The carbon bubble

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The carbon bubble

Yohann Koshy looks at the big problems we could have from the links between the stock market and climate change.


1: If we want to understand the ‘carbon bubble’ we must start with all the hydrocarbon reserves, for example oil and gas, under the ground. They are still under the ground, and no-one has used the oil or gas, but their value already shows in the stock market. This is because people predict the profit that the oil and gas companies will make in the future from them. The market thinks: if there is more oil under the ground, the oil business will stay healthy.

2: But the IPCC say that, if we want to stop global temperature rising by more than two degrees this century, about two-thirds to four-fifths of those underground reserves will need to stay underground. If the market accepts this, the future of ExxonMobil doesn’t look too good. Economists say this oil and gas that we must not use is a ‘stranded asset’. The New Economics Foundation says it could be the biggest asset price bubble in history.

3: Energy companies (and people who depend on them) make up almost a third of the stock market capitalization in the world. If new laws (to reduce climate change) stop companies using the oil and gas, the companies could lose $43 trillion dollars by the end of the century. Banks that lend to these companies are also at risk: they could go bankrupt.

4: It’s a Catch 22 (a problem with no solution): if we deal with the ‘carbon bubble’, the world economy could go into crisis; if we don’t, we humans have no real future on this planet.

5: Next we need to make banks and fossil fuel companies state clearly how big their ‘stranded assets’ are. Markets will then be able to change their predictions. We need to force banks to not encourage more investment in risky carbon. Finally, we need to test central banks to see how resistant they are to problems from the ‘carbon bubble’.

But a really radical solution is to bring in democratic control over finance. Then we could finance a decarbonized economy (defence against floods, home insulation and green energy) instead.


(This article has been simplified so the words, text structure and quotes may have been changed)