Fossil Fuels

Carbon Bubble: Activists' Wishful Thinking?

Does the stock market know something that environmental activists don't?



ExxonMobil and Peabody Energy are in the crosshairs of New York Attorney General Eric Schneiderman, who is accusing them of knowingly failing to warn shareholders of the risks that climate change poses to their businesses. In fact, Schneiderman demanded and secured an agreement from the coal company Peabody Energy to include language in its annual reports noting that future regulatory limits on burning coal as a way to mitigate climate change could impact its bottom line.

The New York attorney general apparently believes in an impending "carbon bubble." This, as the climate change activist group explains, "is the idea that fossil fuel companies are overvalued because if and when the world ever gets serious about dealing with the climate crisis, the fossil fuel companies won't be able to burn their carbon reserves, from which they derive their value."

This idea can be traced back to an article in the April 30, 2009, issue of Nature. There a group of European researchers calculated, using climate model projections, what limits would have to be placed on future carbon dioxide emissions to keep the planet from warming no more than the internationally agreed upon goal of 2 degrees Celsius. They concluded that "less than half the proven economically recoverable oil, gas and coal reserves can still be emitted up to 2050."

The Nature paper is one of the most cited environmental science studies of recent years. The upshot of the article is that in order to prevent the world from getting too hot, at least half of the hydrocarbon assets owned by energy companies must remained buried in the earth as "unburnable carbon."

Later assessments went further, estimating that as much as 85 percent of proved fossil fuel reserves could eventually be unburnable. If these calculations are true, this information should have a big negative effect on the value of fossil fuel company stocks. In 2013, the HSBC bank issued a report that suggested that policies that aim to lower demand for oil and gas, combined with restrictions that make fossil fuel reserves unburnable, put some 40 to 60 percent of the $4 trillion market capitalization of the world's top 200 energy companies at risk.

A new study in the journal Energy Economics asks "when and whether the stock market might have recognized the potential loss of value to energy company shareholders due to unburnable carbon." They find that there has been a very limited response to the scientific finding that significant portions of fossil fuel companies' reserves are unburnable, and therefore supposedly worthless. Does the stock market know something that environmental activists don't?

To figure out what's going on, the researchers looked at how the 63 largest U.S. oil and gas companies' stocks have fared since the publication of the Nature article in 2009. The researchers also tried to determine the effect media reports of unburnable carbon have had on company valuations. Since oil and gas prices have been on something of a roller coaster in the past decade, the researchers' analysis takes into account such things as fluctuations in the price of oil, company earnings announcements, and varying analyst recommendations as they try to isolate the effect on oil and gas stocks.

What did they find? In the three days around the publication of the Nature article, the companies' average stock price dropped 1.5 to 2 percent. However, a couple of weeks later the prices bounced back and were even higher. After news stories detailing the ruinous consequences of unburnable carbon for energy companies, they found "only a small negative reaction…mostly in the two weeks following their publication."

Overall, the researchers estimate that the warnings about unburnable carbon may have reduced the value of their sample companies from $1.088 billion to 1.061 billion, a 2.48 percent drop. That's nowhere near the HSBC suggestion of a 40 to 60 percent decline in valuations. "This evidence," the researchers conclude, "does not support the predictions of many that recognition of unburnable carbon might prompt a significant and substantial reduction in the shareholder value of fossil fuel firms."

Why aren't investors more spooked? The authors speculate that they may be counting on the development of technologies that would capture and sequester carbon dioxide; that they may expect energy companies to invest in alternative no-carbon technologies; or they may think governments will make energy companies whole through rebates and tax incentives. Maybe so. But I suspect that the researchers get it right when they suggest that investors might "be skeptical about whether the demand for oil can actually be pared back within an economically meaningful horizon, regardless of the need to lessen carbon emissions." For now, most investors evidently believe that forecasts of an impending carbon bubble amount to little more than activists' wishful thinking.

Disclosure: I own 50 or 100 shares (I'm still too lazy to check my statements) of ExxonMobil stock that I bought with my own money. The stock prices is down from $103 in 2014 to $79.40 yesterday.

NEXT: Reason Weekly Contest: Offend Those College Students

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Even if the government bard companies form using x amount of fuel that will only increase the value of the fuel they get to use so there will be no true loss of value. Unless the governments starts fining them to pay for so called problems created by carbon usage. Which I’m sure they will pass that bill onto them once the world court starts fining carbon users like the U.S..

    1. Which I’m sure they will pass that bill onto them once the world court starts fining carbon users like the China.


    2. Supply and demand???? That’s crazy talk.

      Arguably, this fuss could raise the value of those carbon reserves. First, supply and demand increases the price of the “burnable” carbon. Then, eventually everyone realizes that their alternate energy fantasies still haven’t been realized, they still aren’t willing to consider nuclear, and NIMBY politics have killed any innovation. Suddenly, the “unburnable” carbon becomes burnable… at the higher prices that have already been accepted.

      Or, maybe we’ll all decide that we don’t give a crap about electricity, heating our homes, and driving our cars.

  2. HSBC bank was at one time a CIA proprietary involved in the drug trade. They paid a fine and went “legit”.

    1. Can you name a bank of any size that isn’t involved in the drug trade?

  3. This is an easy one. It’s not even necessary to read the article to get the correct answer.


    Literally a thousand times yes.

  4. The bubble also assumes no other use for carbon products than fuel I would guess. Even if we eliminate it as a fuel source, there’s no way we’re stopping plastic, carbon fiber and other things these people don’t understand come from the same sources.

    1. Once had a girl at a party recoil in fear when she overheard another guy and myself discussing an export deal we’d done to ship plastic to Canada.

      1. You should see how they react() when you tell them that you design, or build, or operate nuclear power plants…

    2. Plastics is like 0.3% of the oil. Its irrelevant argument.

      And plastics can be made from biomass as cheap as from oil

  5. Perhaps the doogooder attorney general should sue Facebook and Twitter for not making their investors aware that these companies have never shown a profit, may never show a profit, have little hard assets and one day be as valuable as

  6. “…using climate model projections…”

    Alrighty then.

  7. It is nice how a politician is chafing to outlaw the energy sources that makes an urban area like NYC possible without having a clue as to what can replace it.

  8. Im making over $9k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do,


  9. The New York AG should be thrown out of office for abusing his position to engage in purely political persecutions of corporations.

    1. Perhaps he should receive a wood chipper as a Christmas present.

      *note to any shitbag AG’s: that was obviously a joke.

  10. Maybe investors are intelligent enough to determine that, greenies declaring fossil fuel reserves “unburnable” does not make it so. And if the France negotiations are any indication, it will never be so.

  11. All the bleating about stranded fossil fuels is irrelevant. Human fossil fuels use has no effect on climate. Carbon dioxide emissions are beneficial, and climate change is a false premise for regulating them. See Patrick Moore’s recently released lecture

    There is no definitive evidence that CO2 from fossil fuels affects climate. Human activities cause only about 3% of all carbon dioxide (CO2) emissions to the atmosphere. The rest are the result of decomposing plant material.

    CO2 is in equilibrium. While a weak greenhouse gas in theory, its actual climate effects are nullified by stronger forces, particularly the formation of mineral carbonates from atmospheric carbon dioxide. Warmer weather from other causes increases natural CO2 emissions from rotting vegetation, and results in a higher equilibrium level of ambient CO2, as measured by Keeling.

    Anyone who passed 10th grade chemistry can know this using public information. Limestone and marble are the most familiar forms of mineral carbonate. CO2 is an essential component of mineral carbonate (CaCO3, for calcium). Carbonates are the ultimate repository of atmospheric CO2.

    Carbonates form in seawater and soils through biological and chemical processes. The formula is CO2 + CaO = CaCO3. You can make magnesium carbonate in your kitchen by mixing carbonated water with milk of magnesia. For more detail see the paper by Danish researcher Tom Segalstad.

    1. The Earth’s Carbon cycle has had a negative trend since at least the Devonian, maybe earlier. Over the long term the amount of carbon in storage is constantly increasing and the amount cycling is reduced. So no it is not in equilibrium.

      What is happening now is that since the early 19th century ever increasing amounts of that Carbon have been removed from storage by humans in search of energy, some of this Carbon has been immobilized since the Devonian, but is now active. So in the short term the Carbon cycle is not in equilibrium because a fraction of the Carbon that has been stored up in the past 350 million years is now being put back into the system through human effort, this can be shown by the increased amount of Carbon in the atmosphere. It is increasing so there is no equilibrium.

      You can debate all sorts of crap but saying Carbon is in equilibrium is proof you know nothing about what you are babbling on about.

      In this you are much like these idiots who claim that they know exactly how much Carbon energy companies can extract and that their opinion is some sort of iron limit that companies can not exceed because ???

      I guess they think that governments who are dependent on economic growth will suddenly decide to impoverish their citizens and themselves for the greater good of future generations. How you can believe in natural selection and think this sort of crap is beyond me?

    2. Don’t your find your sources a little dated? A lot can happen in 20 years in science. A lot more in 30.

  12. If the effect is 2-3% and the supposed worst case scenario should have a 40%-60% drop, that’s an estimated likelihood of 20:1.

    If the activists believe their own statements, they can make a enormous amount of money trading derivatives on energy companies.

  13. Oil companies know when inflation erodes the value of money too. I’ll bet they are counting on the econazi movement failing. Another option is someone blurting out a value in watts for the “excess” heat allegedly trapped by water vapor and other “greenhouse” gases. This would generate a space-based climate-control industry instead of Luddite nihilist totalitarianism. Who would YOU bet on for right answers? oil companies or psychology and creative writing students?

  14. Poorly written article.

    There are plenty of research now on how fossil free indexes outperform the not-fossil free ones.

    And this has nothing to do with Global Warming or Climate Change regulations.

    Do your homework next time

  15. Does anyone seriously think that the BRIC nations are going to destroy their economies by giving up carbon energy? I don’t care how many conferences happen, how many predictions of dire gloom and doom are put forth, a big chunk of the world will continue to harvest and burn coal, oil and natural gas. If those nations come to the table, it’s to gain economic advantage, either by convincing the West to commit economic suicide via unilateral carbon caps, to negotiate vast wealth transfers from the West, or both.

  16. Does anyone seriously think that the BRIC nations are going to destroy their economies by giving up carbon energy? I don’t care how many conferences happen, how many predictions of dire gloom and doom are put forth, a big chunk of the world will continue to harvest and burn coal, oil and natural gas. If those nations come to the table, it’s to gain economic advantage, either by convincing the West to commit economic suicide via unilateral carbon caps, to negotiate vast wealth transfers from the West, or both.

    1. “the BRIC nations are going to destroy their economies”

      You should read the article again. The work required to sequester tens of billions of tons of CO2 each year should be enough to keep everyone on the planet occupied day and night all year round. The yearly output of the earth’s entire iron mining industry is only some two billion tons.

      1. Yet all the capital used in burying Carbon produces no actual wealth, instead it destoroys it like a Potlatch or sacrifice to the gods. Meanwhile doing almost anything else that generates income probably will increase the relative wealth of whoever is doing it.

        So where are the BRIC countries, or even the First World going to get that Capital to destroy? Even societies that practiced Potlatch did it only rarely, and spent most of their time and effort acquiring wealth. No one can base an entire economy on capital desruction because you need to generate capital to destroy and thus at a minimum with perfect efficiency the amount of Capital generated has to equal the amount destroyed.

        So I am sure you are saying well we destroy only enough capital to save us, so it doesn’t have to go on forever. can you imagine how inefficient a process Capital destruction is going to be? It will always take a huge amount of energy to immobilize Carbon, after all the Earth does this by biologically refining it and then burying it under mountains, and all that wilmrequire huge energy expenditures, which will require ever more Carbon burial.

        And how easy it will be to cheat at? If I am being paid to immobilize Carbon, how the heck will you know I actually did it since finding out will mobilize it again?

        1. I agree with the thrust of your comment. I only mention carbon sequestration because the author Ron Bailey often raises the topic as though it were going to save us or the oil industry. It’s pie in the sky, of course.

          Incidentally, I have nothing against capital destruction and potlaches. Some of man’s greatest accomplishments, from the pyramids to the moon landings have been achieved thanks to the waste of material resources and labour. But I take your point that a society that devoted itself entirely to the sequestration of carbon would be a miserable place.

          1. Potlatches are interesting, the problem I was addressing is that potlatches can be the primary economic activity, In the Pacific Northwest salmon fishing was the activity

            There is a dangerous aspect to potlatch, while potlatches can be very fun they were also a way of dealing with surplus by giving elites a means of asserting their authority. The same is true with Pyramid building, they transformed material surplus into authority and increased state power.

            Once carbon sequestration becomes important it will be a pillar of state power. The state becomes or licenses the specialist who removes carbon, destroying capital. Since this is defined as GOOD, authority and prestige will be gained leading to a path to power and authority based upon capital destruction.

            The ability to sequester carbon will require immense capital and not scale well, nobody is going to consider letting your lawn grow out reql carbon sequestration, only large projects will matter. So this ideologically potent activity will be concentrated in limited hands, probably requiring license. Soon we will have a new priesthood of state dominated entities with a monopoly on the sacrificial ritual of carbon sequestration.

            This is all about control and gaining power, whether intended or not because that is what humans do.

            In an economy without strong potlatch, energy is devoted to increasing societal wealth which allows for liberty, while this destructive economy will be about depriving society.

    2. You are falsely assuming that fossil fuel energy will be the cheapest energy FOREVER.

      You don’t read much about renewables, do you?

  17. “Does the stock market know something that environmental activists don’t?”

    Name something that environmental activists actually do know.

  18. Im making over $9k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do,


  19. If Exxon and Peabody, who clearly had the right to do internal research about climate and not make it public, were actually found guilty of not disclosing the ‘risk’ of climate change to their assets, then every other public corporation in the US that is regulated by the NY regulators would be guilty of the same crime. Not one corporation could say it has no climate related risk to its income and assets. REIT’s would have to disclose that apartment buildings may be destroyed in storms, flooded, and burnt by wildfires caused by climate change. Retailers would have to disclose that their sales would be damaged by the fact that petroleum based products might no longer be allowed to be sold. Technology companies would have to disclose that they are major consumers of energy and if carbon-based fuels were no longer available that they would be forced to curtail services of major server farms. Defense industries would be forced to risk the fact that ships and planes might not be able to be built because their fuel will not be available. Or maybe Exxon and Peabody might have to disclose that future regulations might actually drive prices of their products to such extreme high levels that they will make extremely high profits and may be subject to windfall taxes.

Please to post comments

Comments are closed.