Here, Michael Klare argues that we have already triggered resource problems that will have enormous secondary consequences. It goes without saying that it would have been SO much easier if we had been working on these problems 25 years ago. But 25 years ago, we believed that industrial planning was a sin, the markets would make all the correct decisions, and that believing it was morning in America was an adequate substitute for doing necessary work.
Carbon bubble will plunge the world into another financial crisis – reportTrillions of dollars at risk as stock markets inflate value of fossil fuels that may have to remain buried forever, experts warn
Damian Carrington The Guardian, Thursday 18 April 2013
The world could be heading for a major economic crisis as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, according to leading economists.
"The financial crisis has shown what happens when risks accumulate unnoticed," said Lord (Nicholas) Stern, a professor at the London School of Economics. He said the risk was "very big indeed" and that almost all investors and regulators were failing to address it.
The so-called "carbon bubble" is the result of an over-valuation of oil, coal and gas reserves held by fossil fuel companies. According to a report published on Friday, at least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate change. If the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses. But the stock markets are betting on countries' inaction on climate change.
The stark report is by Stern and the thinktank Carbon Tracker. Their warning is supported by organisations including HSBC, Citi, Standard and Poor's and the International Energy Agency. The Bank of England has also recognised that a collapse in the value of oil, gas and coal assets as nations tackle global warming is a potential systemic risk to the economy, with London being particularly at risk owing to its huge listings of coal.
Stern said that far from reducing efforts to develop fossil fuels, the top 200 companies spent $674bn (£441bn) in 2012 to find and exploit even more new resources, a sum equivalent to 1% of global GDP, which could end up as "stranded" or valueless assets. Stern's landmark 2006 reporton the economic impact of climate change – commissioned by the then chancellor, Gordon Brown – concluded that spending 1% of GDP would pay for a transition to a clean and sustainable economy.
The world's governments have agreed to restrict the global temperature rise to 2C, beyond which the impacts become severe and unpredictable. But Stern said the investors clearly did not believe action to curb climate change was going to be taken. "They can't believe that and also believe that the markets are sensibly valued now."
"They only believe environmental regulation when they see it," said James Leaton, from Carbon Tracker and a former PwC consultant. He said short-termism in financial markets was the other major reason for the carbon bubble. "Analysts say you should ride the train until just before it goes off the cliff. Each thinks they are smart enough to get off in time, but not everyone can get out of the door at the same time. That is why you get bubbles and crashes."
Paul Spedding, an oil and gas analyst at HSBC, said: "The scale of 'listed' unburnable carbon revealed in this report is astonishing. This report makes it clear that 'business as usual' is not a viable option for the fossil fuel industry in the long term. [The market] is assuming it will get early warning, but my worry is that things often happen suddenly in the oil and gas sector."
HSBC warned that 40-60% of the market capitalisation of oil and gas companies was at risk from the carbon bubble, with the top 200 fossil fuel companies alone having a current value of $4tn, along with $1.5tn debt.
Lord McFall, who chaired the Commons Treasury select committee for a decade, said: "Despite its devastating scale, the banking crisis was at its heart an avoidable crisis: the threat of significant carbon writedown has the unmistakable characteristics of the same endemic problems."
The report calculates that the world's currently indicated fossil fuel reserves equate to 2,860bn tonnes of carbon dioxide, but that just 31% could be burned for an 80% chance of keeping below a 2C temperature rise. For a 50% chance of 2C or less, just 38% could be burned.
Carbon capture and storage technology, which buries emissions underground, can play a role in the future, but even an optimistic scenario which sees 3,800 commercial projects worldwide would allow only an extra 4% of fossil fuel reserves to be burned. There are currently no commercial projects up and running. The normally conservative International Energy Agency has also concluded that a major part of fossil fuel reserves is unburnable.
Citi bank warned investors in Australia's vast coal industry that little could be done to avoid the future loss of value in the face of action on climate change. "If the unburnable carbon scenario does occur, it is difficult to see how the value of fossil fuel reserves can be maintained, so we see few options for risk mitigation."
Ratings agencies have expressed concerns, with Standard and Poor's concluding that the risk could lead to the downgrading of the credit ratings of oil companies within a few years.
Steven Oman, senior vice-president at Moody's, said: "It behoves us as investors and as a society to know the true cost of something so that intelligent and constructive policy and investment decisions can be made. Too often the true costs are treated as unquantifiable or even ignored."
Jens Peers, who manages €4bn (£3bn) for Mirova, part of €300bn asset managers Natixis, said: "It is shocking to see the report's numbers, as they are worse than people realise. The risk is massive, but a lot of asset managers think they have a lot of time. I think they are wrong." He said a key moment will come in 2015, the date when the world's governments have pledged to strike a global deal to limit carbon emissions. But he said that fund managers need to move now. If they wait till 2015, "it will be too late for them to take action."
Pension funds are also concerned. "Every pension fund manager needs to ask themselves have we incorporated climate change and carbon risk into our investment strategy? If the answer is no, they need to start to now," said Howard Pearce, head of pension fund management at the Environment Agency, which holds £2bn in assets.
Stern and Leaton both point to China as evidence that carbon cuts are likely to be delivered. China's leaders have said its coal use will peak in the next five years, said Leaton, but this has not been priced in. "I don't know why the market does not believe China," he said. "When it says it is going to do something, it usually does." He said the US and Australia were banking on selling coal to China but that this "doesn't add up".
Jeremy Grantham, a billionaire fund manager who oversees $106bn of assets, said his company was on the verge of pulling out of all coal and unconventional fossil fuels, such as oil from tar sands. "The probability of them running into trouble is too high for me to take that risk as an investor." He said: "If we mean to burn all the coal and any appreciable percentage of the tar sands, or other unconventional oil and gas then we're cooked. [There are] terrible consequences that we will lay at the door of our grandchildren." more
Entering a Resource-Shock World: How Resource Scarcity and Climate Change Could Produce a Global ExplosionBy Michael Klare April 21st, 2013
Brace yourself. You may not be able to tell yet, but according to global experts and the U.S. intelligence community, the earth is already shifting under you. Whether you know it or not, you’re on a new planet, a resource-shock world of a sort humanity has never before experienced.
Two nightmare scenarios -- a global scarcity of vital resources and the onset of extreme climate change -- are already beginning to converge and in the coming decades are likely to produce a tidal wave of unrest, rebellion, competition, and conflict. Just what this tsunami of disaster will look like may, as yet, be hard to discern, but experts warn of “water wars” over contested river systems, global food riots sparked by soaring prices for life’s basics, mass migrations of climate refugees (with resulting anti-migrant violence), and the breakdown of social order or the collapse of states. At first, such mayhem is likely to arise largely in Africa, Central Asia, and other areas of the underdeveloped South, but in time all regions of the planet will be affected.
To appreciate the power of this encroaching catastrophe, it’s necessary to examine each of the forces that are combining to produce this future cataclysm.
Resource Shortages and Resource Wars
Start with one simple given: the prospect of future scarcities of vital natural resources, including energy, water, land, food, and critical minerals. This in itself would guarantee social unrest, geopolitical friction, and war.
It is important to note that absolute scarcity doesn’t have to be on the horizon in any given resource category for this scenario to kick in. A lack of adequate supplies to meet the needs of a growing, ever more urbanized and industrialized global population is enough. Given the wave of extinctions that scientists are recording, some resources -- particular species of fish, animals, and trees, for example -- will become less abundant in the decades to come, and may even disappear altogether. But key materials for modern civilization like oil, uranium, and copper will simply prove harder and more costly to acquire, leading to supply bottlenecks and periodic shortages.
Oil -- the single most important commodity in the international economy -- provides an apt example. Although global oil supplies may actually grow in the coming decades, many experts doubt that they can be expanded sufficiently to meet the needs of a rising global middle class that is, for instance, expected to buy millions of new cars in the near future. In its 2011 World Energy Outlook, the International Energy Agency claimed that an anticipated global oil demand of 104 million barrels per day in 2035 will be satisfied. This, the report suggested, would be thanks in large part to additional supplies of “unconventional oil” (Canadian tar sands, shale oil, and so on), as well as 55 million barrels of new oil from fields “yet to be found” and “yet to be developed.”
However, many analysts scoff at this optimistic assessment, arguing that rising production costs (for energy that will be ever more difficult and costly to extract), environmental opposition, warfare, corruption, and other impediments will make it extremely difficult to achieve increases of this magnitude. In other words, even if production manages for a time to top the 2010 level of 87 million barrels per day, the goal of 104 million barrels will never be reached and the world’s major consumers will face virtual, if not absolute, scarcity.
Water provides another potent example. On an annual basis, the supply of drinking water provided by natural precipitation remains more or less constant: about 40,000 cubic kilometers. But much of this precipitation lands on Greenland, Antarctica, Siberia, and inner Amazonia where there are very few people, so the supply available to major concentrations of humanity is often surprisingly limited. In many regions with high population levels, water supplies are already relatively sparse. This is especially true of North Africa, Central Asia, and the Middle East, where the demand for water continues to grow as a result of rising populations, urbanization, and the emergence of new water-intensive industries. The result, even when the supply remains constant, is an environment of increasing scarcity.
Wherever you look, the picture is roughly the same: supplies of critical resources may be rising or falling, but rarely do they appear to be outpacing demand, producing a sense of widespread and systemic scarcity. However generated, a perception of scarcity -- or imminent scarcity -- regularly leads to anxiety, resentment, hostility, and contentiousness. This pattern is very well understood, and has been evident throughout human history. (much) more