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'Carbon Bubble': is the FTSE sitting on an energy time bomb?
Are we serious about curbing climate change? And if so, can oil and mining giants survive? We assess the implications for savers.
by Gavin Lumsden on Oct 15, 2013 at 08:30
In the past 15 years we’ve had the dot com technology bubble, the property bubble and the banking bubble. All ended with a nasty crash.
Now we’re faced with possibly the most dangerous bubble yet. It’s called the carbon bubble and it’s all to do with the climate change caused by burning fossil fuels like oil, gas and coal. Investors are increasingly concerned about the implications for the big mining and oil companies that dominate the UK's FTSE 100.
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Investors have endured a lot of speculative bubbles in the past 15 years.
We’ve had the dot com technology bubble, the property bubble and the banking bubble. All ended with a nasty crash.
Now we’re faced with possibly the most dangerous bubble yet.
It’s called the carbon bubble and it’s all to do with the climate change caused by burning fossil fuels like oil, gas and coal.
Whatever kind of investor you are you want to pay attention to the carbon bubble debate because it could bring big changes to the stock market and where you invest your money.
In the City of London the penny has begun to drop that the issue of climate change caused by human activity releasing greenhouse gases can’t be ignored anymore.
A campaign group called the Carbon Tracker Initiative has caused a sensation with a report called ‘Unburnable Carbon’.
It makes the simple point that the giant oil and mining companies that dominate the UK’s FTSE 100 – and other stock markets around the world – will be left ‘stranded’ and their share prices damaged if we’re serious about reducing the amount of carbon dioxide that leads to global warming.
Companies like Royal Dutch Shell, BP, BHP Billiton and Anglo American are sitting on huge reserves of fossil fuels that can’t be used if we want to keep rises in global temperatures to within 2% of their level in the pre-industrial age.
The International Panel on Climate Change recently reiterated the 2% temperature increase as the crucial point of no return if we’re to avoid irreversible damage to the global environment and world economy.
Carbon Tracker cites research showing that our global carbon budget – that’s the maximum amount of carbon dioxide we can safely release into the world – is 886 gigatons for the period from 2000 to 2050. A gigaton is a billion tons by the way.
When you deduct what was released already in 2000-2010 that budget falls to just 565 gigatons for the remaining 40 years.
Now get this, the total carbon held within the world’s fossil fuel reserves is nearly 2,800 gigatons. That’s five times more than our global carbon budge
Mining and energy companies listed on stock markets around the world own 745 gigatons of that amount. (Governments own the rest.) If you divide the corporate reserves by five to get their share of the budget you are left with 149 gigatons.
That amount is probably enough on its own to push us past the 2% temperature increase, says the institute.
The ‘carbon bubble’ exists because if you believe this analysis – and an increasing number of people do – then mining and energy companies are massively over valued because 80% of their reserves are worthless.
The institute says between 20-30% could be wiped off stock markets in London, Australia, Canada and Brazil.
Analysts at HSBC bank have warned that European energy companies could see their share prices halve if tough climate protection policies are enforced.
But will they be enforced?
The fact that oil and mining share prices have not slumped in response to this analysis is not just investor complacency.
The stock market is betting that politicians will not pass sufficiently stringent laws to defend the world from devastating climate change. That we’ll continue as we are until it’s too late.
It’s pretty depressing stuff.
But what does it mean for ordinary investors? Should you give up on saving and investing for your retirement?
Not yet, but, as a precaution it may be time to start shifting your money away from the big energy stocks.
We’ve got used to seeing these companies in our funds. They’re huge businesses and they pay big dividends. But there are grave doubts about the long-term sustainability of what they do.
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by Daniel Grote on Feb 27, 2015 at 18:36