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THE CARBON BUBBLE

The most important number in the new IPCC report is a warning to investors

A natural gas flare on an oil well pad burns as the sun sets outside Watford City, North Dakota
REUTERS/Andrew Cullen/File Photo/File Photo
Trillions of dollars of fossil fuel assets could suddenly lose value as a result of climate policy, the IPCC report warned.
  • Tim McDonnell
By Tim McDonnell

Climate reporter

Published

Climate policy is poised to erase $4 trillion off the books of energy companies by 2050, according to the April 4 Intergovernmental Panel on Climate Change report. That’s not just a problem for those companies: If they suddenly collapse, it will send shockwaves across the global economy and could trigger the biggest financial crisis in decades.

The “carbon bubble” started as a warning from a niche group of climate-minded financiers in the early 2010s, but has since become accepted as orthodoxy by most major regulators and financial institutions.

The idea is that much of the oil, gas, and coal held in reserve by energy companies will never be unburied once emissions pricing becomes more widespread and the economy shifts to cleaner alternatives. Infrastructure like pipelines, power plants, and export terminals may also be “stranded” before they have been in use long enough to pay back investors. If so, the companies that own those assets are overvalued, and investors are in for a rude adjustment.

Exactly how big of an adjustment depends on how aggressive climate policy becomes. $4 trillion is the estimate of stranded assets in a world that is 2 degrees Celsius warmer than pre-industrial levels, the maximum targeted in the Paris Agreement; with warming limited to 1.5C, stranded asset risk would be “higher,” the report says, without giving a specific estimate.

IPCC: Existing and planned fossil fuels put climate goals out of reach

In other words, $4 trillion is roughly the financial risk implied by the IPCC report’s overarching conclusion, that the world’s existing and planned fossil fuel infrastructure blows its climate goals out of the water. Assuming that policy gets stronger and clean-energy costs continue to plummet, investors must be on the lookout for stranded asset risk in their portfolios.

That was the rationale behind the Securities and Exchange Commission’s recent decision to require US public companies to disclose their climate-related risks. But merely disclosing risks doesn’t seem to be enough to make companies address them: The IPCC also found that “there is currently not enough evidence in order to conclude whether climate-related risk assessments result in increased climate action.”

That’s why the final frontier of corporate greenwashing is lobbying. Many banks and energy companies are setting decarbonization goals with one hand while lobbying against climate policy with the other, effectively seeking to deflate the carbon bubble not by investing less in fossil fuels but by ensuring their longevity. That’s a gamble with at least $4 trillion at stake.

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