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Concept
Carbon bubble
Summary
The carbon bubble is a hypothesized bubble in the valuation of companies dependent on fossil-fuel-based energy production, resulting from future decreases in value of fossil fuel reserves as they become unusable in order to meet carbon budgets and recognition of negative externalities of carbon fuels which are not yet taken into account in a company's stock market valuation.
While most campaigns to reduce the investment, production, and use of fossil fuels has been based on ethical reasons, financial analysts, economists, and financial institutions have increasingly argued in favor of doing so for financial reasons. Thus, properly pricing fossil fuels based on the carbon bubble theory would mean renewable energy would be significantly more attractive to invest in, and therefore speed up the transition towards sustainable energy.
Many investors throughout the world are raising capital for fossil fuel exploration. However, as the current reserves already exceed the carbon budget these new reserves are unlikely to be exploited, meaning the value of those investments will suffer serious decreases. However, investors are currently encouraged by quarterly result cycles and current accounting standards to ignore these long-term issues in favor of higher short-term gains. The biggest problem for governments and investors is re-balancing the value of these investments with as little damage to the economy or market as possible. An estimate made by Kepler Cheuvreux puts the loss in value of the fossil fuel companies due to the impact of the growing renewables industry at US100 trillion.
The term "carbon bubble" arose in the early 21st century from the increasing awareness of the impact of fossil fuel combustion on global temperatures. "Carbon" refers to the hydrocarbon contained in fossil fuels, while "bubble" refers to economic bubbles, situations where the prices of asset are much higher than the intrinsic value.
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