Is The Carbon Investment Bubble About to Burst?
There's another economic bubble building and when it bursts, it will shake the foundations of our fossil fuel-dependent civilization.
Good news investors: there's still lots of carbon to profit from, an estimated 2,860 billion tons of the stuff in term of its CO2 potential once exhumed and burned in power plants and transportation systems. In fact, according to Carbon Tracker, last year alone, companies invested $647 billion to find and develop carbon fuel reserves. And using present accounting methods, those companies' valuations are in the neighborhood of $4 trillion dollars, on top of which is another $1 trillion-plus in debt.
The bad news is, there's a strong likelihood most, if not all, of that capital will be wasted, becoming stranded assets: financial speak for useless, resulting in perhaps the greatest misallocation of resources - apart from the creation of suburbia - the planet has ever seen, one that makes government loans to Fisker and Solyndra look like your kid's squandered allowance money.
While the earth is richly endowed with lots of carbon, only a fraction of which we've actually pulled up out of the ground and spewed into the atmosphere, to actually recover and burn it all, converting all that coal, petroleum and natural gas into carbon dioxide, not to mention waste heat and pollutants, would effectively overheat the planet through the greenhouse gas effect and condemn life as we know it to oblivion. Remember, it has happened before, but those mass extinction events were caused by cosmological factors: mainly meteor bombardments. This time it would be man-made.
Carbon Tracker and the International Energy Agency (IEA) estimated back in 2010 that the carbon budget of planet earth is somewhere between 565-886 billion tonnes of CO2 over the next roughly 37 years, out to 2050. That would, it was agreed in Cancun, keep planet warming to a 2 degree C increase above pre-industrial levels.
In financial terms that means that between now and 2050, only 20 percent of the planet's fossil fuel reserves can be utilized for energy production. Eighty percent of the Earth's coal, oil and gas are off limits: they are stranded, we simply mustn't use them.
The problem for investors is that money managers from banks to hedge funds to pension and mutual funds have, with virtually no regard to this risk, sunk hundreds of billions into fossil fuel investments: the Bakken play in North Dakota being just one of them. Writes Carbon Trackers in their report …
…this report estimates that the top 200 oil and gas and mining companies have allocated up to $674bn in the last year for finding and developing more reserves and new ways of extracting them.
At the current rate of capital expenditure, the next decade will see over $6trn will be allocated to developing fossil fuels.
These 200 companies already have an invested interest in 1,541 billion tonnes equivalent of CO2, which under a low carbon regime would put those assets off limits. The result, HSBC, the global banking firm, estimates would be a drastic drop in the valuation of those companies to the tune of 40-60 percent. In other words, investors would take the proverbial and financially painful 'haircut' that would pale the 2007 housing bubble when it burst.
Author and environmental activist Bill McKibben and his 350.org movement has been warning colleges, universities and local governments about this problem, urging them to systematically begin divesting their pension funds from any investments in fossil fuels, using the same economic crowbar that pulled down the apartheid regime in South Africa.
And it appears to be working. On April 25, 2013 the Mayor of Seattle, 350.org and the Mayor's Innovation Project announced that nine mayors and city councils are urging their cities to divest from these top 200 companies. The cities include: Madison, WI, Bayfield, WI, Ithaca, NY, Boulder, CO, Rochester, MN, Eugene, OR, Richmond, CA, Berkeley, CA, and San Francisco, CA, where earlier this week, the Board of Supervisors voted unanimously to approve the city's pension fund to divest more than $538 million of its $16 billion from the fossil fuel industry.
The impact would not only be limited to those 200 companies, of course. A strict, low-carbon 'diet' for the planet would directly impact transportation. Because virtually all of the world's vehicles, from 'trains, planes and automobiles,' run on fossil fuels, petroleum mainly at this point, other sources of energy will have to developed: biofuels that aren't dependent on vast quantities of fresh water and solar energy being the most promising choices at the moment.
The beauty of electric vehicles, of course, is that they aren't limited to fossil fuels, even if a large percentage of the power grid is reliant on coal and natural gas at the moment. EVs, unlike conventional cars or even hybrids, can be powered by energy from the sun and wind, itself just another form of solar energy.
Carbon Tracker urges, "To minimise the risks for investors and savers, capital needs to be redirected away from high-carbon options."
Fortunately, that's happening too. So far in 2013, wind and solar energy accounted for all new generation capacity in the United States, and in March, solar was the largest new source added.
Additionally, studies are now emerging that say it is possible, for example, to power New York City entirely with renewable energy.
So, if you're looking for yet another sound, economic reason to root for the success of electric vehicles, the coming fossil fuel bubble is a pretty good one.
Originally published: 27 Apr 2013
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