Abby L. Harvey
GHG Monitor
12/12/2014
The potential threat of a “carbon bubble” resulting in stranded assets has become the focus of intense scrutiny in recent weeks with news that the Bank of England has launched an inquiry into the threat. The carbon bubble refers to the idea that if global temperature rise it to be kept below two degrees Celsius while investments in fossil fuels remain large, those large investments will be lost on resources that cannot be used, resulting in stranded assets. “In a series of reports since 2011, we have been arguing that there is a big bubble of unburnable carbon hanging over the world if policy makers deliver on their promises of keeping global warming below two degrees,” Jeremy Leggett, Chairman of London-Based think tank Carbon Tracker, said this week during a side event at the 20th Conference of the Parties being held in Lima, Peru. “The bottom line is that somewhere between 60 and 80 percent of existing fossil fuel reserves have to stay in the ground if we’re to have a decent chance of hitting that danger threshold target.”
This potential threat is addressed in an Oct. 30 letter which recently became public from Bank of England Governor Mark Carney, to Joan Walley, Chairwoman of the Environmental Audit Committee of the U.K. Parliament. The bank has been investigating the carbon bubble threat for several months, Carney wrote, and will continue its consideration. “The subject of ‘stranded assets’ has been discussed. … In light of these discussions, we will be deepening and widening our inquiry into the topic, and I expect the Financial Policy Committee to also consider this issue as part of its regular horizon scanning work on financial stability risks,” Carney wrote.
The idea of the carbon bubble has been researched for several years by various institutions including Carbon Tracker, and the Green European Fund. “I’ve never seen anything get traction like this argument,” Leggett said. “The argument has been taken by the divestment movement as the basis for its case that morally people should be divesting from fossil fuels.” Within the past several months both Stanford University and the Rockefeller Brothers Fund have announced that they will no longer invest in fossil fuels.
Risks are Not Limited to Private Industry
When considering the threat of the carbon bubble, Leggett said, governments are also at risk of losing large amounts of money to stranded assets. “The governments of the region that are affected are posed with the same kind of threat that big energy companies have. The same logic applies to them. [Companies] are in danger of wasting enormous amounts of their shareholders money; governments are in danger of wasting enormous amounts of their taxpayer’s money, plus whatever is invested externally. The choice is very stark,” Leggett said.
E.ON to Spin off Coal Portion of Company
In a significant shift away from fossil fuels German utility E.ON announced early last week that the company will shift its focus entirely to renewables. “This is the logical consequence of our commitment to be our customers’ partner of choice and to be best in class in terms of customer satisfaction in all our markets,” Johannes Teyssen, CEO of E.ON, said during a press conference. “We will spin off our conventional generation, global energy trading, and exploration and production businesses into a new, independent company, which will play a key role in ensuring supply security for the transformation of energy systems and in reshaping conventional energy markets,”
In explaining the logic behind this decision, Teyssen stated that “until not too long ago, the structure of the energy business was relatively straightforward and linear. The value chain extended from the drill hole, gas field, and power station to transmission lines, the wholesale market, and end customers. … Its technologies are mature and proven. This world still exists and will remain indispensable. In the last few years, however, a new world has grown up alongside it, a world characterized above all by technological innovation and individualized customer expectations.” He added, “The increasing technological maturity and cost-efficiency and thus the growth of renewables constitute a key driver of this trend. More money is invested in renewables than in any other generation technology. Far from diminishing, this trend will actually increase."
Some Energy Companies Dismiss Theory
As the idea of the climate bubble has gained traction, several fossil fuel companies have come forward to publicly dismiss the claim, saying that fossil fuels will have a significant role in the future energy mix. In a May 16 response to shareholders, Shell stated that analyses supporting the carbon bubble underestimate the potential for carbon capture and storage. “While the ‘stranded asset’ notion may appear to be a strong and thought-through case, it does have some fundamental flaws and there is a danger that some interest groups use it to trivialize the important societal issue of rising levels of C02 in the atmosphere,” Shell said. “The methodology has significant gaps, not least a failure to acknowledge the significant projected growth in energy demand, the role of CCS, natural gas, bioenergy and energy efficiency measures. Energy demand growth, in our view, will lead to fossil fuels continuing to play a major role in the energy system- accounting for 40-60% of energy supply in 2050 and beyond, for example. The huge investment required to provide energy is expected to require high energy prices, and not the drastic price drop envisaged for hydrocarbons in the carbon bubble concept,” the company wrote.
