Carbon bubble or hot air? Either way it’s good news for solar investors

Opinion is divided on the extent to which the so-called carbon bubble exists. Are fossil-fuel commodities companies really grossly overvalued with a huge sell-off imminent any day now? According to Forbes the key to the argument is the theory that we must limit the rise in global surface temperature to 2 degrees Celsius relative to the pre-industrial age.

This raises the assumption these fossil-fuel producers will not be able to extract a significant proportion of the resources they own from the ground without causing catastrophic and, perhaps, irreversible climate change. Yet the reserves they own still stand as assets on their balance sheets. There is concern in some quarters that as this realization takes a firmer hold in the markets it will precipitate a massive sell-off and another global financial crisis.

So why hasn’t it happened already? The carbon bubble is not a new idea, it has been around for years. And most significant institutional investors are well aware of it, yet they choose to hang onto their stocks in companies that exploit non-renewable energy sources. Why? There are simply no-where near enough non-renewables available to meet global energy demand and, given current technology and rates of adoption, this situation is likely to persist for decades. “No need to sell today,” is the prevailing wisdom in the market, even though it is clear that day must eventually come.

Some pundits also argue that that the carbon bubble is more hype than reality. This point of view holds that the markets have been gradually discounting stocks built around non-renewables for some time and that we can hold onto cleaner-burning fuels like natural gas a lot longer than, say, coal and oil. Of course there are also those that argue that the 2-degree ceiling for global warming is, at best, an educated guess and we may be able to go on burning fossil fuels beyond that point. While catastrophic climate change is by no means guaranteed above 2 degrees it goes without saying that testing this limit would be a reckless gamble on a scale that humanity has never seen before.

A study from University College London, published in the journal Nature in January 2015, argues convincingly that we simply cannot ignore the 2-degree limit agreed by the world’s nations and that, ideally, we should aim to have stopped burning fossil fuels almost completely in about 20 years. Estimates of what this will cost fossil fuel companies and economies run as high as $28-trillion, perhaps cheap at the price when one considers that the survival of humanity is potentially at stake.

“What is absolutely clear is that if the renewable energy sector is going to have to fill the gap left by a massive slow-down in the use of fossil fuels both the rate of adoption and innovation is going to have to speed up significantly,” said Dr Shawn Qu of Canadian Solar. “But any way one looks at it the future for companies like ours is extremely bright. Having to cope with rapidly accelerating demand is a nice problem to have,” he added.

 

“Given the time frame we are looking at, I believe that the so-called carbon-bubble will more likely slowly deflate, rather than burst, as investors and perhaps fossil-fuel energy producers themselves gradually divest form non-renewables, using the profits of today to invest in renewables for tomorrow, or so one would hope”, concluded Dr. Qu.