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Suddenly Carbon is a US$6 Trillion Bubble

April 22, 2013
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Source: Daily Bell

Carbon-Intensive Investors Risk $6 Trillion 'Bubble,' Study Says ... Investors in carbon-intensive business could see $6 trillion wasted as policies limiting global warming stop them from exploiting their coal, oil and gas reserves, according to research by the Carbon Tracker Initiative and a climate-change research unit at the London School of Economics. If this rate continues for the next decade some $6 trillion risks being wasted on "unburnable" or stranded assets, according to the report, released today ... – Bloomberg

Dominant Social Theme: Carbon is a plague and we need to wipe it out.

Free-Market Analysis: Suddenly, the reality of carbon investing is sinking in. According to this Bloomberg article, "banks, funds and institutional investors are seeking clarity from government and central banks about how greenhouse- gas emissions may affect the value of their investments."

Of course, The Bank of England is involved in damage control. According to Bloomberg, the BOE will "evaluate whether the U.K.'s exposure to investments in polluting industries poses a risk to financial stability" – but only after investors began to demand such a clarification.

The real point of this exercise seems to be to warn Western corporations that they will have to perform a kind of self-limiting exercise to make sure that resources available to them conform to the letter of the law. This is typical of the way Western markets operate now – with government setting the pace and then focusing on ways to bring corporations in line so that the private sector effectively enforces unpopular mandates.

Here's more from the article:

"If the markets carry on regardless, with the regulators looking the other away, they're just asleep on their watch," James Leaton, research director at Carbon Tracker, a project by non-profit Investor Watch, said in an interview in London. "The longer it goes on, the bigger the bubble will get."

Bonds of fossil fuel companies could be vulnerable to ratings downgrades, pushing up their financing costs while equity valuations could plummet as much as 60 percent if industries become less carbon-intensive, the study showed, citing HSBC Holdings Plc analysis.

The analysis shows that 60 to 80 percent of coal, oil and gas reserves of the 200 public companies studied could be unburnable if the world is to curb emissions to limit global warming to 2 degrees Celsius, a United Nations target.

Even without UN targets, the focus on air quality in nations including China and the U.S., and the falling costs of wind and solar technologies should drive investors to seek low- carbon opportunities, Leaton said.

The report calls on finance ministers to incorporate climate change into assessment of risk in the capital markets and urges financial regulators to require companies to report CO2 emissions embedded in their fossil fuel reserves. Ratings agencies should address climate change as part of efforts to tackle risk, it said.

Again, what is going on here is a way of ensuring that the private sector falls in line with the goal of eliminating carbon from their processes. Yet the science itself is not settled; there is no sure way of telling whether man-made carbon is heating up the environment, nor whether the environment itself is getting hotter.

In fact, the carbon trading apparatus that was supposed to self-regulate the larger entities has languished. The US shut down carbon trading. Europe's carbon trading marts are gradually fizzling.

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