Markets face risk of carbon bubble

After the crash and the credit crunch, investors are being warned of the potential consequences of a ‘carbon bubble’.

Stock markets are sitting on vast reserves of fossil fuels that cannot be burnt if the world is to stick to climate change targets, according to research issued by the Carbon Tracker initiative.

The report claims that only 20 per cent of listed carbon reserves can be used if the target of a 2 degrees Celsius rise in global temperatures is to be achieved by 2050. The 2 degree limit is based on the growing scientific consensus on limiting the most harmful effects of climate change.

Fossil fuel reserves, which are held as assets by 200 listed oil, gas and coal companies, represent potential carbon emissions of 745 gigatonnes of carbon dioxide. But only 149 GtCO2 can be burnt if the world’s remaining carbon budget is to be stuck to by 2050. Investors therefore face  the risk of having 80 per cent of carbon assets stranded, according to the report.

If consumption continues at current rates, it is warned that the unburnable carbon limit will be reached in 16 years. ‘Today’s financial architecture is not fit for purpose to manage the transition to a low-carbon economy’ said the report.

James Leaton, project director of Carbon Tracker, said: “regulators must not sleepwalk towards another financial disaster. They must act now to improve disclosure by fossil fuel reserves owners and assess systemic financial risks to the capital markets posed by unburnable carbon”.

According to the research, the London Stock Exchange is at particular risk. The UK has less than 0.2 per cent of the world’s oil, gas and coal reserves but company reserves listed in London have a carbon emissions potential of 105 GtCO2– nearly ten times the UK’s carbon budget between now and 2050.

“The financial crisis demonstrated that markets don’t act to save themselves” continued Mr. Leaton. “Everyone assumed house prices would always go up until the bubble burst; at present everyone is assuming we can keep increasing carbon emissions.”