The Carbon Bubble

In my last blog I cited three reasons for the impending death spiral of fossil fuels: the need to take action on climate change, the falling price of renewables and the rising price of fossil fuels. Currently stock markets value oil, gas and coal companies as if they were actually ever going to be able to economically exploit all known fossil fuel reserves. This simply will not happen. Probably 80% of known reserves will never be used and therefore the stock market valuations of the fossil fuel companies are massively inflated. This overvaluation is often referred to as the Carbon Bubble. Like all bubbles it will someday burst. The financial analysts Kepler Chevreux estimate the potential losses over the next two decades to be in the region of $28 Trillion.

Sometimes us Green campaigners are accused of saying some rather outlandish things. However the massive and rapid change from fossil fuels to renewables is being urged on by some pretty big and hard headed organisations, including two of the World’s largest banks, UBS and Citigroup. In a recent report UBS claim that in Europe big power stations could pretty well all be redundant in 10 to 20 years, as decentralised solar and other renewables, battery storage and electric cars replace existing fossil fuel technology.

The death spiral of fossil fuels will not happen evenly or in a planned way. Market forces will kill off those projects with the highest capital requirements and the riskiest production forecasts. Arctic and Deep Ocean drilling, tar sands and fracking for shale gas are obvious candidates to be first to become uneconomic and consigned to history. Many other oil, gas and coal projects will rapidly follow, with only the lowest cost gas and oil fields and coal mines able to complete with the falling costs of renewables. This is the line that UBS and Citigroup seem to be saying. I’d argue for the global introduction of carbon taxes to help hasten the process. I’d also argue that managing this transition so as to minimize economic chaos, while also speeding the process along to prevent climate catastrophe, will be a tremendous challenge, but one full of positive opportunities.

The renewables revolution is not happening evenly around the World or even within countries as my last blog on the uneven deployment of photovoltaics in the USA demonstrated. The UBS group cites Germany, Spain and Italy as likely leaders in the European context, as their energy prices are higher than some countries and regulatory support has been stronger. I would add a lot of other countries to this list, both in Europe and globally.

Both the economic and the ecological case to transform the global economy are becoming ever clearer by the day. UBS say “It’s time to join the revolution”. Welcome to the barricades! Achieving historic change often requires some pretty strange alliances! Bankers and eco-activists, unite! Onward, together!  (Jeremy Williams blog)