The Carbon Bubble

One of the problems with REDD is that it will not address climate change, for the simple reason that to address climate change we need to reduce the amount of fossil fuel burned. While we need to reduce deforestation, trading carbon stored in forests against fossil fuel emissions will help lock in polluting technology.

One of the more obvious problems is that if we don’t stop burning fossil fuels, the forests will go up in smoke, or be blown down in storms, resulting in yet more emissions. Addressing runaway climate change must involve dramatic reductions in emissions from fossil fuels and leaving fossil fuels in the equivalent of “An Underground National Park”, as George Monbiot puts it. But if we fail to reduce emissions from fossil fuels no amount of REDD chicanery will either save the forests or prevent runaway climate change.

Last month, the Carbon Tracker initiative put out a report looking at how much more fossil fuel we can afford to burn if we are to avoid global warming exceeding 2°C. In the report, “Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?”, Carbon Tracker summarises as follows:

Research by the Potsdam Institute calculates that to reduce the chance of exceeding 2°C warming to 20%, the global carbon budget for 2000-2050 is 886 GtCO2. Minus emissions from the first decade of this century, this leaves a budget of 565 GtCO2 for the remaining 40 years to 2050.

The world’s total fossil fuel reserves amounts to a carbon potential of 2795 GtCO2. That’s almost five times the available carbon budget for the next 40 years.

The Carbon Tracker initiative focusses on “the fossil fuel reserves held by publicly listed companies and the way they are valued and assessed by markets”. The analysis raises an interesting problem. Currently, financial markets treat fossil fuel reserves as assets. But, if governments become serious about reducing carbon emissions, at some point the vast majority of these assets will become “stranded”. The report explains that,

Investors are thus left exposed to the risk of unburnable carbon. If the 2°C target is rigorously applied, then up to 80% of declared reserves owned by the world’s largest listed coal, oil and gas companies and their investors would be subject to impairment as these assets become stranded.

If we continue burning fossil fuels at the current rate, in only 16 years we will reach the limit of our carbon budget – that’s the amount we can burn if we are to stand a chance of remaining within 2°C warming.

Investments in fossil fuels, then, could end up as dodgy as a sub-prime mortgage backed collateralised debt obligation in 2008. Writing in the Guardian, Duncan Clark suggests that there are four possible explanations for the current situation:

1. The markets are working well and the risks of unburnable carbon are already incorporated in the cost of energy investments.

2. The markets understand the risks, but are hoping that new technologies of carbon capture will save the day.

3. The markets are “acting irrationally”, making judgements based on bad information and are inflating a carbon bubble.

4. The markets are behaving rationally because they realise that the risks of governments coming to an agreement on leaving fossil fuels in the ground is extremely slim.

The first option seems unlikely, Clark notes, not least because companies continue to raise money to prospect for new reserves, which makes little sense if a large percentage of existing reserves have to be left in the ground. The second option seems unlikely because of the slow pace at which carbon capture is developing.

The scary part is that the third and fourth options seem equally plausible. A carbon bubble would be less worrying because the bubble will eventually burst. Unfortunately, it seems that the financial sector doesn’t see too much problem with the fourth option. When asked about the Carbon Tracker initiative report, one oil and gas analyst told the Financial Times:

“I think it’s a bollocks subject. I’m not interested in this kind of subject. I think this is complete hot air.”

REDD may appear to provide a lifeline. It may appear that by reducing emissions from deforestation we can burn an equivalent amount of fossil fuel, thus giving ourselves more time to adjust to a new low carbon economy. But the reality is that about 40% of the CO2 peak concentration will still be in the atmosphere 1,000 years later (putting a slightly different perspective on the issue of “permanence” in REDD). A 2008 paper published by Proceedings of the National Academy of Sciences of the USA, found that “climate change that takes place due to increases in carbon dioxide concentration is largely irreversible for 1,000 years after emissions stop.” That’s a pretty good argument for keeping emissions as low as possible and stopping them sooner, rather than later.

The other problem with REDD is that it creates a distraction at the UN climate negotiations. Instead of attempting to address runaway climate change by setting limits on the amount of fossil fuel that can be burned, REDD offers negotiators a way of saying that at least they have achieved something.

James Leaton, project director of Carbon Tracker, commented to the Financial Times‘ Energy Source blog,

“The financial crisis demonstrated that markets don’t act to save themselves. Everyone assumed house prices would always go up until the bubble burst; at present everyone is assuming we can keep increasing carbon emissions.”

REDD and other carbon trading schemes reinforce the illusion that we can keep increasing carbon emissions. At the same time, they create opportunities for trading in fiendishly complex derivatives of carbon, increasing the probability of another type of carbon bubble.