In an interview about the economic impact of climate change, Al Gore has warned that individuals, investment funds, and institutions should divest from fossil fuel companies before the great “carbon bubble” bursts in world financial markets. Gore maintains that the largest risk ever to the financial markets is now global climate change.
In the lead-up to Gore’s Climate Reality Project multimedia event, on video he discussed the investment consequences of the obvious realization that the world is going to have to leave most of its known fossil fuels reserves in the ground, if we are to have a liveable climate that is. These known fossil fuel reserves are already counted as valuable assets by the financial markets, so that spells future trouble for these stocks, and for the markets overall, because the assets are currently so overpriced.
Gore explains that, “There are $7 trillion worth carbon assets on the books of multinational energy companies today. There are another $14 trillion owned by sovereigns like governments in the Persian Gulf region. But just to take the public companies; the valuation of those companies and their assets is now based on the assumption that all of those carbon assets are going to be sold and burned. And they are not. The global scientific community has just reaffirmed that no more than one-third can ever possibly be burned without destroying the future.”
Gore likens these fossil fuel assets to sub-prime mortgages, saying “these are sub-prime carbon assets”. He explains that sub-prime mortgages had an artificial value based on the assumption that people who couldn’t make a downpayment on a mortgage would never default on their loans. The institutions selling them operated on the assumption that selling them on would magically eliminate the risk involved, at least for them. It was a self-serving illusion. Eventually, when the assets were examined more closely, it resulted in them being “suddenly and massively repriced, and that’s what triggered the global credit crisis, and detonated the Great Recession”.
Gore asserts that the “sub-prime carbon assets” are even more overvalued because the fossil fuels are not going to be burned; “They cannot be burned and will not be burned. At what point does the market recognize that this is an illusion? We have a carbon bubble.”
The big concern is of course that the bursting of this financial bubble will, yet again, involve a lot of investors who didn’t see it coming losing a lot of money. It’s certainly a sobering assessment of the future of the financial markets in relation to fossil fuel companies.
To read more on the so-called carbon bubble and its consequences, see some of our previous posts on the subject. We have been covering this important subject for over 2 years now:
Growing ‘Carbon Bubble’ Threatens Future Stability Of World Economy
Fossil Fuel Reserves Will Have To Be Left In The Ground: IPCC Report
Why Carbon-Heavy Investments Are Like Investing In Subprime Mortgages
San Francisco Board Resolves To Take $583M Out Of Fossil Fuel Industry