
of fossil fuels that can be consumed by 2050.
Smart investors can already see that most fossil fuel
reserves are essentially unburnable because of the
need to reduce emissions in line with the global
agreement. They can see that investing in companies
that rely solely or heavily on constantly replenishing
reserves of fossil fuels is becoming a very risky
decision.
But I hope this report will mean
that regulators also take note,
because much of the embedded
risk from these potentially toxic
carbon assets is not openly
recognised through current
reporting requirements.
The financial crisis has shown what happens when
risks accumulate unnoticed. So it is important that
companies and regulators work together to openly
declare and quantify these valuation risks associated
with carbon, allowing investors and shareholders to
consider how best to manage them.
If these valuation risks are made more transparent,
companies that currently specialise in fossil fuels
will be able to develop new business models that
take into account the fact that demand for their
products will decline steeply over the next decades,
and to consider their options for diversifying in order
to maintain their value. Investors will also be able to
consider whether it is better to stay with high-carbon
assets, or instead seek new opportunities in those
businesses that are best positioned gain in a low
carbon economy.
This report provides investors and regulators with
the evidence they need that serious risks are growing
for high-carbon assets. It should help them to better
manage these risks in a timely and effective way.
Professor Lord Stern of Brentford, Chair, Grantham
Research Institute on Climate Change and the
Environment, London School of Economics and
Political Science
Of course this presuposes that humanity has enough sanity to eventually agree to limits,
mark doesn't like google
there are issues when the end user is the product and taste is an issue...
(hat tip to Josh)
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