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The “Carbon Bubble”: Is the market over-valuing fossil fuel assets?



Four years ago a group of financial experts at the Carbon Tracker think tank asked a simple question: what effect would global responses to climate change have on investments in the fossil fuel sector? They concluded that capital markets could be carrying a bubble, linked to over-investment in fossil fuel-heavy industries (Carbon Tracker, 2011), whose size dwarves the housing bubble that caused the global financial crisis in 2008 (Fullerton, 2011). This answer initiated tremors in the financial world that may lead to a seismic shift in investment practices globally.

“Fossil fuel companies have assets that cannot be exploited in a world that stays beneath the 2°C guardrail”

Their work began from an understanding that ongoing emissions of greenhouse gases will cause further warming and long lasting changes in all components of the climate system, leading to severe, pervasive and irreversible impacts for people and ecosystems. In order to limit this damage the 2010 UN Cancun Climate Conference formally committed national governments to limit global temperature rises to 2°C (UN, 2010) (although many scientists regard this degree of warming to be overly dangerous (Anderson, 2011)).

A celebrated scientific paper translated this temperature rise into more tangible terms. This paper found in 2009 that to have an 80% chance of keeping global warming beneath 2°C the world had a remaining carbon budget (total fuel that can be burnt) of 565 GtCO2 (gigatonnes of carbon dioxide equivalent) until 2050 (Meinshausen et al., 2009). This amount of greenhouse gas emissions represents the (relatively) safe guardrail for maintaining climate stability.

This pivotal paper took this issue one iteration further towards economic reality: it asked how does the allowed carbon budget compare to existing fossil fuel reserves (resources that are economically recoverable using current technologies and prices) possessed by companies and nations? If existing reserves were less than the carbon budget then a collective sigh of relief could be heaved as all reserves could be exploited without risking exposure to the worst effects of anthropogenic climate change.

However, the authors reported an alarming finding – using reviews by energy agencies and energy companies they found that existing fossil fuel reserves, if combusted, would generate 2795 GtCO2, a number almost five-fold greater that the amount safe to burn (Meinshausen et al., 2009). The conclusion scientists drew from this work was simple: in order to have a chance for a stable climate, approximately 80% of known fossil fuel reserves must not be exploited.

Carbon Tracker took the simple step of translating this finding into the bottom line language of the market: which companies would lose out on profits? Although most oil, gas and coal reserves are held by countries not by private companies, even the top 100 listed coal companies and top 100 listed oil and gas companies possess fossil fuel reserves that would produce 745 GtCO2, enough to blow the remaining carbon budget by themselves (Carbon Tracker, 2011). In other words, if just the fossil fuel reserves possessed by the top 200 fossil fuel companies were exploited this would push warming beyond the 2°C limit. This does not take into account the increase in fossil fuel reserves produced by aggressive exploration for new resources by the major fossil fuel companies (on which they spent $800 billion in 2010 (Global Data, 2010).

This means that these 200 fossil fuel companies have assets that cannot be exploited in a world that stays beneath the 2°C guardrail; assets which would then be ‘stranded’. This stranding is likely to occur as a result of a combination of changes in the market and regulatory environment associated with the transition to a low carbon economy (Carbon Tracker, 2011). Capital invested in new projects to exploit fossil fuel resources that are more difficult and costlier to access may be at the greatest risk of stranding, especially considering such projects can take 15-20 years to come online, a period when financial and political conditions are likely to be markedly altered (Carbon Tracker, 2011).

This risk led Carbon Tracker to coin the phrase ‘carbon bubble’. If the worth of listed companies is dependent on the amount of fossil fuel reserves they possess, but stranding of these assets is likely to occur, the value of the fossil fuel sector is likely to be over-inflated. The term ‘carbon bubble’ invokes recent over-valuations like the dotcom bubble of the 90s and the recent housing bubble. In terms of sheer magnitude, however, the carbon bubble (including nationally-owned carbon assets) (Fullerton, 2011), estimated at $22 trillion, is vastly larger than the subprime mortgage writedown of $4 trillion that crashed markets in 2007-2008 (IMF, 2009).

“The value of the fossil fuel sector is likely to be over-inflated.

These risks are particularly pertinent to the UK market, which is home to many of the largest fossil fuel companies, including BP, Royal Dutch Shell, Rio Tinto, and BHP Billiton, amongst others. The London Stock Exchange carries companies who account for 18.7% of the remaining global carbon budget, and so is highly exposed to carbon risk (Carbon Tracker, 2011).

Carbon Tracker’s work has presented investors with two problems. Firstly, it has made clear the financial risk of ongoing investment in the fossil fuel industry, particularly new capital expenditure into potentially high risk, low return projects. Secondly, it presents a moral quandary to investors: the only way that these industries will remain profitable is if serious action to reduce the use of high carbon fuels is not taken. That is, continued investment in these industries is tantamount to betting on global environmental destruction.

It is this second issue that the rapidly growing Fossil Free campaign has sought to highlight, encouraging investors to divest from fossil fuel companies. This campaign has had considerable success with more than 220 institutions committing to divest in excess of $50 billion. Many of these institutions have taken into account both the financial risk of continuing investment, along with the risk to the environment.

Increasingly, however, it is hard-nosed investors that are paying attention to the financial downside and moving their money away from carbon intensive investments. The insurance company AXA announced earlier this year that it would move £355 million from coal investments because “it is our responsibility, as a long-term institutional investor, to consider carbon as a risk and to accompany the global energy transition” (The Guardian, 2015a). This move was mirrored by Norway’s decision to sell shares in coal companies held by its $900 billion sovereign wealth fund, which owns about 1.3% of all listed companies globally, because they pose “both financial risks and climate risks” (NYTimes, 2015).

“ The carbon bubble is thought to be larger than the subprime mortgage writedown that crashed markets in 2007-2008.”

The Bank of England has also highlighted risks regarding the financial security of fossil fuel assets. Mark Carney, governor of the Bank of England, has identified the financial risk posed by fossil fuel stranding, given the “vast majority of reserves are unburnable” if temperature rise is to be limited (The Guardian, 2014; Financial Times, 2015) and has warned that insurance companies could suffer a “huge hit” (The Guardian, 2015b) . The G20 has asked the Financial Stability Board to report this November about potential shocks to the banking sector stemming from a drastic revaluation of fossil fuel assets (RTCC, 2015). These fears are shared by the private sector, with HSBC warning investors that the risk of fossil fuel stranding are “growing” (HSBC, 2015), while the consultancy Mercer warned that high carbon energy industries faced potentially severe losses over the next 35 years (Mercer, 2015).

“The only way that these industries [carbon markets] will remain profitable is if serious action to reduce the use of high carbon fuels is not taken.”

One group that has not accepted this analysis is the major fossil fuel companies themselves, including Shell, BP and Exxon Mobil who have published future energy scenarios that predict increasing growth over the next three decades, and claim that their assets are not at risk of stranding.

Carbon Tracker has responded by pointing out that fossil fuel companies’ returns have fallen as investments in capital intensive, low return projects, such as oil sands, has increased, and that such a pattern is likely to continue (Carbon Tracker, 2014). In essence, continued growth in oil demand and a reduction carbon emissions to limit global warming are incompatible.


Carbon Tracker’s ongoing work seeks to determine which projects and companies are most vulnerable to stranding, based on the breakeven oil price required for specific fossil fuel projects to be economically recoverable. The conclusions reached underline the increasing risks associated with large capital expenditures on carbon intensive projects with time spans of decades.

Investors have also been encouraged to persuade the major players in the oil and gas industry to adjust their business practices in order to become less exposed to the ‘carbon bubble’. Carbon Tracker advocates a slow deflation of the ‘carbon bubble’ by judicious investment in viable fossil fuel projects and a return of capital to shareholders as companies reduce their operations. The alternative – a sudden pop of the sector as the climate hits catastrophic tipping points – presents a daunting scenario of ecological and financial turmoil. It remains to be seen whether investors will act before such shocks are experienced.



Anderson, K. (2011).”Climate Change: going beyond dangerous.” Tyndall Centre for Climate Change http://kevinanderson.info/blog/wp-content/uploads/2013/01/EcoCities-presentation-for-distribution-.pdf


Carbon Tracker (2011). ‘Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?’ http://www.carbontracker.org/report/carbon-bubble/


Carbon Tracker (2014). ‘Response to Exxon: An Analytical perspective’ http://www.carbontracker.org/report/oil-gas-majors-fact-sheets/


Fullerton, J, The Capital Institute (2011). The Big Choice. http://capitalinstitute.org/blog/big-choice-0/#_ednref3


Financial Times (2015). ‘Stranded Assets and climate stimulus.’



HSBC (2015). ‘Stranded assets: what next?’ http://www.businessgreen.com/digital_assets/8779/hsbc_Stranded_assets_what_next.pdf


IMF (2009). “World Economic Outlook: Crisis and Recovery.”   https://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf


Global Data (2010). Global Oil and Gas Capital Expenditure Outlook. http://www.investorideas.com/Research/PDFs/CAPEX_PR.pdf


Meinshausen, et al. (2009). ‘Greenhouse-gas emission targets for limiting global warming to 2 C.’ Nature 458.7242: 1158-1162. http://www.nature.com/nature/journal/v458/n7242/full/nature08017.html


Mercer (2015). ‘Investing in a Time of Climate Change – 2015 Study.’



NYTimes (2015). ‘Norway Will Divest From Coal in Push Against Climate Change.’ http://www.nytimes.com/2015/06/06/science/norway-in-push-against-climate-change-will-divest-from-coal.html



RTCC (2015). ‘Mark Carney set for new ‘stranded assets’ intervention.’ http://www.rtcc.org/2015/07/28/mark-carney-set-for-new-stranded-assets-intervention/


The Guardian (2014). ‘Mark Carney: most fossil fuel reserves can’t be burned.’ http://www.theguardian.com/environment/2014/oct/13/mark-carney-fossil-fuel-reserves-burned-carbon-bubble


The Guardian (2015a). ‘AXA to divest from high-risk coal funds due to threat of climate change.’



The Guardian (2015b). ‘Bank of England warns of financial risk from fossil fuel investments.’



United Nations (2010). ‘Framework Convention on Climate Change: Decisions adopted by the Conference of the Parties.’ http://unfccc.int/resource/docs/2010/cop16/eng/07a01.pdf#page=2


Is a medical doctor, who has just completed a PhD in Neuroscience at King’s. He helped found the group Fossil Free KCL which has been advocating for King’s to divest from fossil fuels.





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