Approaching ‘carbon bubble” could wipe trillions from global economy

In this May 13, 2010 file photo, pelicans float on the water with an offshore oil platform in the background in the Santa Barbara Channel off the coast of Santa Barbara, Calif. Oil and gas companies drilling off the coast of Southern California violated state regulations nearly 400 times in the past three years, according to a report by an environmental group. (AP Photo/Mark J. Terrill, File)

(Courthouse News Service) Mass unemployment, public disenchantment with institutions, a restless body politic – these are some of the features of a brave new world that could come about if prices of fossil fuels suddenly crater due to the rapid development of renewable energy technology.

In a first-of-its-kind study issued Monday, economists from around the globe used simulations to chart the decline of fossil fuels industries and the repercussions for the global economy.

Cambridge University researchers found technological momentum in the renewable energy sector will lead to a widespread devaluation of fossil fuel assets by as soon as 2035, with major implications for nations with carbon-based economies.

“Until now, observers mostly paid attention to the likely effectiveness of climate policies, but not to the ongoing and effectively irreversible technological transition,” said Dr Jean-Francois Mercure, study lead author from Radboud University and Cambridge University’s Centre for Environment, Energy and Natural Resource Governance.

Published in Nature Climate Change, the article says these economic upheavals will be driven more by market forces than public policy like the Paris Agreement, and there will be clear winners and losers.

Winners include countries like China, since its emphasis on renewable energy market investments – in part to solve its extreme and persistent pollution problems – makes it ready to adapt to the coming change.

Other fossil fuel importers like Japan and several European nations also stand to benefit as expenditures allocated to fossil fuels fall dramatically. If this is coupled with investment in renewable energies, these countries could see their gross domestic product soar as well as a boost in employment for the renewable energy sectors.

But such a rise in renewable energy will also create what the researchers term a “carbon bubble”: an abrupt shift in prices of fossil fuels due to sharply falling demand. According to some scenarios contemplated in the study, up to $4 trillion in assets could be wiped out of the global economy abruptly.

This bodes ill for countries who rely on carbon exports to prop up major parts of their economies – including Canada, Russian and the United States.

“Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands,” said Jorge Viñuales, study co-author and a professor from Cambridge University. “For too long, global climate policy has been seen as a prisoner’s dilemma game, where some nations can do nothing and get a ‘free ride’ on the efforts of others. Our results show this is no longer the case.”

Vinuales and the other authors stress that the Paris Agreement and other climate change public policy have limited influence on the market forces in the global economy and this cataclysmic change in fossil fuel values will happen irrespective of any given country’s attitudes toward climate change of nostalgia for the fossil fuel industry.

The paper’s dire warnings about the future global energy markets come at a time when the Trump administration is promoting fossil fuel industries, stacking federal agencies with high-level officials tied to the industry while deleting or altering climate change-related materials produced by the federal government.

Another study out Monday found that the United States still contributes $27 billion in subsidies to the fossil fuel industry to assist with production, consumption and exploration.

Cambridge economists caution that overreliance on this type of fossil fuel resurgence is short-sighted and could lead to enormous economic upheavals including mass unemployment in the fossil fuel industry.

Such employment trends could fuel populism, mistrust of the government and a worsening of the public disenchantment with government and capitalism already on display.

“If we are to defuse this time-bomb in the global economy, we need to move promptly but cautiously,” said Hector Pollitt, study co-author from Cambridge Econometrics. “The carbon bubble must be deflated before it becomes too big, but progress must also be carefully managed.”

One nightmare scenario contemplated by the economists envisions what would happen if the depression in oil and gas assets is accompanied by level production from OPEC nations in the Middle East.

“If OPEC nations maintain production levels as prices drop, they will crowd out the market,” said Pollitt. “OPEC nations will be the only ones able to produce fossil fuels at the low costs required, and exporters such as the U.S. and Canada will be unable to compete.”

The authors recommend a series of short- and long-term steps to ward off the type of disasters that could materialize under a range of scenarios.

Investment in renewable energy technologies along with economic diversification will be paramount for countries like the United States, Russia and Canada, the researchers say.

For individual investors, pension funds and other asset managers that rely on energy stocks as part of their portfolio, the authors have a simple message: divest.

“Divestment from fossil fuels is both a prudential and necessary thing to do,” said Mercure. “Investment and pension funds need to evaluate how much of their money is in fossil fuel assets and reassess the risk they are taking.”