LONDON, United Kingdom — Members of parliament in the United Kingdom warned that stock markets have created a 600 billion pound ($997.62 billion in USD) “carbon bubble” by drastically overvaluing companies that use fossil fuels for energy production.
If demands to reduce carbon emissions by 2020 are met, up to 80% of fossil fuels will have to remain in the ground due to the disastrous environmental effects of climate change produced by greenhouse gas emissions. Additionally, less than half the 200 billion pounds ($332.54 billion) needed to deliver emissions cuts are in place.
Political will and a lack of consensus on climate change in the private sector have resulted in an overvaluation of fossil fuel assets held by companies. This, in turn, is expected to produce alarming consequences down the road. This is because a runaway climate and international regulation on fossil fuels ought to lower the value of fossil fuels, but they have not done so.
The carbon bubble also produces the most financial risks for pension-savers and investors. A Green European Foundation report estimated the exposure of 23 European Union pension funds and the 20 largest EU banks to oil, gas and coal mining firms. The report indicated that “5% of total assets for pension funds, 4% for insurance companies and 1.4% for banks were exposed to risk from a carbon bubble.”
As a result, the carbon bubble poses a serious threat to the financial stability of the EU as a whole. Member states and financial institutions are expected to take a serious hit, as there are over 1 trillion euros ($1.3866 trillion) held in high-risk carbon assets, which will have to stay in the ground to avoid financial and environmental catastrophe.
In addition to the implications of climate change itself, international law has also required a shift away from fossil fuel use. A 2010 United Nations agreement reached in Cancun, Mexico, established a global warming limitation of a 2°C rise. The U.K. participated in the agreement, but is therefore placed in a tough position due to the carbon bubble.
To address the situation, the Environmental Audit Committee (EAC) of the U.K. Parliament has also warned that an increase in green finance and infrastructure would be necessary to meet the emissions reduction goals and avoid a destabilizing climate.
Moving towards a low-carbon economy has become inevitable. However, it is either financial risk in the carbon bubble or environmental risk in a destabilizing climate that would compel the private sector to move away from greenhouse gas-emitting fossil fuels to green technologies. Although it would take a large amount of capital to make the change, waiting to do so may produce startling, irreversible problems.
As stated by the executive secretary of the UN Framework Convention on Climate Change, Christiana Figueres, “We will move to a low-carbon world because nature will force us, or because policy will guide us. If we wait until nature forces us, the cost will be astronomical.”
Sources: BBC, The Guardian, The Guardian