The Carbon Bubble

by | June 28, 2019

Credit: Flickr, KansasJayhawk17

Today I’ll share two stories (that are absolutely terrifying) because I believe they’re so important that they’ll ultimately accelerate the time it takes for the planetary crisis to become the central concern of our society.

I’ll also mention an enormous disruption to financial markets that will likely happen around the same time as society’s inevitable turning point and prioritization of the climate crisis. This financial disruption has been dubbed the “carbon bubble” and is beginning to alarm experts around the world.

Truly Scary Developments

  • Permafrost is melting 70 years ahead of schedule.
  • Our climate’s sensitivity to GHG emissions may have been drastically underestimated.
    • Scientists aren’t sure how to explain it yet and some are definitely skeptical, but with the most recent data and knowledge incorporated, many of the IPCC’s newest models are saying the climate could warm 66% more than previously expected for a given amount of greenhouse gas emissions.
    • Translation: If the latest models are right, it’s going to get way hotter than we thought it would.

So even as more hopeful signs emerge, the alarm bells continue to ring louder and louder.

An under-reported one to keep an eye on is coming from the financial market. They’re calling it the “carbon bubble”.

The Carbon Bubble

Credit: Carbon Tracker

More and more experts are warning of a “carbon bubble” including a coalition of 34 central banks that recently released an enlightening report about it. They’ve laid out recommendations for action to help avoid a climate-driven “sudden collapse in asset prices”.

I think Alex Steffen explains what the upcoming carbon bubble is very well in “The Real Politics of the Planetary Crisis”:

“Here’s the blunt reality: the pressure to cut emissions and respond to a changing climate are going to alter what we do and don’t see as valuable. Climate action will trigger an enormous shift in the way we value things.

If we can’t burn oil, it’s not worth very much. If we can’t defend coastal real estate from rising seas (or even insure it, for that matter), it’s not worth very much. If the industrial process a company owns exposes them to future climate litigation, it’s not worth very much. The value of those assets is going to plummet, inevitably… and likely, soon.

Currently, though, these assets are valued very highly. Oil is seen as hugely valuable, coastal real estate is seen as hugely valuable, industrial patents are seen as hugely valuable. When there’s a large difference between how markets think assets should be valued and what they are (or will) actually be worth, we call it a “bubble”.

Experts now call the differences between valuations and worth in fossil fuel corporations, climate-harmful industries and vulnerable physical assets the ‘Carbon Bubble.’ It is still growing. And here’s the thing about bubbles: they always pop.

…There is no long game in high-carbon industries. Their owners know this. They don’t need a long game, though: their investment horizons are years (or even months), not decades. Investors don’t even need successful companies, actually — as we’ve seen time and time again with hostile takeovers, pump-and-dumps, stock buybacks and other financial looting tactics. All they need is the perception of the inevitability of future profit, today. That’s what keeps valuations high.

Here’s something critical it took me a long time (and the patience of a few smart friends) to understand: the Carbon Bubble will pop not when high-carbon practices become impossible, but when their profits cease to be seen as reliable. As it becomes clear that these assets will not produce profit in the future, their valuations will drop — even if the businesses that own them continue to function for years. The value of oil companies will collapse long before the last barrel of oil is burned; the value of beachfront hotels will collapse long before rising tides flood their lobbies.

Put another way: The pop comes when people understand that growth in these industries is over and that, in fact, these industries are now going to contract. That’s when investors start pulling out and looking for safer bets. As investors begin to flee these companies, others realize more devaluation is on the way, so they want to get out before the drop: a trickle of divestment becomes a flood and the price collapses. What triggers the drop is investors ceasing to believe the company has a strong future.

Because that risk already exists, the pop is way closer than most people understand.

A crisis in investor confidence is the biggest threat to fossil fuel companies — not environmentalists, regulations, clean energy competitors or climate agreements. For high-carbon industries to continue to be attractive investments, then, they must spin a tale of future growth. They must make potential investors believe that even if there is a Carbon Bubble, it is decades away from popping — that their high profits today will continue for the foreseeable future, so their stock is worth buying.

All the Carbon Lobby needs to do to reap gargantuan profits is to forestall serious climate action for another decade or so. All they need to do is to lose slowly.

That same decade, of course, is the last one we have to avoid catastrophic losses.” – Alex Steffen

Whether it comes in the form of a bubble or not, the valuations of many companies and assets will eventually reflect the reality of the climate crisis and our necessary response to it.

Yes, this may cause chaos in the short term and many people will be left holding the bag of these highly overvalued assets – but ultimately this will be a good thing. It means investors are starting to get smart and money is flowing in the right direction – towards the sustainable future rather than the harmful industries of the past.

This correction – this accurate and rational re-evaluation of what is and isn’t valuable is inevitable. It’s just a matter of when.

This post originally featured in the Crowdsourcing Sustainability newsletter. Sign up for the newsletter below!

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