After being regarded either as a warning from progressive-thinking analysts or as a concept by environmentalists, the environment carbon bubble, also known as the “unburnable” carbon, has now been recognised officially as a possible systemic risk for financial markets worldwide. The erstwhile concept has since gained rapid ascent in financial markets last year.
Continued investments in coal, gas, oil, and other fossil fuels by major corporations may precipitate a crash in the share market and result in a crisis of sub-prime proportion in the existing economic cycle. This is one of the reasons why the Bank of England sent an enquiry letter to the Environment Audit Committee of the House of Commons.
Pro- and Anti-Carbon Bubble Supporters
According to the Bank of England’s Governor, Mark Carney, preliminary discussions have been made regarding the potential financial stability risks that this carbon bubble may bring about. Financial analysts welcomed this move and suggested other financial regulators and central banks follow suit. The carbon bubble is taken seriously by Citigroup, Kepler Chevreux, and Deutsch Bank.
Shell, Big Oil, Exxon Mobil, and Big Coal do not accept the scenarios or stranded assets to be real possibilities that the carbon bubble could cause. Any agreement between countries restricting global warming to 2C or 1.5C may mean the implementation of some kind of budget which leaves two thirds of fossil fuels exclusively in the ground, hence, the resistance of those companies.
One Regulator’s Dream is One User’s Nightmare
One scheme does not make the situation any better. The CRC, short for Carbon Reduction Commitment Energy Efficient Scheme, may be a dream for an industry regulator (but a) climate nightmare for a user. While it seems to affect only major clients who use more than 6,000 MWh in electricity billed every half hour, it overlaps with two other schemes.
These include the European Union’s Emissions Trading Scheme or EUETS and the Climate Change Agreements (CCAs). The CRC, to say the least, not only has a name far too long for comfort, its 257 pages of rules can be quite unfathomable for the man on the street. The Australian government, for instance, recognizes neither the CRC nor the environment carbon bubble issue as significant.
Former Future Fund Treasurer Peter Costello, for one, said he “saw no reason” for the diversion of investments from coal companies. Additionally, Prime Minister Tony Abbott’s administration has always maintained that it “stands up” for coal and has all but mocked the divestment moves of investors who want to protect themselves against potential carbon bubble scenarios.
More Regulatory Voices Needed
Still, the Bank of England’s action prompted the non-government organisation Carbon Tracker to comment that it was the first acknowledgement from a major financial regulator that, indeed, the global listing for coal and gas and oil reserves could precipitate crucial financial consequences in the light of becoming stranded assets.
According to Carbon Tracker Founder/Executive Director Mark Campanale, the “poor” disclosure practices made by fossil fuel companies mask the potential financial risks of fossil fuels as assets. None of the companies – Exxon Mobil, Shell, Statoil, and MOL, among others –- surveyed by Carbon Brief considered climate action to be threatening to their businesses in the immediate future.
More regulatory voices like that of the Bank of England’s are needed to stop the efforts of major gas, coal, and oil companies that are trying to silence the substantive debates on effective and cost efficient ways for shifting to a hundred percent clean energy by the year 2050.