Climate Change and the Carbon bubble Could Cause a Financial Shock

Climate change is already very palpable in many countries. With a few exceptions, the truth is that in most countries, the climate is changing and the average temperatures are rising appreciably. The shift towards an energy-based socioeconomy with a low carbon footprint is absolutely necessary, although it is not known whether that alone is sufficient (at this point).

Today we have two pieces of news for you: one good and one bad. The good news is that this essential shift that shifts the energy mix away from fossil fuel pollutants is already happening. The bad news is that it also opens an economically very dangerous scenario, since the famous carbon bubble can explode, putting the global financial stability at high risk.

Climate change is already here

There can be no debate about the rise in temperatures globally, because unfortunately, the empirical data is here, and it shows the clear upward trend in temperatures.  By the way, the scientific community had been alerting us for many years. There are countless academic publications on the subject. For example, a few months ago, in the middle of a polar winter, temperatures in the North Pole reached 45 degrees above the usual temperature. Think about that.

In Cape Town, they barely have water for consumption. The local authorities set a specific date for when the city would be left without a drop of water for consumption. Fortunately, that date passed only a few weeks ago, and water continues to flow from the tap, but the fact is that it is literally drop by drop: they have only managed to save the situation by drastically reducing the maximum daily consumption allowed per person, leaving it at only 50 liters per person per day.

The measures taken by the South African authorities is nothing more than a band aid solution in the very short term.  Do not doubt that the consequences of all this are unpredictable and very likely catastrophic. A change in the energy model is necessary. But there are deniers. These deniers have pivoted from denying that climate change was happening, to simply denying that the already evident change is a consequence of the intensive use of fossil fuels.

Beyond distributing blame, let’s try to find solutions

The problem is that many solutions, which now have immediate relevance and visibility, fall into the domain of long term solutions that do not address the urgent objective of avoiding a climate change that is already here.

It has been mostly the market itself that is bringing solutions. The turn towards clean energy began as a mere political intention in the most aware countries. This intention became determination soon after, but that socioeconomic turn did not go beyond a few pieces of legislation that sought to force a market that resisted leaving fossil fuels behind.

But sometimes the economy surprises us (for good), and reality surpasses the most idealistic fiction. I do not know if we will arrive in time to avoid (or reverse) the effects of climate change, but the truth is that today the adoption of clean energy is no longer a matter being solely espoused by politicians and directors, but by citizens and, more importantly, by companies as well.

Indeed, the development of clean energy has progressively cheapened its cost, making it more efficient as well from an economic point of view. It has been observed that the carbon footprint of most countries has reduced, and paradoxically, has done so even in those countries without commitments or climate policy.

The Bad News 

Any socioeconomic change carries risk. The more disruptive the change, the more likely it is that it may involve collateral damage. In some cases, they can be even potentially destructive.

In addition, with major socio-economic changes such as climate change, the possibilities of unforeseen and unimaginable risks that end up materializing is much greater, since there are too many possible implications and derivatives, and it is practically impossible to foresee all outcomes.

There is a CO2 level above which there is no remedy or return to the rise in temperatures (at least in a human dimension). That is why the turn towards clean energies, besides being necessary, must be fast. And it’s happening quickly judging by the results, although we do not know if it’s fast enough to avoid disaster. However, the speed of that change is also potentially damaging in economic terms and in the short term.

Socieconomies always need time to adapt to new scenarios

Yes, indeed, embarking on a change of energy model is a colossal task. But, what happens if it is the market that undertakes it faster than the speed of adaptation of the old productive fabric based on fossil fuels?

This is the problem that is commonly referred to as the “carbon bubble”: the overvaluation of assets and companies producing (and based on) “dirty” fuels and fuels. This bubble can be abruptly punctured with a sharp turn of demand, which would cause the valuation of its assets to plummet.

This is no longer just a history of interests of oil tycoons who desperately choose to avoid the inevitable. Unfortunately, the question is not as simple, and the “carbon bubble” is a long-known problem in economic and scientific circles, and even the most pro-climate activists are aware of the big problem. In fact, the origin of today’s analysis is in the academic world, and more specifically in a study by the magazine “Nature Climate Change“.

This study takes for granted the existence of this bubble, and takes into account the high financial and economic impact of its possible (or rather probable) puncture. In addition, the study highlights that it is very likely that the puncture will occur before 2035.

Nobody is safe from the carbon bubble

Make no mistake, the oil and fossil fuel sector has been (and still is) a colossal sector in almost all the socioeconomies of the planet. This is a very important economic sector, and so much so that, if it rushes into the void of a financial crisis, it can drag a large part of the rest of the economy down along with it.

Don’t think for a second that you are safe simply because you bought an electric car and consume 100% renewable energy. The breakdown of most fossil energy companies would have a huge detrimental impact: in any economy where a giant falls, the domino effect has a nonzero probability, and in the case of this important sector, the probability is not negligible.

Remember the real estate bubble? Well, remember that it also affected those who speculated, those we refused to speculate, those who had a home, and those who did not. Everyone, because crises do not understand people, but only numbers. The puncture of the colossal “carbon bubble” will no doubt end up affecting you in some (or many) ways as well.

But we really had no alternative to the burst. We said that socieconomies always need time to adapt to new scenarios. Unfortunately, we probably don’t have anymore time. Not to be pessimistic, but, rather rigorous, today we had to lay out all possible scenarios.  At least to be able to prepare ourselves for what may be inevitable.

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