Carbon Bubble Spells Future Financial Chaos
The world’s economy is essentially one giant Aero bar, I say this as it is seemingly made up of endless bubbles. We have had the dot-com bubble, the property bubble and the credit bubble, to name but a few. Now lurking – if anything as overtly non-threatening as a bubble can lurk – on the horizon is the prospect of the bubble to end all bubbles – the carbon bubble.
According to – now archetypal green crusader – Al Gore the threat comes from companies failing to take into account the possible future stranding of their carbon based assets. As more and more anti-carbon regulations are introduced to combat global warming, the depreciation of these assets will accelerate until they are worth next to nought. Investor behaviour has yet to react to this scenario and carbon based commodities account for at least $7tn on the books of publicly listed companies – double the GDP of Germany.
Mr. Gore also warned that the effects of the carbon bubble are likely to set off a chain reaction that could spread to agriculture, real estate and infrastructure unless immediate steps are taken.
In order to gently deflate this bubble before it is fatally attracted to something sharp and pointy, he and his investment partner David Blood have proposed a four point plan.
- Companies, investors and regulators should identify the carbon risks in their portfolios
- Company Managers and boards should publicly disclose these risks
- Investment portfolios should be diversified to include low-carbon infrastructure
- Money should be taken out of high carbon assets
Scientists have already suggested that our “Carbon Budget” will only extend us a credit line for the next 30 years. If we continue spending thereafter we face the prospect of cataclysmic events reshaping the planet as we know it. Failing to take this future into account means that fund managers could be held for gross negligence and give those eternal winners – lawyers – the chance to make a killing from endless lawsuits. It’s lose-lose!
In what may sadly turn out to be a particularly resonant statement, Mr. Gore said that in the wake of the financial crisis investors were “embarrassed that they did not see what was blindingly obvious in retrospect”. Let’s hope that they have learned their lesson – as this time, even more is at stake.
Fiona Harvey (2013) Al Gore: World is on brink of “carbon bubble” http://www.theguardian.com/environment/2013/nov/01/gore-warns-carbon-bubble