business climate change economics energy

The carbon black hole in the economy

There is an aspect to climate change that I have been aware of but have not given much thought to – the potential for climate change action to trigger a financial crisis through stranded carbon assets. The problem has been explored by Carbon Tracker’s Unburnable Carbon reports, and I’ve just been reading their 2013 update. Let me summarise the argument.

  • Oil companies count their reserves as assets. If they win the rights to a new oilfield or make a new discovery, those reserves are added as assets and the value of the company rises.
  • This means that the value of an oil company on the stock market depends substantially on the oil, coal or gas reserves that they control.


  • If we are to prevent serious climate change, we cannot use all those reserves. To keep below 2 degrees of warming, we can really only burn a fifth of them.


  • Action to limit the burning of fossil fuels would make those fossil fuel reserves into stranded assets – assets that cannot be bought, sold, or used.
  • With their underlying assets now worthless, the value of oil companies would plummet on the stock market. It would be the bursting of an enormous ‘carbon bubble’.
  • Since oil companies are among the largest companies in the world, the loss of value would be in the order of trillions of dollars. The London Stock Exchange could lose 20-30% of its value.


  • It would not just be the oil companies and their investors that suffered. A multi-trillion dollar black hole in the global economy would be a major financial crisis, with knock-on effects for banking, pensions and public spending.

This is a major problem, because for those not inclined to take climate change very seriously, it’s a powerful argument for the status quo. It’s a particularly thorny problem for those countries that run stock exchanges overloaded with fossil fuels – Russia, Britain, the US and Canada being the largest. The more serious we get about climate change, the greater the risk that investors will begin to worry about those carbon assets.

It’s little wonder that the government talk up climate action while simultaneously creating tax incentives for shale gas. The carbon bubble may also explain, in part at least, the creakingly slow progress on an international agreement. If asked to choose between the risk of climate change and the risk of financial crisis, we all know which way the government would go.

The answer is of course not to let things get to that kind of choice, but to begin to revalue carbon ahead of time. The first step is to recognise the systemic risk that the carbon bubble poses, rather than ignoring it as we’re doing at the moment. Those stock exchanges that are heavily weighted towards fossil fuels need to diversify – something that Boris Johnson has already highlighted in London. Investors need to look at their exposure to the carbon bubble and respond accordingly. Companies could pursue ‘integrated accounting’ practices that account for their carbon, allowing investors to make better decisions. There aren’t any big obvious solutions – it will take a change of mindset across regulators, accountants, the extractive industry and their investors together.

 Ultimately, the financial market is pricing carbon as an asset when it ought to be a liability. That needs to change. “There are more fossil fuels listed on the world’s capital markets than we can afford to burn if we are to prevent dangerous climate change” say Mark Campanale and Jeremy Leggett in the 2013 update.” The missing element in creating a low carbon future is a financial system which will enable that to happen.”



  1. This was a fantastic post! I’ve read a little bit about the carbon bubble in the Guardian but you’ve summarised the issue in a much more lucid way.

    This really is a tricky issue. Personally, I’d love to see Shell, BP, Exxon Mobil and the rest go totally bust. But I know realistically that would, as you say, trigger a huge financial crash that’d have knock on effects for everyone and generally be a massive disaster. A bubble this big bursting without a plan B would probably cause a depression. So, what the big energy companies really need to do is start a huge scale investment in renewable energy as fast as possible.

    The only problem is they’d apparently much rather just burn their assets, so they’re fighting tooth and claw to persuade governments to ignore climate change and carry on as normal. What everyone needs to grasp is that the price of inaction, in economic terms, is FAR GREATER than the price of action. Arrgh.

  2. Hopefully there will be an expansion in renewables, nuclear energy, energy management and recycling industries to compensate. However if we economise and use less energy and materials, the overall value of energy intensive assets must surely reduce as you say, but does this really matter? If we waste less, we require less income, so is our true wealth altered? Perhaps our quality of life improves because we have more free time.

  3. I find the whole concept ridiculous. If the western nations decide the ‘devalue’ or abandon any fossil fuel resources do we honestly belive that the BRIC or MIST countries will follow our example. They will simply smirk and take full advantage of our philanthropic naivety. They will continue to buy up world resources and keep steamrollering ahead. We will take advantage of their manufacturing/cheap labour and claim to be ‘green’ while someone else is polluting the planet on our behalf……

    1. You’ve not understood the problem. Nobody decides to devalue fossil fuels out of some kind of environmental or philanthropic idea. It’s a market reaction.

    1. Why is the author of that piece going after Lord Stern? The Unburnable Carbon reports are written by James Leaton, at the request of Mark Campanale and Jeremy Leggett. If he’s going to deliver a credible critique, he could start by getting the author right. Maybe he didn’t actually read it.

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