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Send  Share  RSS  Twitter  03 May 2012

CARBON INVESTMENTS: Is the World Facing a Carbon Bubble‘

 





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Concern has been raised about the exposure of financial markets to high carbon
investments which could pose systemic risk.

The focus is on the fossil fuel reserves held by publicly listed companies and the way these assets are valued and assessed by markets. Currently, financial markets have an unlimited capacity to treat fossil fuel reserves as assets.

The worldwide move to reduce carbon emissions may create systemic risks for investors in fossil fuel assets as the shift to a low-carbon economy evolves. The question that now arises is whether financial markets are facing a carbon bubble in an environment where the world accelerates its move to a low-carbon economy.

Worldwide Move to Reduce Carbon Emissions

South African carbon advisory firm Promethium Carbon says if this is the case then fossilfuel reserve estimates could become overvalued as the world moves away from these energy resources in preference to cleaner energy.

“Research released by Carbon Tracker indicates that only one-fifth of the reserves could be burnt by 2015 if we are to reduce the likelihood of exceeding 2˚C global warming to 20%,” says Promethium Carbon director Robbie Louw.

The report indicates that global fossil fuel reserves are overvalued in listed company balance sheets and have the potential of creating a carbon bubble where the listed value of these companies could be cut or reduced dramatically.

It is estimated that five of the top ten FTSE 100 companies are almost exclusively high-carbon and alone account for 25% of the indexÂ’s entire market capitalisation, he says.

At present regulators are not monitoring the concentration of high carbon investments in the financial system and have no view on what level would be too high.

“The exposure of non-listed companies and institutional investors is even less known.”

Louw suggests that strategies need to be developed to manage the possibility of overexposure. “It is important that markets are aware of these risks and are able to take the necessary measures to evaluate risk to avoid similar consequences to the sub-prime carbon crisis.”


 
 
 
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