From “peak oil” to “unburnable carbon”

Peak oil is many things, but this isn’t about peak oil, so I don’t have to try to enumerate them.  But do recall just one version of the peaker story – peak oil as a repository of hope.  This is the take in which, despairing of other avenues to rapid, large-scale change, we look to peak oil to at least save us from the more extreme forms of climate disaster.

The idea here is that, as we burn our way through the peak, fossil fuels will get more expensive and this will tip the competitive balance to low-carbon energy sources.  So that despite the obvious reality of the day – let’s just say “governance failure” for the moment, and leave it at that – in which it’s all but impossible to price carbon at anything like its true social cost, its price will nevertheless rise, maybe even fast enough to save our bacon.

Does anyone still believe this?  They won’t after reading the Carbon Bubble report, which was just released by the impeccably capitalist Carbon Tracker Initiative, which describes itself as “the first project of Investor Watch, a non-profit company established by its directors to align the capital markets with efforts to tackle climate change.”  This report, which is unfortunately based on current science (unfortunately because current science is pretty terrifying) begins by noting that we have a mere 565 Gigatonnes of CO2 left in our shared planetary 2000 to 2050 carbon budget, if we intend to maintain a high probability (80%) of holding the warming below 2C.  Which we should absolutely do, for lots of reasons — think “managing the unavoidable, and avoiding the unmanageable.”  It then goes on to demonstrate, by simple arithmetic, that “only 20% of the total reserves can be burned unabated, leaving up to 80% of assets technically unburnable.”

Which is to say that peak oil can’t save us, because if we get anywhere near it we’re toast.  Instead, the only transition scenarios that might hold water are those in which we manage to leave fossil fuels behind while we still have plenty to spare.  A future not of peak oil but rather of unburnable carbon.

There’s a lot to say about all this, but the bottom line is that – surprise! – the financial markets are failing yet again!  This time they’re radically overvaluing the value of coal and oil companies, by failing to put a reasonable price of the risk associated with climate mobilization.  Which is to say, the risk that we will actually decide to not commit civilizational suicide.  Because if we do so decide, we’ll have to contrive, one way or another, to not burn most of the proven fossil reserves on the planet.  Which in turn means that the current astronomic valuations of the companies that own those reserves will have to be, ahem, adjusted.

The authors of the Carbon Bubble report would like to see this adjustment take place in a rational manner.

“Now is the time to move into the second generation of investor action on climate change, which tackles the system that is locked into financing fossil fuels. Climate change poses a great threat to the global economy and it is not unrealistic to expect regulators responsible for assessing new systemic risks to address the carbon bubble.

The goal now is for regulators to send clear signals to the market that cause a shift away from the huge carbon stockpiles which pose a systemic risk to investors. This is the duty of the regulator – to rise to this challenge and prevent the bubble bursting.”

The alternative, of course, is one in which “the markets decide” that, one way or another, most known economic reserves of fossil fuels will never be burned, and then proceed to rapidly, not to say catastrophically, reprice coal and oils stocks.

As Paul Gilding put it in his flawed but useful new book, The Great Disruption, “if you lose your shirt on your coal and oil investments, don’t say you weren’t warned.”