"Our financial system has gone through a variety of bubbles. The real estate bubble, the commodity bubble, the dot-com bubble. A potential new one is emerging: the carbon bubble."
So warns an EU Greens/EFA Group report that looks at the risk of fossil fuels investments to Europe's top 43 banks and pension funds. Entitled The Price of Doing Too Little Too Late, the report is slated for presentation at a conference in Brussels on Thursday. It attempts to quantify the real financial risks of fossil fuel investment.
"The carbon bubble refers to the overvaluation of fossil fuel reserves and related assets should the world meet its stated objective of limiting climate change," explains the report. In order to mitigate climate disaster by limiting temperature increase to two degrees Celsius compared to the pre-industrial age, humanity must drastically limit fossil extraction. Yet, current fossil fuels assets assume that fossil fuel reserves will be extracted. This contradiction between the constant growth of capitalism and the limits posed by the climate emergency means that "the majority of fossil fuel reserves are stranded assets," the report notes.
In other words, the seemingly lucrative fossil fuels industry is really a bubble. And it will burst.
The report identifies a steep risk to European financial systems: 5% of total assets for pension funds, 4% for insurance companies, and 1.4% for banks. According to the report, this amounts to no small sum: "The total estimated exposures are approximately € 260-330 billion for EU pension funds, € 460-480 billion for banks and € 300-400 billion for insurance companies," the authors note.
According to the report:
The result is sobering. With a total estimated exposure to high carbon assets of over €1 trillion for these institutions, there is ground for serious concern. A number of individual actors and Member States are particularly at risk. The most vulnerable financial institutions include two of Europe’s largest banks in France and a number of sizeable pension funds in the United Kingdom and the Netherlands. Yet again for other Member States, such as Germany, a lack of transparency has hidden their carbon exposure.
The EFA study follows a spate of other warnings about the dangers of the carbon bubble, including two reports, also released in the past 24 hours, that warn of the economic catastrophe of fossil fuels investment.
Fossil fuel corporations "are not only setting us up to an ecological cataclysm, which, sadly, in parts of the world is already coming true, but they are also setting us up for what is probably the greatest financial bubble of all time,” said Bill McKibben, co-founder of 350.org, upon the announcement of the EFA study.
Many insist that contradiction between corporate growth and human and environmental well-being underscores the need for profound economic and social transformation.
"Limitless growth is the fantasy of economists, businesses and politicians," wrote Vandana Shiva in The Guardian. "It is seen as a measure of progress. As a result, gross domestic product (GDP), which is supposed to measure the wealth of nations, has emerged as both the most powerful number and dominant concept in our times. However, economic growth hides the poverty it creates through the destruction of nature, which in turn leads to communities lacking the capacity to provide for themselves."