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The carbon bubble is a hypothesized bubble in the valuation of companies dependent on fossil-fuel-based energy production, because the true costs of carbon dioxide in intensifying global warming are not yet taken into account in a company's stock market valuation. Currently the price of fossil fuels companies' shares is calculated under the assumption that all fossil fuel reserves will be consumed. An estimate made by Kepler Chevreux puts the loss in value of the fossil fuel companies due to the impact of the growing renewables industry at US$28 trillion over the next two decades-long. A more recent analysis made by Citi puts that figure at $100 trillion.
Analysts in both the petroleum and financial industries are concluding that the "age of oil" has already reached a new stage where the excess supply that appeared in late 2014 may continue to prevail in the future. A consensus appears to be emerging that an international agreement will be reached to introduce measures to constrain the combustion of hydrocarbons in an effort to limit global temperature rise to the nominal 2 °C that is consensually predicted to limit environmental harm to tolerable levels.
According to the UK's Committee on Climate Change, overvaluing companies that produce fossil fuels and greenhouse gases poses a serious threat to the economy. The committee warned the British government and Bank of England of the risks of the carbon bubble in 2014. The following year, Mark Carney, the Governor of the Bank of England, in his lecture to Lloyd's of London, warned that limiting global warming to 2 °C appears to require that the "vast majority" of fossil fuel reserves be "stranded assets", or "literally unburnable without expensive carbon-capture technology", resulting in "potentially huge" exposure to investors in that sector. He concluded that "the window of opportunity is finite and shrinking" for responding to the threat that climate change poses to financial resilience and longer-term prosperity, which he called the "tragedy of the horizon". That same month, the Prudential Regulation Authority of the Bank of England issued a report discussing the risks and opportunities that climate change presents to the insurance industry.
In his speech announcing his denial of the proposal to build the Keystone XL oil pipeline, United States President Barack Obama gave as one reason for the decision "... ultimately, if we’re going to prevent large parts of this Earth from becoming not only inhospitable but uninhabitable in our lifetimes, we’re going to have to keep some fossil fuels in the ground...".
The term "carbon bubble" arose in the early 21st century from the increasing awareness of the impact of fossil fuel combustion on global temperatures. The term was coined by the Carbon Tracker Initiative which published key reports in July 2011 and April 2013. and it was further popularised in the New Scientist magazine in October 2011. A widely shared article by Bill McKibben was published in Rolling Stone magazine in July 2012, bringing the idea to the attention of a popular audience. These were followed later in 2013 by a report from the Demos think tank.
Author Bill McKibben has estimated that to sustain human life in the world, up to $20 trillion worth of fossil fuel reserves will need to remain in the ground. The Stern report in 2006 stated that the benefits of strong, early action to decrease the use of oil, coal and gas considerably outweigh the costs. Fossil fuel contributors, the building industry, and land use practices ignore the responsibility of the external costs and ignore the polluter pays principle according to which climate change costs will be paid by historical climate polluters.
Prospects for orderly bubble deflation
A planned and orderly transition away from dependence on fossil fuels could prevent a disruptive "bursting of the carbon bubble". A number of developments are supporting such a transition.
- Government action on climate change
- A detailed academic study of the consequences for the producers of the various hydrocarbon fuels concluded in early 2015 that a third of global oil reserves, half of gas reserves and over 80% of current coal reserves should remain underground from 2010 to 2050 in order to meet the target of no more than a 2 °C rise in average global temperature. Hence continued exploration or development of reserves would be extraneous to needs. To meet the 2 °C target, strong measures would be needed to suppress demand, such as a substantial carbon tax leaving a lower price for the producers from a smaller market. The impact on producers would vary widely depending on the cost of production in their areas of operation. For example, the impact in Canada would be far larger than in the United States. Open-pit mining of bituminous sands in Canada would soon drop to negligible levels after 2020 in all scenarios considered because it is considerably less economic than other methods of production.
- In mid-2015, the Centre for Science and Policy, University of Cambridge published a report assessing the risks from climate change in order to estimate the amount of resources that should be allocated to address them. The report notes that "standard economic estimates of the global costs of climate change are wildly sensitive both to assumptions about the science, and to judgments about the value of human life. They are also likely to be systematically biased towards underestimation of risk, as they tend to omit a wide range of impacts that are difficult to quantify".
- Awareness in the financial industry
- By 2013, there was significant awareness in the financial industry of the risks associated with exposure to companies involved in extraction of fossil fuels. In early 2014, the FTSE Group, BlackRock and the Natural Resources Defense Council collaborated in the creation of a stock market index series that excludes companies linked to exploration, ownership or extraction of carbon-based fossil fuel reserves. These indices are intended to make it easier for investors to steer their investments away from such companies. It has been proposed that companies be required by law to report on their greenhouse gas emissions and assess the risk this could pose to their future financial performance. According to Christiana Figueres, UNFCCC, companies have a duty to shareholders to move to a low-carbon economy, because of the effects of the carbon bubble.
- Divestment campaigning
- The ongoing fossil fuels divestment campaign in universities, churches and pension funds contributes to divestiture from fossil fuel companies. By late 2015, this divestiture was reported to reach $2.6 trillion, by September 2019, total divestment commitments had grown to an approximate value of $11.48 trillion.
- In September 2019, when the University of California announced, it will divest its $83 billion in endowment and pension funds from the fossil fuel industry, UC officials said, they made it for financial reasons: "We believe hanging on to fossil fuel assets is a financial risk."
- Cheaper clean energy
- The price of renewable energy is continually dropping. As of 2014 new wind power is cheaper than new coal and gas power in Australia, China and the United States. Also the electricity produced from a photovoltaic roof system is cheaper than the electricity from the grid in many countries and places in the world.
- Real pollution control
- Fossil fuels are known for their huge negative externalities or hidden costs. Tackling this market failure will make alternative energies more competitive and will reduce the consumption of fossil fuels.
- Cancellation of government energy subsidies
- According to the International Monetary Fund, governments around the world gave $523 billion direct subsidies for fossil fuels in 2011. If a carbon tax of $25 per ton of CO2 is included the subsidies total $1.9 trillion only for 2011. Removing fossil fuels subsidies will further reduce their consumption and make the alternative energies even more competitive.
- Renewable corporations lobbying
- As the penetration of the renewable energy increases so will the wealth of the renewable energy corporations. This and the increasing number of employees in the renewable energy sector will inevitably transform into political lobbying against fossil fuels.
- Urbanization and Electric transportation
- Urbanization combined with increasing availability of convenient, safe and efficient public transport, green buildings and efficient energy distribution, as well as extended product life/use/re-use, increased local recycling and self-sustainability in raw materials drive down energy consumption. Perversely, ready access to travel and luxury, more batteries (energy storage and conversion losses) and proliferation of low cost LED technology, e.g. for advertising and decorative uses, may negate some of the potential energy savings. Switching to renewables sourced, electricity based transportation will reduce the demand for fossil fuels, particularly petroleum. Combining roof photovoltaics with second hand EV batteries will further reduce the dependence on fossil fuels as they will provide the needed grid storage for the times when the intermittent renewable energy sources are not producing electricity.
- Innovation and Efficiency
- Innovations in, for example, information technology, miniaturisation, LEDs, virtual reality, 3D printing, new materials and biotechnology enable energy reduction in the areas of human sustenance and travel, as well as physical product creation and distribution. They also offer new avenues for economic growth and technological leadership, and are thus especially important for sustained wealth creation in the most developed, net-energy importing nations. Energy consumption may be expected to decrease as the service sector of the economy continues to grow whilst heavy industry, construction, manufacturing and agricultural sectors reduce. Increased investments in energy efficiency may lead to less consumed energy even when the economy grows. Without growth in energy usage the prices of fossil fuels will decrease and most of the mega energy projects may be uneconomical.
- Demographics and Changes in consumer behavior
- A shrinking and ageing, already materially prosperous, satisfied and individualistic society may be less motivated towards additional, energy consuming material goods and new construction. On the other hand, longer life expectancy and increasing leisure and travel time will increase total energy use over an individual's lifetime. According to research by U.S. PIRG Education Fund reported in late 2014: "Over the last decade – after 60-plus years of steady increases – the number of miles driven by the average American has been falling. Young Americans have experienced the greatest changes: driving less; taking public transport, biking and walking more; and seeking out places to live in cities and walkable communities where driving is an option, not a necessity." Data from the U.S. Energy Information Administration show that U.S. consumption of both coal and petroleum liquids peaked in 2005, and at the end of 2014 had fallen by 21% and 13% respectively. Consumption of natural gas continued to climb, resulting in the rate of total fossil fuel consumption in terms of energy units falling only 6% from its peak in 2007 to a plateau. On the other hand, global consumption of petroleum climbed steadily a total of 32% from 1995 to 2014.
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