Carbon bubble could trigger global financial crisis

Volcanic gas bubble bursting in water

A new study led by the University of Cambridge has found that there will be a dramatic decline in the demand for fossil fuels in the near future, driven by a major global shift in power and transportation technology.

Their simulations suggest that this fall in demand could leave vast reserves of fossil fuels as "stranded assets", abruptly turning from high-value assets to low-value assets before 2035.

Since the International Energy Agency said in a 2016 report that fossil fuel prices were set to rise till at least 2040, a number of long-term investments have been made in the sector. "The carbon bubble must be deflated before it becomes too big, but progress must also be carefully managed".

The authors say that by 2035, up to $1 trillion dollars could be wiped off the economy if new actions to keep warming to less than 3.6 degrees Fahrenheit are taken.

Some big economies - like China, Japan and many countries in the European Union - which now rely on costly fossil fuel imports, would benefit in the scenario of the prices collapsing.

This change in the near future would occur even if major nations did not adopt climate-friendly energy policies, leading to a slump in fossil fuel prices and stocks of associated companies. The scientists warn that losses will be exacerbated if these countries neglect renewable energy in favour of fossil fuels.

The research over and over again ran simulations to estimate the outcomes of many combinations of global environmental and economic change.

Despite the virtual stranglehold on global production of crude oil by OPEC and Russian Federation, and the pursuit of environmentally-unfriendly policies by the Trump administration, a new study found there is an economic "carbon bubble" forming, one that could lead to the sudden loss of up to $4 trillion in the global economy by 2035, mostly accounted for by "stranded" fossil fuel stockpiles.

"The bubble is still growing right now - investors believe fossil fuel consumption will go on for decades, they believe climate policies will not be tough enough", Jorge Vinuales, a professor at the University of Cambridge and co-author of the study, told The Telegraph over phone.

"Individual nations can not avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands", he said. "Our results show this is no longer the case".


This would cause an initial $4 trillion of fossil fuel assets to vanish.

One of the factors that may add to the commotion caused by fossil fuel asset stranding is what's referred to as a "sell-out" by Organization of the Petroleum Exporting Countries (OPEC) countries in the Middle East.

'If OPEC nations maintain production levels as prices drop, they will crowd out the market, ' said Pollitt.

In this new world, it would seem China - which has already begun investing substantially in renewable energy technologies - stands to gain the most and could establish itself as the clear global power, ahead of its USA and Russian rivals.

The study further suggests that in a one-and-four-trillion USA dollars equivalence, the global economy in fossil fuel assets alone could be wiped out.

'China is already a world leader in renewable energy technologies, and needs to deploy them domestically to tackle risky levels of pollution, ' Viñuales said. Additionally, stranding would take a higher toll on some of its main geopolitical competitors.

The research authors propose that economic damage from adherence to fossil fuels may result in political turmoil of the kind the world is perhaps already witnessing.

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

For example, countries and regions that are heavily reliant on the importing of fossil fuels - such as the EU, Japan and China - would thrive knowing that a focus of investment in renewable energy technology could help boost GDP.

'Divestment from fossil fuels is both a prudential and necessary thing to do, ' said Dr Jean-Francois 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".

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