Experts Warn: Carbon Bubble Could Worsen Global Economic Crisis
The world could be heading for another major economic shock as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, according to new research.
In its second seminal report, Unburnable Carbon 2013: Wasted Capital and Stranded Assets, the Carbon Tracker Initiative found that firms invested $674 billion last year alone in projects trying to find and develop new fossil fuels reserves.
To stick to current agreed global limits on emissions—and keep warming below 2˚C—the International Energy Agency warns that two thirds of the known global fossil fuel reserves must stay in the ground. This means 60-80 percent of the fossil fuels listed by companies are effectively ‘unburnable’ and therefore worthless, which could lead to massive market losses.
The authors of the latest report say that even if these rules were relaxed to allow emissions to a level which would see a 3˚C temperature rise, there would still have to be limits on fossil fuels. And while carbon capture and storage technology, which buries emissions underground, can play a role in the future, Carbon Tracker warns is unlikely to make any impact until the second half of the 21st century.
This highlights a fundamental contradiction–on the one hand vast amounts of fossil fuels must remain in the ground and on the other huge amounts of money is being poured into finding new reserves.
Commenting on the report, Lord Nicholas Stern, former chief economist of the World Bank said the business models of fossil fuel companies continue to be based on the extreme assumption that there will be no limits to greenhouse gas emissions. He warned that $6 trillion could be pumped into the ‘carbon bubble’ over the next decade.
Lord Stern said:
Smart investors can already see that most fossil fuel reserves are essentially unburnable because of the need to reduce emissions in line with the global agreement by governments to avoid global warming of more than 2°C. They can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision.
But I hope this report will mean that regulators also take note, because much of the embedded risk from these potentially toxic carbon assets is not openly recognized through current reporting requirements.
The researchers are calling on the financial industry to improve the transparency and regulation around risky fossil fuel investments.
Along with banking giants HSBC they want to ensure that the potentially toxic assets underpinning global markets are plain for all to see as it could have major implications for global trading centers such as New York and London.
Fund managers speaking out in support of these recommendations have urged industry-wide action sooner rather than later in order to prevent shocks like the sub-prime mortgage crash that triggered the current global recession. The average pension fund portfolio already sinks 55 percent of its investments into risky carbon assets according to recent figures.
According to the report:
Company valuation and credit ratings methodologies do not typically inform investors about their exposure to these stranded assets, despite these reserves supporting share value of $4 trillion in 2012 and servicing $1.27 trillion in outstanding corporate debt over the same period. We need to challenge these methodologies:
- To avoid systemic risks such as climate change, investors will have to demand to go beyond the traditional definition of risk as underperforming the benchmark
- The rebalancing and redistribution of funds if required to protect shareholders’ interest and prevent wasted capital, the scale of which can be seen below. Greater understanding of the uncertainty and risk around fossil fuels can help the redistribution of these funds towards alternatives more attractive.
Financial institutions use pension payments or shareholder money to make investments and maximize returns–but they also have a duty to act in their members’ best interests. However, individuals have the power to trigger a positive shift.
With the carbon bubble looming, investing in fossil fuel projects could hurt members’ savings, members can demand that financial institutions report and reduce their exposure to climate change risk.
ShareAction has launched a platform to coincide with the launch of the latest report, allowing people to research their pension funds and send letters of concern to the financial institutions using their money to fund dangerous fossil fuel projects.
This study also makes a number of recommendations for action by governments, financial intermediaries, institutional investors and citizens to manage this risk:
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By Katherine Kornei
Clear-cutting a forest is relatively easy—just pick a tree and start chopping. But there are benefits to more sophisticated forest management. One technique—which involves repeatedly harvesting smaller trees every 30 or so years but leaving an upper story of larger trees for longer periods (60, 90, or 120 years)—ensures a steady supply of both firewood and construction timber.
A Pattern in the Rings<p>The <a href="https://www.encyclopedia.com/science/dictionaries-thesauruses-pictures-and-press-releases/coppice-standards-0" target="_blank">coppice-with-standards</a> management practice produces a two-story forest, said <a href="https://www.researchgate.net/profile/Bernhard_Muigg" target="_blank">Bernhard Muigg</a>, a dendrochronologist at the University of Freiburg in Germany. "You have an upper story of single trees that are allowed to grow for several understory generations."</p><p>That arrangement imprints a characteristic tree ring pattern in a forest's upper story trees (the "standards"): thick rings indicative of heavy growth, which show up at regular intervals as the surrounding smaller trees are cut down. "The trees are growing faster," said Muigg. "You can really see it with your naked eye."</p><p>Muigg and his collaborators characterized that <a href="https://ltrr.arizona.edu/about/treerings" target="_blank">dendrochronological pattern</a> in 161 oak trees growing in central Germany, one of the few remaining sites in Europe with actively managed coppice-with-standards forests. They found up to nine cycles of heavy growth in the trees, the oldest of which was planted in 1761. The researchers then turned to a historical data set — more than 2,000 oak <a href="https://eos.org/articles/podcast-discovering-europes-history-through-its-timbers" target="_blank" rel="noopener noreferrer">timbers from buildings and archaeological sites</a> in Germany and France dating from between 300 and 2015 — to look for a similar pattern.</p>
A Gap of 500 Years<p>The team found wood with the characteristic coppice-with-standards tree ring pattern dating to as early as the 6th century. That was a surprise, Muigg and his colleagues concluded, because the first mention of this forest management practice in historical documents occurred only roughly 500 years later, in the 13th century.</p><p>It's probable that forest management practices were not well documented prior to the High Middle Ages (1000–1250), the researchers suggested. "Forests are mainly mentioned in the context of royal hunting interests or donations," said Muigg. Dendrochronological studies are particularly important because they can reveal information not captured by a sparse historical record, he added.</p><p>These results were <a href="https://www.nature.com/articles/s41598-020-78933-8" target="_blank">published in December in <em>Scientific Reports</em></a>.</p><p>"It's nice to see the longevity and the history of coppice-with-standards," said <a href="https://www.teagasc.ie/contact/staff-directory/s/ian-short/" target="_blank">Ian Short</a>, a forestry researcher at Teagasc, the Agriculture and Food Development Authority in Ireland, not involved in the research. This technique is valuable because it promotes conservation and habitat biodiversity, Short said. "In the next 10 or 20 years, I think we'll see more coppice-with-standards coming back into production."</p><p>In the future, Muigg and his collaborators hope to analyze a larger sample of historic timbers to trace how the coppice-with-standards practice spread throughout Europe. It will be interesting to understand where this technique originated and how it propagated, said Muigg, and there are plenty of old pieces of wood waiting to be analyzed. "There [are] tons of dendrochronological data."</p><p><em><a href="mailto:email@example.com" target="_blank" rel="noopener noreferrer">Katherine Kornei</a> is a freelance science journalist covering Earth and space science. Her bylines frequently appear in Eos, Science, and The New York Times. Katherine holds a Ph.D. in astronomy from the University of California, Los Angeles.</em></p><p><em>This story originally appeared in <a href="https://eos.org/articles/tree-rings-reveal-how-ancient-forests-were-managed" target="_blank">Eos</a></em> <em>and is republished here as part of Covering Climate Now, a global journalism collaboration strengthening coverage of the climate story.</em></p>
Earth's ice is melting 57 percent faster than in the 1990s and the world has lost more than 28 trillion tons of ice since 1994, research published Monday in The Cryosphere shows.
By Jewel Fraser
Noreen Nunez lives in a middle-class neighborhood that rises up a hillside in Trinidad's Tunapuna-Piarco region.