Are we in a Carbon Bubble?

1

In their analysis, the Task Force on Climate Related Financial Disclosures (TCFD) found three risks related to Climate Change: i) Physical Risk (direct impact from more frequent extreme weather events), ii) transition Risk (coming from the transition to low carbon economies) and iii) Liability Risk (coming from those who take a loss or damage from Climate Change).

If the world is looking for greener and better solutions, Transition Risk is huge! This prompts the question: Are we in a carbon bubble? If we define this as “A hypothesised overvaluation of fossil fuels companies based on the thesis that the current valuation of their assets does not reflect the risk of them becoming stranded”, I would believe this is a “yes”. Now, the question becomes: What happens when it burst?

2

I’d agree, people are notoriously bad at pricing in risk and the risk of fossil fuel based companies becoming stranded approaches 100% given enough time. People are obviously biased towards the short term, but those with a real strategic outlook are taking drastic action. This is why Dubai and Saudi have been spending 10s of billions on ‘vanity’ projects to diversify their economies, because they understand these risks very well.