Will the ‘carbon bubble’ be the cause of the next shock to our economic and financial system? This report, commissioned by the Greens/EFA Group and published by GEF, highlights the risk faced by financial institutions to changes in the value of their fossil fuel-based assets. The report was written by Profundo and Sustainable Finance Lab.
The so-called ‘carbon bubble’ – which refers to the overvaluation of oil, gas and coal mining companies because of the need to shift from fossil fuels to renewable energy sources – poses a growing risk to our economies.
If we want to have a chance to limit global warming below 2°C and therefore avoid harmful climate change, the amount of fossil fuels that can actually be burnt is limited, and the majority of fossil fuel reserves would become stranded assets. Today, private companies own about a 1/4 of fossil fuel reserves. If a large part of these reserves cannot be extracted, that reduces the valuation of these companies and their ability to repay their debt. The carbon bubble therefore poses serious risks to the financial sector, given the financial institutions´ large exposures to oil, gas and coal mining companies through equity, bond, and loan portfolios.