Tuesday, April 23, 2013

Carbon bubbles?



Over the past couple of days I had few twitter exchanges about the term ‘carbon bubble’. These were triggered by a (rhetorical?) question from Maarten Hajer who asked: "'Carbon bubble' is quite a catchy new discourse. Can this language turn the tables?"

The reference was to this Guardian story, printed on the title page on Friday 19 April (Carbon bubble will plunge the world into another financial crisis).


It summarizes a report published by Lord Stern and the thinktank Carbon Tracker. It is worth mentioning the assumptions and assertions made by the report:

The so-called "carbon bubble" is the result of an over-valuation of oilcoal and gas reserves held by fossil fuel companies.
At least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate changeIf the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses. But the stock markets are betting on countries' inaction on climate change.”

So the warning is that we will see a burst of the overvalued fossil fuels IF the international agreements will be implemented. This is a paradox and a somewhat off-putting political message. It makes us wonder what to prefer, a world with perhaps serious, dangerous long-term climate change, or a world with another certain financial collapse. If put in front of this dilemma, I am sure people will not think twice what to prefer. The political message of the metaphor seems to be defeatist.

The carbon bubble metaphor suggests that the ‘over-valuation’ of fossil fuels cannot go on because there is urgent political action looming. But how convincing is this argument? What we have seen in the past years was a bursting of renewable energy bubbles, and a dramatic fall in coal prices as a result of the production of cheap shale gas. Of course one might say, in the long run fossil fuels will be phased out and therefore no longer profitable. But this will happen only if and when cheaper low carbon technologies are introduced and markets make a transition. Current climate policies are toothless. Such a transition can take many forms depending on how well they are managed. True, financial and economic disruptions cannot be excluded in the transition and climate campaigners always knew this (or should have known).

In my reading the whole argument (and the metaphor) of carbon bubbles is based on wishful thinking. It wants to believe that the 2 degree goal will be somehow implemented and that therefore the fossil fuel companies and their assets will go bust. The bubble metaphor is supposed to convey a sense of alarm. Rhetoric as usual, from the usual suspects.

Yet, there may be a subtler message here. If the link between overvalued assets and serious climate policy exists, this means that the very climate policy might trigger a crisis if the transition into a low carbon economy is not well managed. And in this sense the bubble talk has perhaps some merit. It indicates that effective climate policies may lead to economic disruption. And the hesitancy on part of policy makers with regard to such policies might be explained by this very possibility.  

7 comments:

Richard S J Tol said...

Besides defeatist, carbon bubbles are nonsense.

Stern assumes that:
1. the long-term value of fossil fuel assets will be affected by climate policy; this would only be true if climate policy is kept secret from the market;
2. the value of fossil fuel companies is to a large extent determined by the reserves they own; this is simply not true; expected profits in the short term are far more important;
3. a sharp drop in the value of fossil fuel companies causes an economic crises; empirical evidence suggests otherwise; we've seen large energy companies wobble and fall without wider ramifications.

Mark B. said...

"the whole argument (and the metaphor) of carbon bubbles is based on wishful thinking."


Better to say delusional. In coming decades, dissertations will be written on the madness of climate alarmism of the early 21st century, just like books have been written about the tulip bubble and end-of-the-world religious cults.

@ReinerGrundmann said...

Richard Tol has written a more elaborate comment on his blog, see here:
http://richardtol.blogspot.co.uk/2013/05/blowing-carbon-bubbles.html

His conclusion is the same:

'In sum, there is no carbon bubble. If there were a carbon bubble, it would not be about to burst. If it would burst, the economic impact would be minimal.'

Meanwhile, Naomi Klein in the Guardian claims how serious the issue is, how even green groups are lured into the bubble and how the movement against the bubble is growing.

http://www.guardian.co.uk/commentisfree/2013/may/03/giants-green-world-profit-planets-destruction

Werner Krauss said...

Reiner,

are you sure that the Naomi Klein article has something to do with the carbon bubble problem? She argues for green groups' divestment from fossil fuel polluters; not because of a carbon bubble, but for environmental (climate change) reasons. Different issue, right?

@ReinerGrundmann said...

Werner
both issues are connected. The divestment idea has a direct bearing on the carbon bubble rhetoric. As one commentar wrote on Klein's article:

'The overall message is clear: Environmentalist bean-counters, watch out.
And an additional pecuniary and a-moral argument: with the Carbon Bubble hovering in the background above to go *POP*, they stand to lose a lot anyway.'

Werner Krauss said...

Reiner,

no doubt, you can connect. But one should not confound symbolic and monetary capital; you cannot judge the value of the first by the outcome of the second. And I understand Naomi Klein's call for disinvestment as a question of attitude, of political correctness in the first place. At least, she does not mention the carbon bubble theory. Instead, she tries to agitate campuses and tries to establish a moral standard on NGOs. If this makes sense in terms of carbon output etc is another question, of course. But of course, nobody wants to see Greenpeace invest its capital into EXXON, right?

@ReinerGrundmann said...

Yes, I agree. Although I can imagine quite a few people who would like to see Greenpeace investing its capital into EXXON ;-)

Having said this, the problem of a moralising discourse with regard to climate is that we would not know where to stop. Virtually every act of our daily lives is connected to fossil fuel use and it is impossible to draw a line between 'good' and 'evil' lifestyles. There is, of course a lot of easy symbolic action (against SUV's - pro ethical shopping). But if you face the harsh realities, you realize how implicated everyone is, including the Greens, greens, fundamental GREENs, etc. So I read Klein's piece as an attempt to show a way where symbolically at least a clear demarcation line can be drawn, between good and evil. At the same time I suspect it has deeper motives and is intended to connect to the carbon bubble story.