Gore & Blood

Will the popping of the carbon bubble really bop investors?

November 2, 2013
Obsession
Energy Shocks
November 2, 2013

What if the “carbon” bubble is like the sub-prime housing bubble?

A bunch of assets are valued thanks to certain assumptions—that fossil fuels prices won’t zoom upwards or that most homeowners won’t default on their loans—and then those assumptions turn out wrong. People did default on their home loans. And, presumably, the price of carbon-based fuel will eventually increase.

That’s the analogy painted by former US vice president Al Gore and investor David Blood, who run an investment fund focused on how long-term trends like climate change will affect the markets. Gore, a prominent environmentalist, is putting his money where his mouth is, but also engaging in some wishful thinking.

The logic goes this way: Preventing a devastating 2°C increase in global temperatures will require limits on carbon emissions, according to the International Energy Agency, that will keep two-thirds of the world’s remaining fossil fuel reserves in the ground. Policies to achieve that range from carbon taxes and emissions caps to larger investments in renewable energy and battery storage. This trend will create “stranded carbon assets” (pdf)—starting with the dirtiest ones like coal and companies that depend on it.

Gore and Blood want to push back against the idea that public policies creating higher prices on carbon will be apparent well in advance. Sudden regulatory changes in response to health threats and a volatile climate, leaps forward in renewable energy innovation, and social unrest could all make carbon assets suddenly less valuable, and investors should be wary.

But it’s not clear that the market is necessarily missing this information. Consider the US coal industry, which is under pressure from both natural gas and environmental regulators. The Environmental Protection Agency is preparing new emissions rules for coal plants that will make their operation much more expensive, and the government doesn’t project any new coal plants will be built between 2018 and 2035. Now, consider the change in stock prices of US coal firms over the last two years. It doesn’t look like markets are treating them as a growing asset:

Screen Shot 2013-11-01 at 2.09.13 PM

Indeed, there’s one point where the two investors echo the talking points of the coal industry: Technology to capture and separate carbon emissions at dirty power plants isn’t cost effective at scale, which will make it harder for coal power plants to survive further efforts to clean them up.

It’s certainly possible that sudden changes in public policy—driven by conditions like over-the-top pollution in China—could become far more aggressive in the future and pull the rug out from under carbon assets before investors are prepared. It’s arguably better for the planet if, per the housing bubble analogy, it’s 2006 and Gore is John Paulson, shorting the sub-prime market. But today it appears the carbon bubble is deflating at a gradual pace.

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