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The carbon bubble begins to deflate

In order to meet the ambitious goals set out in the Paris climate agreement, between 60 and 80 percent of oil, coal and gas reserves cannot be exploited, according to various studies (e.g. the London School of Economics' joint research with the Carbon Tracker Initiative or University College London's study). If they are burnt, the temperature of global warming compared to pre-industrial levels would rise much higher than can be managed.

Consequently, this would mean that investments in fossil fuel companies become worth less and less, as they will not be able to sell or burn their reserves anymore. However, until now, the market hardly responded to this danger of a “carbon bubble”, which refers to the assets of fossil fuel companies becoming worthless due to ambitious climate goals that ruin their business model.

This is where the movement for divestment from of fossil fuels starts: As they call for funds, banks or insurances to divest, they want to withdraw capital from fossil fuel companies, aiming at stopping them from exploiting fossil fuel reserves further. Because only then is there a chance of sustainable development without catastrophic climate change.

And it seems as though the movement is being heard in the business world – slowly but surely: A study by EY just found out that an enormous number (49%) of the companies they asked plan to divest from fossil fuels in the next two years. And an even more astounding 84% of companies believe that their divestment created long-term value in the remaining business. (See here). 

Of course it is important to note: This is a business perspective. Thus, we have to take into account that some, or many of these companies, might not have divested because of their concern of global warming and the environment, but because of profitability. However, this just shows how important binding political agreements on tackling climate change are, as investors expect that the value of fossil fuel companies will go down dramatically because they can’t sell oil and coal anymore, they begin to draw back their money. The carbon bubble begins to deflate. 

And yet, this is not happening nearly fast enough to effectively prevent dramatic global warming. This is the reason why calling for divestment from fossil fuels continues to be so important.

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