Fossil fuels aren’t only damaging environmental wellness, but the world’s financial wellbeing also. This is according to leading economists, who say that as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, the world could be heading for a major economic crisis.
Lord (Nicholas) Stern, a professor at the London School of Economics, said ‘The financial crisis has shown what happens when risks accumulate unnoticed,’ adding that almost all investors and regulators are failing to address the risk which is ‘very big indeed.’ This “carbon bubble” has come out of the fact that the oil, coal and gas reserves held by fossil fuel companies have been over-valued.
If the world meets the existing internationally agreed targets to avoid the threshold for “dangerous” climate change, at least two-thirds of these reserves will have to remain underground. While that means good news for the planet, the market will massively lose out as these reserves will be in effect unburnable and so worthless. As it stands, the stock markets are betting on countries’ inaction on climate change.
This is based on a report from Stern and the think-tank Carbon Tracker, whose warning is supported by organisations including HSBC, Citi, Standard and Poor’s and the International Energy Agency. According to Stern, instead of reducing efforts to develop fossil fuels, the top 200 companies spent $674bn (£441bn) in 2012 to find and exploit even more new resources. This basically means that 1% of global GDP could end up as “stranded” or valueless assets, even though Stern’s landmark 2006 report on the economic impact of climate change concluded that spending 1% of GDP would pay for a transition to a clean and sustainable economy.
Stern said the investors clearly did not believe action to curb climate change was going to be taken, noting ‘They can’t believe that and also believe that the markets are sensibly valued now.’ James Leaton, from Carbon Tracker and a former PwC consultant, added, ‘They only believe environmental regulation when they see it. Analysts say you should ride the train until just before it goes off the cliff. Each thinks they are smart enough to get off in time, but not everyone can get out of the door at the same time. That is why you get bubbles and crashes.’
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