What is the carbon bubble?
Investments amounting to trillions of dollars in fossil fuels – coal mines, oil wells, power stations, conventional vehicles – will lose their value when the world moves decisively to a low-carbon economy. Fossil fuel reserves and production facilities will become stranded assets, having absorbed capital but unable to be used to make a profit. This carbon bubble has been estimated at between $1tn and $4tn (£3tn), a large chunk of the global economy’s balance sheet.
What will happen when it bursts?
Investors with high exposure to fossil fuels in their portfolios will be hurt, as those companies and assets cease to be profitable. Jobs will be lost in fossil fuel production and related industries. If the bubble bursts suddenly, as a new paper in Nature suggests it might, rather than gradually deflating over decades, then it could trigger a financial crisis.
Is bursting the carbon bubble a good thing?
Arguably yes, in that it corrects what has long been a market failure. Currently, fossil fuel prices do not reflect the environmental damage the fuels do, in climate change and air and water pollution. If they were priced to take these external factors into account, they would cost much more and businesses would seek alternatives – that is the idea behind carbon pricing. However, adding those external costs at a stroke would send energy prices soaring, with far-reaching effects across the economy. That is why economists prefer to phase in more realistic pricing for carbon-rich fuels over time. And the converse is also true: if renewables and energy efficiency were to result in an unexpected plunge in demand for fossil fuels, independently of government actions, that could send fossil fuel prices through the floor, triggering a crisis among the millions of investors in those assets.
Does the bubble bursting mean we will keep more fossil fuels in the ground?
Probably, but it could encourage some countries to pump out more, at least in the short term. For instance, if demand for fossil fuels drops suddenly then the OPEC countries could flood the market with cheap oil and gas, leaving those with more expensive assets – shale, tar sands, Arctic drilling – unable to compete.
But does it mean we have solved climate change, because we are moving to low-carbon tech?
Again, not quite. Lots of other actions are still needed, not least because the world could adjust to lower fossil fuel demand with a glut of energy production. The transition to a low-carbon economy is happening, but still much too slowly. At current rates, we will smash through the 2C ceilingpromised under the Paris agreement, with rises of 3C and higher forecast. Without strong further commitments on climate change from major nations, we will reach our emissions targets too late and face a future of locked-in global warming that will result in floods, droughts, heatwaves and losses to global agriculture.
Which countries will benefit if the carbon bubble bursts?
China relies on high-cost fuel imports at present and is benefitting from its investments in renewables, as is Japan, which has also invested heavily in energy efficiency. The EU is likely to be another winner as it has also moved early to pursue a low-carbon path.
Which countries are most at risk?
Middle Eastern oil-rich states have built their economies on fossil fuels, so would need to diversify, which some are beginning to talk about. Russia could see its domestic fossil fuel industries collapse. Canada and the US could also be at risk: with their production of high-cost unconventional oil and gas from tar sands and shale, they are vulnerable both to a drop in demand and a drop in fossil fuel prices, unless their industries have invested in renewable energy and greater efficiency.
What could stop the bubble bursting?
A reversal of major nations’ support for low-carbon technology and a reversion to an over-reliance on fossil fuels, which in many cases would have to involve large taxpayer subsidies for the latter.