‘Carbon bubble’ could spark global financial crisis

A sudden drop in demand for fossil fuels caused by advancements in energy efficiency and renewable power could trigger a global financial crisis greater than the one seen in 2008.

That is according to a new study led by researchers at Cambridge University, which warns that a fall in demand is likely to happen by 2035 regardless of climate policies adopted by governments.

Detailed simulations show how this could cause a ‘carbon bubble’ built on long-term investments to burst, potentially wiping $4trn (£3trn) off the global economy, compared to the $0.25trn loss that set off the 2008 crash.

“Our analysis suggests that, contrary to investor expectations, the stranding of fossil fuels assets may happen even without new climate policies,” study co-author, Jorge Viñuales, said.

“This suggests a carbon bubble is forming and it is likely to burst. Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands.”

Published in the journal Nature Climate Change, the study warns there will be clear economic winners and losers as a consequence of stranded assets caused by a fall in demand for fossil fuels.

Major carbon exporters with relatively high production costs like the US and Russia would see domestic industries collapse, which would be worsened by governments continuing to neglect renewable energy.

In contrast, Japan, China and many EU nations that rely on high-cost fossil fuel imports could see their national expenditure fall, and a boost in GDP with the right investment in low-carbon technologies.

This is particularly true for China, which might have the most to gain from a fall in demand for fossil fuels, with a crisis potentially taking a higher toll on its main geopolitical competitors.

One of the factors that may contribute to the upheaval would be a ‘sell-out’ by OPEC Middle Eastern countries, with these nations producing fossil fuels at prices so low that they cut other exporters like the US and Canada out of the market.

“Divestment from fossil fuels is both a prudential and necessary thing to do,” said study lead author, Jean-François Mercure. “Investment and pension funds need to evaluate how much of their money is in fossil fuel assets.

“A useful step would be to expand financial disclosure requirements, making companies and financial managers reveal assets at risk from fossil fuel decline, so that it becomes reflected in asset prices.”

Image credit: iStock