Carbon bubble: The risky future of fossil investments

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  Quantumrun Foresight
• December 9, 2024

Insight summary

The carbon bubble refers to the overvaluation of fossil fuel assets as the world transitions to a low-carbon economy, potentially leading to financial losses in affected industries. Governments and businesses are beginning to acknowledge these risks, with some shifting towards renewable energy sources to avoid stranded assets. However, many companies are still expanding fossil fuel production, increasing the likelihood of economic disruption as global efforts to reduce emissions intensify.

Carbon bubble context

The "carbon bubble" concept refers to the overvaluation of fossil fuel assets in the global economy, driven by the assumption that these resources will continue to be exploited. This term gained attention following the 2009 Copenhagen climate talks when the Carbon Tracker Initiative (CTI) warned that as the world shifts toward a low-carbon economy, many fossil fuel assets would become stranded—essentially losing their value. According to the CTI, companies that are heavily invested in coal, oil, and gas may face significant financial losses, as global efforts to reduce carbon emissions accelerate. While essential for mitigating climate change, this shift could trigger an economic collapse similar to previous financial bubbles. The value of stranded assets is estimated to be USD $25 trillion.

Governments, businesses, and financial institutions have begun to acknowledge the risks posed by the carbon bubble. For example, in 2018, the Republic of Ireland became the first country to commit to divesting its state investment fund from fossil fuels, setting a strong precedent for other nations. Additionally, financial leaders like Mark Carney, the former Governor of the Bank of England, have repeatedly warned of a possible "climate Minsky Moment," a sudden collapse in asset values if the energy transition is not managed smoothly. Moreover, major oil companies like Shell, BP, and Saudi Aramco are under increasing pressure to align their business models with the goals of the Paris Agreement, though reports from think tanks show that most remain far off track. This growing awareness has sparked discussions about regulatory changes that require greater transparency on climate-related financial risks.

Despite the increasing focus on the carbon bubble, many fossil fuel companies continue to expand their operations, which could worsen the financial risks tied to stranded assets. A 2024 report by CTI analyzed 25 of the world’s largest oil and gas companies and found that none are currently aligned with the Paris Agreement's goal to limit global warming to well below 2 degrees Celsius. As fossil fuel production persists, companies like ConocoPhillips are even increasing their output by nearly 50% by 2030. 

Disruptive impact

As fossil fuel assets lose value, retirement funds or investment portfolios tied to these industries may suffer. Additionally, the growing shift to renewable energy could increase the cost of living in the short term as energy infrastructures transition. However, individuals may benefit from new job opportunities in the clean energy sector as governments and companies invest more in this area. In particular, roles in solar energy, battery storage, and electric vehicle production could rise as demand for fossil fuels drops.

For businesses, the carbon bubble trend may prompt shifts in strategies, forcing companies to diversify and move away from fossil fuel dependency. For example, energy companies may need to pivot their business models toward renewable energy sources, or risk being left behind. This shift is already happening, as oil and gas companies gradually reduce their fossil fuel investments and explore greener technologies. Additionally, industries dependent on fossil fuels, such as transportation and manufacturing, may need to rethink supply chains and energy use. Firms that invest early in decarbonization could gain a competitive edge in markets increasingly driven by environmental policies and consumer preferences.

Meanwhile, governments may face pressure to adapt their policies and financial strategies as the risk of stranded assets becomes more apparent. For example, tax revenues from fossil fuel industries may decrease, requiring governments to explore new revenue streams and adjust subsidies. Furthermore, nations may need to accelerate investments in green infrastructure, such as renewable energy grids and electric vehicle networks, to support the transition. Countries leading the way in divesting from fossil fuels could also serve as models for others. 

Implications of a carbon bubble

Wider implications of a carbon bubble may include: 

• Companies shifting to renewable energy technologies, creating new markets and reducing dependency on fossil fuels.
• Governments increasing carbon taxes to encourage lower emissions, potentially raising costs for businesses and consumers in the short term.
• Political alliances forming between countries with advanced clean energy technologies, reshaping global energy diplomacy.
• Cities adapting infrastructure to accommodate renewable energy sources, improving urban sustainability but requiring significant public investment.
• Supply chains changing as businesses seek cleaner alternatives to high-carbon inputs, increasing demand for low-carbon materials and services.
• Consumers opting for greener products as awareness of climate impacts rises, pushing companies to meet sustainability demands or lose market share.
• Educational systems evolving to prepare workers for careers in green industries, with new vocational programs focused on renewable technologies.
• New environmental regulations requiring businesses to report carbon footprints, driving greater corporate transparency and accountability.

Questions to consider

• How could changes in energy costs affect your daily lifestyle and spending habits in the next decade?
• How could your local government balance economic stability while transitioning away from fossil fuel industries?