Decline and Fall: The Size & Vulnerability of the Fossil Fuel System

By Kingsmill Bond, Ed Vaughan, and Harry Benham - Carbon Tracker, June 4, 2020

Renewable costs are below those of fossil fuels. Five years ago, fossil fuels were the cheapest baseload. The collapse in renewable costs means that for 85% of the world, renewable electricity is the cheapest source of new baseload. By the early 2020s it will be every major country. Because of the rise of cheap renewables, the fossil fuel system is ripe for disruption. This disruption will be have profound financial implications for investors as a quarter of equity markets and half of corporate bond markets are ‘carbon entangled’.

Those responsible for our pension schemes should sit up and take notice; but even greater concern should be felt by financial regulators, as they grapple with finding the right tools to manage the risks of a deflating ‘carbon bubble’.

The world faces two contrasting pathways. Either it can secure the ‘trillion dollar green gigafall’, the trillions that can be generated at low cost from the sun and the wind – particularly benefiting the poorest inhabitants of the world currently dependent upon high cost fossil fuel imports. Or it can stay locked into business as usual, tied into a declining industry that both threatens the global economy with the worst effects of a warming planet, and damages investors with losses, low returns and destabilised equity and credit markets.

In Carbon Tracker’s first report, some ten years ago, entitled ‘Unburnable Carbon – are the World’s Financial Markets Carrying a Carbon Bubble’ we highlighted that listed fossil fuel companies have the potential to develop enough reserves to take the world way beyond 3˚C. Our second report, ‘Unburnable Carbon – Wasted Capital and Stranded Assets’, noted that if we can’t burn what we have already found, why continue to invest in the fossil fuel industry’s expansion? Yet today, we know that some $1 trillion is spent annually on expanding supply and this report goes more into these numbers. Before we wind down the fossil fuel system, we need to stop expanding it.

Some argue that ‘fossil fuels will go away of their own accord’ as the result of the rapid progress made by cleaner technologies and the collapse in demand for fossil fuels driven by the terrible COVID-19 epidemic. Unfortunately, as this report makes clear, financial markets are still heavily tied in to the fossil fuel system.

Read the report (PDF).

Disclaimer: The views expressed here are not the official position of the IWW (or even the IWW’s EUC) and do not necessarily represent the views of anyone but the author.