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The World Bank Warns that the 'Carbon Bubble' Could Tank the Global Economy

The next fossil fuel disaster may be economic rather than environmental.

by Becky Ferreira
Oct 12 2015, 8:06pm

Coal burning plant in Poland. Image: Petr Štefek

If humans want to ensure our long-term survival on the planet, we need to kick our addiction to fossil fuels. That much has been clear for decades.

What's remarkable, however, is that governments around the world are actually stepping up to the plate on this issue by subsidizing and promoting clean, renewable energy sources within their own borders and beyond. The latest estimates from the International Energy Agency suggest that a full quarter of the world's energy needs will be met by renewable sources like solar, wind, and hydro by 2020, owing to "a remarkable shift in a very limited period of time."

This is great news for the environment, and bodes well for a sustainable future on Earth. But according to Rachel Kyte, the VP of the World Bank and its special envoy for climate change, this shift—while necessary—might be accompanied by some nasty financial repercussions.

"If we accept that we need to have less carbon in our growth, then we might have a financial risk associated with the prominence in our economy of companies who are heavily invested in carbon," Kyte told AFP on Saturday, during the annual World Bank meeting in Lima, Peru.

"That's the whole question of the carbon bubble," she said.

Oil blaze in Iraq. Image: U.S. Marine Corps photo by LCpl. Dick Kotecki

This idea of a carbon bubble is essentially that slowing carbon pollution and human-driven climate change has resulted in a massively overvalued fossil fuel industry, and the reason why is somewhat mind-boggling. The industry's value has traditionally been based on the assumption that every accessible oil, coal, and gas reserve on the planet would eventually be extracted, consumed, and exhausted. The assumed plan, in essence, was to burn through every last drop of non-renewable fuel we could get our hands on.

Of course, it has now become clear that this plan would have colossal ecological, environmental, and social consequences, including the loss of the Antarctic Ice Sheet and the subsequent destruction of pretty much all coastal cities, according to a recent study in Science Advances.

Obviously, we shouldn't go that route. But this leaves the industry inflated by stranded assets that will (hopefully) never be extracted. Kyte is only the latest of many specialists to point out that it is only a matter of time before the bubble bursts. When it does, we could be facing a crippling worldwide recession sparked by the dissolution of trillions of dollars tied up in fossil fuel investments that are plainly not viable.

This is not to say that we should relax restrictions on the fossil fuel industry or impede the momentum of green technology—far from it. A recession is more manageable than an environmental apocalypse, after all.

But this latest warning from Kyte highlights that the switch from non-renewable to renewable energy sources may be a bumpier road than expected, and exposes the insanity of valuing the fossil fuel industry in such a reckless way. But hopefully, it will lead to better management of energy resources in the future, in much the same way that studying the environmental havoc wreaked by fossil fuels led to the aggressive switch to green technology we are finally enjoying today.

As financial analyst Steven Oman told the BBC in 2013, "it behoves us as investors and as a society to know the true cost of something so that intelligent and constructive policy and investment decisions can be made."

"Too often the true costs are treated as unquantifiable or even ignored."