Why Carbon-Heavy Investments Are Like Investing In Subprime Mortgages

by John Johnston on 02/16/2012

in Business

Coal pile

This is a subject we touched on mid last year (see Growing ‘Carbon Bubble’ Threatens Future Stability Of World Economy), and no doubt we will write about it again in the future. This subject isn’t going away until it’s dealt with, or forced to be dealt with by so called market “externalities”, which aren’t really external at all.

This week, none other than Al (love him or hate him) Gore has picked up on the subject by likening carbon heavy investments to the illusory value of subprime mortgages. And we all now know how those turned out.

Gore said investors in fossil fuel companies who are ignoring the full cost of carbon emissions, directly related to their investments, are making a similar mistake investors in subprime mortgages made in the lead-up to the bursting of the housing bubble.

In an interview Gore stated, “The value of the subprime mortgages was based on a false assumption,” and that “In almost exactly the same way, the value of all of these carbon fuel reserves is based on a similarly absurd assumption.” Further, “These subprime carbon assets have an asserted value based on the assumption that it’s perfectly OK to put 90 million tons of global warming pollution into the atmosphere every 24 hours. Actually, it’s not.”

He makes a strong point. When current climate science findings begin to be taken seriously by the world – and I mean really seriously, not just lip service, or pussyfooting about on the edges of real action, or flat-out denial in some cases still – what do we think is going to happen to the value of those massive and suddenly unusable fossil fuel reserves, that are already priced into the market?

They will become worthless. We’ll have to leave a lot of coal in the ground for one, and certainly halt all that “unconventional oil” development that’s currently ramping up. At the very least, current fossil fuel reserves will have to be used very sparingly, over a very, very long period of time, rather than in the business-as-usual, hell-for-leather way the world currently is using them. I’m even assuming that we use most of the “easy to get” oil here. Increasingly though, we are drilling deeper offshore for oil, and digging up and refining oil sands on a massive scale.

Alberta oil sands - 2011

Alberta oil sands development – 2011

The question is: when will the realization hit?

I hope i’m wrong, but my money is increasingly on when there is a massive environmental disaster, or series of environmental disasters, that make it too difficult to ignore and deny climate change any longer. At some point, it will become incredibly obvious.

Who knows when that will be? Will it be a near ice-free Arctic summer? Melting Arctic ice is only encouraging fossil fuel companies into developing in previously untapped areas at the moment. Will it be repeated, massive floods in low lying cities? Increasingly severe and prolonged droughts? Longer and more severe summer heat waves? A accumulation and combination of all of these and more?

I hope a transition away from fossil fuels will be a more orderly and less devastating process than that. If history is anything to go by, we humans seem to wait until the last moment to act, until real and immediate crisis is upon us, or even after that. When we have a full-blown disaster on our hands, we pick up the pieces from the debris and build again. Can we really afford to do that with this particular problem?

In any case, when our heavy use of  fossil fuels and dedication to carbon intensive investments suddenly subsides, or the “carbon bubble” bursts, a hell of a lot of money will suddenly be thrown, by necessity, at solutions and cleaner alternatives to fossile fuels.

Gore is advocating a new kind of “Sustainable Capitalism”, as a necessary and fast transition away from carbon intensive investments and fossil fuel reliance. The idea is for investments to help combat climate change and boost profits in the long term, rather than going down the other disastrous path.

Gore asserts that, “The bitter experience that the subprime mortgages caused should be a reminder that stranded assets have the potential for doing a great deal of damage.”

Although cleantech and clean energy investments worldwide are going from strength to strength, are they going to be enough without everyone getting on board pretty quickly? Time will tell.

What are your thoughts? Is a quick and orderly transition to a more sustainable form of capitalism the way forward to avert the bursting of a massive carbon investment bubble?

Feature image CC licensed by Joost J. Bakker: Coal pile
Bottom image courtesy of NASA: Alberta oil sands – 2011



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