Fossil-fuel investments are destined to lose their economic value
The Coming Carbon Asset Bubble: Investors Need to Adjust Now
By AL GORE AND DAVID BLOOD
Wall Street Journal, Oct. 29, 2013 7:27 p.m. ET
After the credit crisis and Great Recession, it seemed ridiculous to have thought that investing in subprime mortgages was a good idea. As with most market "bubbles," the risk of giving 7.5 million mortgages to people who couldn't possibly pay them off was somehow invisible to many investors at the time.
One reason such bubbles form is the tendency by many investors to confuse "risk" with "uncertainty." As the economist Frank Knight established, there is a subtle but crucial distinction between the two: Uncertainty is what good investors usually fear the most, because it cannot be measured or priced as risk can be. But when investors mislabel risk as uncertainty, they become vulnerable to the assumption that since it cannot be measured, they might as well ignore it.
That is exactly what is happening with the subprime carbon asset bubble: It is still growing because most market participants are mistakenly treating carbon risk as an uncertainty, and are thus failing to incorporate it in investment analyses. By overlooking a known material-risk factor, investors are exposing their portfolios to an externality that should be integrated into the capital allocation process.
Here is the relevance of carbon to investing: There is consensus within the scientific community that increasing the global temperature by more than 2°C will likely cause devastating and irreversible damage to the planet. Reliable measurements make it clear that we will easily cross this threshold in the near term at our current rate of CO2 emissions. So in an effort to avoid it, the International Energy Agency has calculated a global "Carbon Budget" that accommodates the burning of merely one-third of existing fossil fuel reserves by 2050. Put differently, at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2°C of warming—creating "stranded carbon assets."
(Continued here.)
By AL GORE AND DAVID BLOOD
Wall Street Journal, Oct. 29, 2013 7:27 p.m. ET
After the credit crisis and Great Recession, it seemed ridiculous to have thought that investing in subprime mortgages was a good idea. As with most market "bubbles," the risk of giving 7.5 million mortgages to people who couldn't possibly pay them off was somehow invisible to many investors at the time.
One reason such bubbles form is the tendency by many investors to confuse "risk" with "uncertainty." As the economist Frank Knight established, there is a subtle but crucial distinction between the two: Uncertainty is what good investors usually fear the most, because it cannot be measured or priced as risk can be. But when investors mislabel risk as uncertainty, they become vulnerable to the assumption that since it cannot be measured, they might as well ignore it.
That is exactly what is happening with the subprime carbon asset bubble: It is still growing because most market participants are mistakenly treating carbon risk as an uncertainty, and are thus failing to incorporate it in investment analyses. By overlooking a known material-risk factor, investors are exposing their portfolios to an externality that should be integrated into the capital allocation process.
Here is the relevance of carbon to investing: There is consensus within the scientific community that increasing the global temperature by more than 2°C will likely cause devastating and irreversible damage to the planet. Reliable measurements make it clear that we will easily cross this threshold in the near term at our current rate of CO2 emissions. So in an effort to avoid it, the International Energy Agency has calculated a global "Carbon Budget" that accommodates the burning of merely one-third of existing fossil fuel reserves by 2050. Put differently, at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2°C of warming—creating "stranded carbon assets."
(Continued here.)
Powered by Blogger
1 Comments:
Just as people are beginning to tune out Obama, people long ago tuned out Gore and his apochrophyl predictions of doom and gloom when it has been colder than a witch's tit this summer, this past winter and over the past few years. 2011/2012 winter was warm, but that was an anomoly. This winter is expected to be brutally cold in the upper midwest.
Keep drilling on private lands. Keep fracking. Cheap abundant energy is wonderful!
Post a Comment
<< Home