Another reason to switch to renewable energy as quickly as possible. Bubbles can drive economies forward and actually produce some positive results (which was seen with the investment boom from the stock bubble in the 1990s in the U.S.) due to the increase in the wealth effect generating more demand, but if that demand isn’t compensated for with the burst of large bubbles, recessions happen. There is today a tremendous amount of wealth directly because of fossil fuels, and if that wealth sharply drops in value and isn’t replaced, there might be a shock to the world economy.
Several major economies rely heavily on fossil-fuel production and exports. The price of fossil-fuel companies’ shares is calculated under the assumption that all fossil-fuel reserves will be consumed. But to do so would be inconsistent with the tight carbon budget set in the 2015 Paris Agreement, which limits the increase in global average temperature to ‘well below 2°C above pre-industrial levels’. So far, this prospect has not deterred continuing investment in fossil fuels because many believe that climate policies will not be adopted, or at least not in the near future.
However, and crucially, researchers now show that ongoing technological change, by itself and even without new climate policies, is already reducing global demand growth for fossil fuels, which could peak in the near future. New climate policies would only aggravate the impact. Continuing investment in fossil fuels is therefore creating a dangerous ‘carbon bubble’ that could burst, with massive economic and geopolitical consequences.
The scientists conclude that further economic damage from a potential bubble burst could be avoided by decarbonising early. “Divestment is a prudential thing to do. We should be carefully looking at where we are investing our money.”