The next global economic shock could come from the carbon markets as an investment bubble in fossil fuels grows to the tune of trillions of dollars.

“The financial crisis has shown what happens when risks accumulate unnoticed,” said Lord Nicholas Stern, a professor at the London School of Economics. The risk was “very big indeed,” he said, and almost all investors and regulators were failing to address it.

The carbon bubble is a result of an overvaluation of oil, coal and gas stores held by energy companies. According to a report published Friday, at minimum, two-thirds of these reserves will be kept underground if countries stick to existing internationally agreed upon emissions targets to avoid more than a 2 degree rise in the world’s temperature.

Given major industrial nations’ failure to meet previous targets, however, it is unlikely the 2 degree limit will be respected. But if the agreements hold, the reserves in question will be unburnable and worthless. That would produce massive market losses. But the stock markets are betting against it.

— Posted by Alexander Reed Kelly.

The Guardian:

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 report on 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.

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