Bursting the Carbon Bubble

By Michael Green

One of the world’s fastest-growing social movements is calling for citizens and institutions to sell out of fossil fuels – but it’s not just a matter of morality. Hard-headed analysts say there’s a growing risk of a collapse in the value of fossil fuel investments. Taken together, these warnings present a new way to understand our climate crisis.

In this edited version of his Lunchbox/Soapbox address, Michael Green takes us inside the movement - starting in the offices of Goldman Sachs, listening to US climate activist Bill McKibben.


Away from the glare and confusion on climate change, there is a deeper conversation going on. It is changing the way climate activists plan their campaigns, and it is changing conversations behind the doors where money talks.

Here is one example: on Tuesday, I went to a lunchtime meeting at Goldman Sachs, at 101 Collins Street, the swankiest office building in town.

In Rolling Stone, in 2009, journalist Matt Taibbi described Goldman Sachs like this: ‘The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.’

But, arguably, this meeting on Tuesday was an unusual one. There were about 100 people from the superannuation and fund management industry, in a big teleconference in Sydney and Melbourne, and they were there to talk to the American climate activist Bill McKibben.

Now McKibben, who is touring Australia this week, also writes for Rolling Stone. In one article last year he wrote this: ‘We need to view the fossil-fuel industry in a new light. It has become a rogue industry, reckless like no other force on Earth.’

McKibben got arrested twice last year for his climate activism. The event went for nearly two hours – McKibben gave a short spiel, and then there was an extended discussion session with a panel of super fund managers and investment analysts. Why were they engaging with this guy? Before I get to why they’re all willing to be there, I want to offer one small update on our current climate projections.

Image from Bill McKibben's groundbreaking 2012 *Rolling Stone* article.

Image from Bill McKibben's groundbreaking 2012 Rolling Stone article.

Turn Down the Heat: The World Bank report

Late last year the World Bank put out a report called ‘Turn Down the Heat’ report, which stated that even if all nations fulfill their pledges to reduce emissions, we’re still on track for 3.5 to 4ËšC warming by the end of the century.

A 4°C world means: ‘Extreme heat waves, declining global food stocks, loss of ecosystems and biodiversity, and life-threatening sea level rise.’ They concluded that there is no certainty that it’s possible for humanity to adapt to a 4°C hotter world. 

Their paper says that to keep an 80 per cent chance of staying at 2 degrees or below, we can only release about one-fifth of the carbon dioxide in current proven fossil fuel reserves.

It’s a terrifying thought – put out by a very conservative public institution. It’s also hard to really comprehend what kind of changes that would involve, and what kind of suffering it would entail. But one thing it makes me think is that we need to do a better job of avoiding that situation.

Carbon budget: We’re blowing it

And that’s why I come back to that meeting at Goldman Sachs. The reason I was there and those finance types were there, is that a different way of thinking about the climate crisis has sharpened the debate. It’s the idea of a carbon budget. In 2009, scientists from the Potsdam Institute in Germany produced a set of emissions scenarios together with their likely influence on global temperatures.

Their paper says that to keep an 80 per cent chance of staying at 2 degrees or below, we can only release about one-fifth of the carbon dioxide in current proven fossil fuel reserves.

It’s worth noting that at the rate we’re going, we’ll have blown the budget by mid next decade. And of course, the fossil fuel industry is always searching for more.

Even for a 50/50 chance of going over 2 degrees, the report said, two-thirds of our coal, oil and gas must stay in the ground.

Subsequently, a British organisation called Carbon Tracker added to that analysis. They released some research saying that the reserves held by the world’s 200 largest listed coal, oil and gas companies alone is more than enough to exceed that threshold.

The moral case

Since the carbon budget idea has become more common, there have been two kinds of responses: the moral case and the business case. I’ll cover each one, and then the way they cross over, because that’s particularly unusual and relevant for us as citizens.

As I’ve mentioned, Bill McKibben is the person most associated with the moral case. Simply put, his argument goes like this: ‘if it’s wrong to wreck the planet, then it’s wrong to profit from that wreckage’.

Based on the unexpected popularity of his Rolling Stone article, he and others started a new campaign for calling for universities, churches, cities and pension funds to sell out of fossil fuel companies. It’s called Go Fossil Free, and it’s spread like wildfire across the US. In just over six months there are already several hundred campaigns, and a dozen or so institutions have agreed to divest.

The argument isn’t so much that they’ll bankrupt the companies, but that they’ll undermine their social licence, and that open up room for regulation.

People are working on this moral divestment case here already. If you haven’t seen any yet, you can expect to. As with the US, it’s not only targeted at universities, but also churches and local councils, and for banks not to fund new fossil fuel projects. 

One plank of their campaign is a moral call to action for citizens: there’s no sense in greening your home if you’re investing in climate change all the while. You’ve got to change the way you invest.

They’ve had two wins so far: the NSW Synod of the Uniting Church has announced plans to divest from fossil fuels. And a couple of years ago, ANU students successfully campaigned for the university to sell stocks in a coal seam gas company called Metgasco. Those students are a cheeky bunch – they’re part of the national Lock the Campus campaign and they’ve since filed FOI requests for all the details of the university’s fossil fuel holdings. Now they’re moving onto the ACT government.

But most of all, the campaign here is aimed at superannuation funds.

There’s a campaign called the Vital Few – which is run by an organisation chaired by former liberal leader John Hewson. It hasn’t had much success yet, but they say it’s early days. The Vital Few campaign says that across the super industry, about 55 per cent of funds are held in high carbon investments and only 2 per cent in low (although there’s no standard definition for what that means).

One plank of their campaign is a moral call to action for citizens: there’s no sense in greening your home if you’re investing in climate change all the while. You’ve got to change the way you invest.

All these campaigns have different approaches and different targets, but share a common thread – there’s a moral reason not to invest in fossil fuels, both for us as individuals and for our institutions.

The business case

But there’s another way to look at those numbers, and it’s this: ‘Holy heck, if four-fifths are going to stay in the ground, then someone is going to lose a lot of money.’ Essentially, the argument is that investing in fossil fuels is risky, and you’ll want to sell down your stake, because if you don’t, at some point you’ll lose it.

In the case of listed companies, the value of their reserves is factored into their share price. Those reserves are assets on their books, and investors currently have an expectation that they will deliver an income stream in the future. And of course, it’s not just fossil fuels – all kinds of industries have a lot of assets tied up in the carbon economy.

Climate risk

This is one element of a broader set of risks that are described as ‘climate risk’ – the prospect of reduced earnings or devalued assets, caused by climate change.

The first, as I just mentioned, is the ‘carbon bubble’ or the ‘unburnable carbon’ scenario. It’s the prospect that we’ll get our act together to prevent emissions, and fossil fuels will lose value. That could be due to tough policy measures, such as robust carbon pricing or regulations, here, in China or elsewhere.

There are other kinds of climate risk too. For example, the risk that cheap clean technology will out-compete fossil fuels. Or, curiously, if you’re a long-term investor, there’s a risk in the possibility that others will switch away from fossil fuels.

When I started researching this stuff, I was overwhelmed by the vast quantity of reports on it. The finance world is rife with warnings about it.

Then there’s the mother of all climate risks: the physical impacts. At the lower end of the scale – which, as we’ve seen around the world already, is by no means low – and, perhaps it’s a flood that destroys infrastructure. But remember the World Bank’s scenario of a 4-degree hotter world: it’s safe to assume that a climate to which humanity can’t adapt is not consistent with steady returns for investors.

Reports on reports on reports

When I started researching this stuff, I was overwhelmed by the vast quantity of reports on it. The finance world is rife with warnings about it. Most of the words spilled have been about climate risk in relation to ‘asset owners’: pension funds, super funds, insurers and sovereign wealth funds, such as the Future Fund. Among investors, they have a uniquely long-term perspective. In Australia the average super member has 20 years before they’ll retire.

Last year, the Asset Owner’s Disclosure Project – the organisation chaired by John Hewson, and which also runs the Vital Few campaign – released ratings of the way the funds are dealing climate risk. Australia had six of the top ten funds around the world (Local Government Super, CareSuper, Cbus Super, VicSuper, UniSuper and AustralianSuper). But there’s no cause for celebration. The report concluded that no fund had ‘accurately assessed or managed its climate risk’. The highest rating fund, Local Government Super, estimates that it has about 10 per cent of its money in low-carbon assets, and 45 per cent in high.

The head of sustainability for Local Government Super, Bill Harnett, was at that meeting at Goldman Sachs, and he said this: ‘There is an inescapable logic that there are more fossil fuels on balance sheets around the world than we will ever be able to realise in our investments. There is an inevitability. We don’t know when, but we know it will come.’

And yet, his fund’s portfolio is still a long way from investing in a way that is consistent with limiting global warming to 2 degrees.

Why isn’t there change?

At that meeting at Goldman Sachs, everyone in the room accepted the broad numbers that McKibben stated – that four-fifths must stay in the ground. I’m assured that all the big Australian superannuation funds accept that this risk exists, in a broad sense.

Much of the discussion was about how they don’t know how to evaluate it. A couple of large financial analysts have tried. In recent months, HSBC in London did some modelling that showed a deflating carbon bubble could nearly halve the value of coal assets on the London exchange, and knock three-fifths from the value of oil and gas companies. Citi Research did a similar exercise for the Australian stock exchange and found that 14 per cent of value of the ASX200 is in coal, oil and gas, and related industries.

But the superannuation funds in the room say they don’t know how to incorporate those scenarios into their investment decisions.

Ian Wood from AMP Capital said there are two broad reasons. One is that conventional financial modelling gives greater weight to short-term earnings. Future dollars are discounted, so if a coal project is making money now, then that matters more.

The other reason is the immense uncertainty about how those scenarios could play out. What will government policy be, here and around the world? If the carbon price spreads, what will it be? When and where will it be brought in? What will happen to technology? What will China do? Here’s the upshot: for the time being, almost all of our superannuation funds are taking a position that that we won’t limit warming to 2 degrees. They’re betting that we’ll exceed the safe threshold for human civilisation. And they’re not just betting on the game, they’re playing it as well. Their investment policy helps shape that 4-degree world, and helps us on course for a world where they won’t get a good return on very many of their investments.

With a couple of minor exceptions, they’re all just sitting there, watching each other and saying they accept that it’s all true, but they can’t do anything about it.

Bad news and good news

I left the meeting with two conflicting thoughts. The 100 people there that day, they’re the ones in the whole industry who are the most engaged. And even they can’t find it in their modelling to take account of a risk they all acknowledge to be real. They’ll figure out a way at some stage, but it’s clear the change isn’t happening fast enough. Right now, the business case isn’t enough to convince super funds to change.

Because of the nature of investment decisions, the tipping point isn’t the day when all governments sign off on a radical climate justice agreement. It’s the day when enough people think that significant action is possible.

But there was something else. The really interesting thing about that meeting on Tuesday was this: McKibben was in the room. And the fact that he was in the room made the climate risk more significant for everyone there who was listening. The same goes for all of the campaigns, both the moral and business ones, the civic and corporate pressure.

As McKibben put it at Goldman Sachs: ‘For our purposes the fight is as good as the win.’ There’s a kind of vicious cycle in the way we’re investing at the moment – it reinforces the systems that cause climate change.

But the carbon bubble idea is so uncertain at the moment, and public policy is so uncertain, that the more people are talking about the carbon bubble, the more likelihood there is one. So there’s a virtuous circle too. If these big institutions move their money, and if individuals badger their funds and their friends about it, then it becomes more of a reality for the people who are deciding how money is invested. It becomes more likely that governments will implement policy and regulations consistent with 2-degree warming.

Because of the nature of investment decisions, the tipping point isn’t the day when all governments sign off on a radical climate justice agreement. It’s the day when enough people think that significant action is possible. Or when they believe that China really is shifting away from coal. Or when they accept that the cost of solar panels has come down so fast that our centralised, fossil fuel energy system is going to change. Or when they get frightened that others are going to trade out first.

There is a deeper conversation occurring, and it is one that accepts the science, and one that includes both climate activists and market analysts. It has the potential to shift rapidly. It is happening – the only question is whether citizens can make sure it happens in time.

Portrait of Michael Green

Michael Green is a journalist in Melbourne. He has written about environmental and social issues for the Age, Sydney Morning Herald, Nature, Nautilus, Smith Journal, Right Now and Overland, among others. He is the coordinator of Behind the Wire, and has been working on a book of people’s stories from detention called They Cannot Take the Sky, which will be published in March 2017 by Allen & Unwin. He is also producing an exhibition at Melbourne’s Immigration Museum based on the stories in the book, which will open on 17 March 2017.

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