That’s Why They call Them Bubbles. Carbon Set for Biggest Pop in History.

Guardian:

Plunging prices for renewable energy and rapidly increasing investment in low-carbon technologies could leave fossil fuel companies with trillions in stranded assets and spark a global financial crisis, a new study has found.

A sudden drop in demand for fossil fuels before 2035 is likely, according to the study, given the current global investments and economic advantages in a low-carbon transition.

The existence of a “carbon bubble” – assets in fossil fuels that are currently overvalued because, in the medium and long-term, the world will have to drastically reduce greenhouse gas emissions – has long been proposed by academics, activists and investors. The new study, published on Monday in the journal Nature Climate Change, shows that a sharp slump in the value of fossil fuels would cause this bubble to burst, and posits that such a slump is likely before 2035 based on current patterns of energy use.

Crucially, the findings suggest that a rapid decline in fossil fuel demand is no longer dependent on stronger policies and actions from governments around the world. Instead, the authors’ detailed simulations found the demand drop would take place even if major nations undertake no new climate policies, or reverse some previous commitments.

That is because advances in technologies for energy efficiency and renewable power, and the accompanying drop in their price, have made low-carbon energy much more economically and technically attractive.

Dr Jean-François Mercure, the lead author, from Radboud and Cambridge universities, told the Guardian: “This is happening already – we have observed the data and made projections from there. With more policies from governments, this would happen faster. But without strong [climate] policies, it is already happening. To some degree at least you can’t stop it. But if people stop putting funds now in fossil fuels, they may at least limit their losses.”

By moving to a lower-carbon footing, companies and investors could take advantage of the transition that is occurring, rather than trying to fight the growing trend. Mercure said fossil fuel companies were likely to fight among each other for the remaining market, rather than have a strong impact on renewable energy businesses.

Prof Jorge Viñuales, co-author, said: “Contrary to investor expectations, the stranding of fossil fuel assets may happen even without new climate policies. Individual nations cannot avoid the situation by ignoring the Paris agreement or burying their heads in coal and tar sands.”

However, Mercure also warned that the transition was happening too slowly to stave off the worst effects of climate change. Although the trajectory towards a low-carbon economy would continue, to keep within 2C above pre-industrial levels – the limit set under the Paris agreement – would require much stronger government action and new policies.

That could also help investors by pointing the way to deflation of the carbon bubble before they make new investments in fossil fuel assets.

The paper supports the view of some policy and investment experts that economics and technology are now driving action on climate change, where before impetus was all from policymakers. Former UN climate chief Christiana Figueres told the Guardian, a year after Donald Trump announced the withdrawal of the US from the Paris agreement: “There is a big difference between the economics of climate change and the politics of climate change. Is Trump going to stop that advance [by businesses towards low-carbon technologies]? I don’t think so.”

Frédéric Samama, of Europe’s biggest asset manager Amundi, also believes investors have reached a “tipping point”, in relation to taking action on greenhouse gases through their portfolio management. He told Bloomberg last month that “until recently, the question” of climate change was “not on their radar screen”.

Bloomberg:

The world’s deepest-pocketed investors are starting to take climate change seriously, according to Amundi SA.

“We are really observing a tipping point among the institutional investors on climate change,” said Frederic Samama, co-head of institutional clients at the Paris-based firm. “Until recently, that question was not on their radar screen. It’s changing, and it’s changing super fast.”

Risks from global warming range from damage to physical assets from extreme weather to falling prices on fossil fuel-related assets, as the world moves away from burning coal and oil. Bank of England governor Mark Carney has repeatedly warned that these risks are not priced in adequately and that investors may have exposure to a “climate Minsky moment” if they don’t take action.

Amundi’s remarks hold weight because it has 1.4 trillion euros ($1.6 trillion) under management, making it the largest asset manager in Europe. It runs the world’s largest green bond fund with the International Finance Corp. and is planning to deploy $2 billion into emerging markets. Mainstream investors are beginning to recognize both the threats and opportunities coming from climate-related issues, Samama said.

“If we have this major shift required in terms of how we manage the planet, for sure it will impact the asset prices,” he said. “Can we evaluate the automakers without taking into account the new bans of diesel cars? Can we evaluate the fossil fuel industry without taking into account the risks of regulation related to the drop of the price of renewable energy?”

Nature Climate Change – Macroeconomic Impact of Stranded Fossil Fuel Assets:

Several major economies rely heavily on fossil fuel production and exports, yet current low-carbon technology diffusion, energy efficiency and climate policy may be substantially reducing global demand for fossil fuels^1,2,3,4. This trend is inconsistent with observed investment in new fossil fuel ventures^1,2, which could become stranded as a result. Here, we use an integrated global economy–environment simulation model to study the macroeconomic impact of stranded fossil fuel assets (SFFA). Our analysis suggests that part of the SFFA would occur as a result of an already ongoing technological trajectory, irrespective of whether or not new climate policies are adopted; the loss would be amplified if new climate policies to reach the 2 °C target of the Paris Agreement are adopted and/or if low-cost producers (some OPEC countries) maintain their level of production (‘sell out’) despite declining demand; the magnitude of the loss from SFFA may amount to a discounted global wealth loss of US$1–4 trillion; and there are clear distributional impacts, with winners (for example, net importers such as China or the EU) and losers (for example, Russia, the United States or Canada, which could see their fossil fuel industries nearly shut down), although the two effects would largely offset each other at the level of aggregate global GDP.

Forbes:

Some of the world’s biggest investors have called on global leaders to scale up their climate change ambitions, increase investment in the switch to a low-carbon economy and help companies to reduce their climate risks.

The call comes as a new report reveals that the G7 nations – the U.S., France, Germany, Canada, Italy, Japan and the U.K. – are still spending at least $100 billion subsidizing fossil fuels even though they have pledged to end such subsidies by 2025 .

Some 288 investors with more than $26 trillion in assets under management have written to the leaders of the G7 nations ahead of their summit in Canada this week, stating that “the global shift to clean energy is under way, but much more needs to be done by governments to accelerate the low carbon transition and to improve the resilience of our economy, society and the financial system to climate risks .”

“We are concerned that the implementation of the Paris Agreement is currently falling short of the agreed goal of ‘holding the increase in the global average temperature to well below 2-degrees Celsius above pre-industrial levels.’” they added.

The investors, which include Allianz Global Investors, Aviva Investors, DWS, HSBC Global Asset Management, Nomura Asset Management, Australian Super, and Calpers, say that they are doing their part by making significant investments into low-carbon assets, incorporating climate change scenarios and climate risk management into their investment processes and engaging with the largest greenhouse gas emitters.