‘Carbon bubble’ could wipe trillions from global economy; Fossil fuel demand will decline in near future with major economic & geopolitical consequences; need to decarbonise early

  • Scientists conclude that further economic damage from a potential bubble burst could be avoided by decarbonising early.
  • The study findings support the existence of a carbon bubble which, if not deflated early, could lead to a discounted global wealth loss of between 1 to 4 trillion dollars, a loss comparable to what triggered the 2007 financial crisis.
  • “New efficiency standards imply that we do more with the same amounts of energy, as older, less efficient technologies are gradually phased out. The transition is therefore irreversible; however its pace can vary according to whether and how new climate policies are implemented.”

June 4, 2018 Radboud University Nijmegen Read full ScienceDaily article

Unlike current expectations, new research suggests that the prospects of the fossil-fuel industry are not bright, and that its demise may have profound economic and geopolitical consequences. Relying on ground breaking modelling techniques, researchers show that the consumption of fossil fuels will slow down or decline in the near future, as a result of ongoing technological change, potentially exacerbated by new climate policies.

….This transition will result in clear winners, importers such as China and the EU, and losers, exporters such as Russia, the USA or Canada, which could see their fossil-fuel industries nearly shut down. If these countries keep up their investment and production levels despite declining demand, the global wealth loss could be huge: 1-4 trillion dollars, a loss comparable to that which triggered the financial crisis in 2007. Even the USA could not pull out from the transition, as it would only hurt itself even more. Global climate policy is therefore no longer a ‘prisoner’s dilemma’ game.

The study findings support the existence of a carbon bubble which, if not deflated early, could lead to a discounted global wealth loss of between 1 to 4 trillion dollars, a loss comparable to what triggered the 2007 financial crisis.If countries keep investing in equipment to search for, extract, process and transport fossil fuels, even though their demand declines, they will end up losing money on these investments on top of their losses due to limited exports,” Mercure explains. “Countries should instead carefully deflate the carbon bubble through investment in a variety of industries and steady divestment. The way in which this is done will determine the impact of the ongoing low-carbon transition on the financial sector.”…

…much like companies, pension funds and other institutions currently invest in fossil-fuel assets. Following recommendations from central banks, commercial banks are increasingly looking at the financial risks of stranded fossil-fuel assets, even though their possible impacts have not yet been fully determined. Until now, observers mostly paid attention to the likely effectiveness of climate policies, but not to the ongoing and effectively irreversible technological transition. This level of ‘creative destruction’ appears inevitable now and must be carefully managed,” Mercure concludes.

J.-F. Mercure, H. Pollitt, J. E. Viñuales, N. R. Edwards, P. B. Holden, U. Chewpreecha, P. Salas, I. Sognnaes, A. Lam, F. Knobloch. Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 2018; DOI: 10.1038/s41558-018-0182-1