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The great unburnable Carbon Bubble: three reasons why the experts are wrong

by | 20th, April 2013

Prince of Wales speaks on climate change

I DO think this is a lovely little misunderstanding of how the world works from M’Lord Stern. He’s telling us that all hte oil and coal that people have found is worth nothing because we cannot afford to burn it. So, why are all these companies valuing it at more than nothing?

The world could be heading for a major economic crisis as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, according to leading economists.

“The financial crisis has shown what happens when risks accumulate unnoticed,” said Lord (Nicholas) Stern, a professor at the London School of Economics. He said the risk was “very big indeed” and that almost all investors and regulators were failing to address it.

The so-called “carbon bubble” is the result of an over-valuation of oil, coal and gas reserves held by fossil fuel companies. According to a report published on Friday, at least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for “dangerous” climate change. If the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses. But the stock markets are betting on countries’ inaction on climate change.

It’s actually wrong in three ways.

Firstly, it says that we can only burn x amount of carbon before we reach a 2 oC rise. Unfortunately, they seem to be using rather old results for climate sensitivity to reach this conclusion. The newer, more accurate ones, are telling us that we can use quite a lot more than they assume before we reach that point.

The second is that this is actually the wrong question. We don’t want to know what temperature we should not reach: rather, we want to know how much damage something will do. That is, what is the cost of either changing or not changing things. A temperature target is simply the wrong target.

The third is even more worrying, especially coming from an economist like Stern. It’s not exactly unusual for a politician or bureaucrat to say that something is worth a different amount than what the markets think it is worth. But in such cases it’s always, but always, the politicians and bureaucrats who are wrong. We had that long experiment of the 20th century to prove that one: markets value things better than politicians and bureaucrats.

Photo: The Prince of Wales speaks with Lord Nicholas Stern (right) before the Corporate Leaders Group on Climate Change meeting, at St James’s Palace in central London. Picture date: Wednesday July 16, 2008. Photo credit should read: John Stillwell/PA Wire

 



Posted: 20th, April 2013 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink