Countries sticking to internationally agreed upon goals to address global warming could pop the “carbon bubble” and cause another financial crisis as government policy will render oil, gas, and coal reserves held by companies unattainable, a recent study claims.
According to a report by a London School of Economics professor and the think tank Carbon Tracker, stock markets have created a carbon bubble by overvaluing fossil fuel assets which could be rendered unusable by potential government regulations to fight global warming.
The report said that at least two-thirds of oil, coal, and gas reserves held by fossil fuels companies will be made unattainable and rendered effectively worthless if internationally agreed upon climate targets are to be met. If countries stick to the agreements, locking up all those resources would lead to huge market losses and hurt to the global economy.
“The financial crisis has shown what happens when risks accumulate unnoticed,” said Lord Nicholas Stern, a professor at the London School of Economics and one of the report’s authors.
According to the Guardian, the report’s warning is supported by HSBC, Citi, Standard and Poor’s and the International Energy Agency.
In 2010, world governments agreed to reduce greenhouse gas emissions enough to avoid a rise in global temperature of more than 2 degrees Celsius above pre-industrial levels. According to the report, between 60 percent and 80 percent of oil, gas, and coal reserves of publicly listed companies would be “unburnable” in order to achieve that goal.
According to the report, more than $6 trillion will be allocated towards developing fossil fuels over the next decade. The top 200 companies spent $674 billion in 2012 to develop fossil fuels which could potentially be made unattainable.
However, markets don’t seem to be concerned about an international climate agreement stranding their resources.
“They can’t believe that and also believe that the markets are sensibly valued now,” said Stern.
“They only believe environmental regulation when they see it,” said James Leaton of Carbon Tracker. “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 crashes.”
“The scale of ‘listed’ unburnable carbon revealed in this report is astonishing,” said Paul Spedding, an oil and gas analyst at HSBC. “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.”
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