The Death of Fossil Fuels: An Economic Disaster?

Credit: © Andrey Burmakin / Fotolia  Oil pumps (stock image).

New research suggests that the prospects of the fossil-fuel
industry are not bright, and that its demise may have
profound economic and geopolitical consequences. 


As a rule, I don't put much stock in doom and gloom forecasts.  However, this study brings up several points to consider when trying to plan for your personal financial future.
  • One:  the global transition from fossil fuels to renewable energy sources has taken on a life of its own that transcends any one nation's attempts to continue a fossil fuel economy.  As the authors say, "ongoing technological change, by itself and even without new climate policies, is already reducing global demand growth for fossil fuels."
  • Two: as the global economy makes this transitions, countries who are fossil fuel suppliers are potentially losers in the transition while consumer countries will see their economies profit.
While the authors see a potential for world wide depression from this transition, I understand from both experience and reading that forecasts of any kind have to be taken with a grain of salt, and that a substantial number of bleak forecasts never come about.

But as the old adage says, "Hope for the best but prepare for the worst."

Here's the report:
*  *  *  *  *

Potential 'Carbon bubble' could wipe
trillions from the global economy

Demand for fossil fuels will decline in the near future
with major macroeconomic and geopolitical consequences.

New research shows that the demise of the fossil-fuel industry has profound economic and geopolitical consequences. Relying on ground breaking modelling techniques, researchers from Radboud University, the University of Cambridge (C-EENRG), Cambridge Econometrics, The Open University (UK) and the University of Macau show that the consumption of fossil fuels will slow down or decline in the near future, as a result of ongoing technological change, potentially exacerbated by new climate policies.

This transition will result in clear winners, importers such as China and the EU, and losers, exporters such as Russia, the USA or Canada, which could see their fossil-fuel industries nearly shut down. If these countries keep up their investment and production levels despite declining demand, the global wealth loss could be huge: 1-4 trillion dollars, a loss comparable to that which triggered the financial crisis in 2007. Even the USA could not pull out from the transition, as it would only hurt itself even more. Global climate policy is therefore no longer a 'prisoner's dilemma' game.

A dangerous 'carbon bubble'
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.

Winners and losers
The scientists modelled the decline of demand for fossil fuels using novel modelling techniques that track the diffusion of low-carbon technologies on the basis of empirical data. Examples are technologies in power generation, cars and households that become more efficient and therefore diminish the use of fossil fuels. They then tracked what this means for national economies, as some economies lose an important industry (mostly due to loss of competitiveness), while other economies get rid of high current fossil-fuel expenditures and imports. "This means that by 2035, Gross Domestic Product (GDP) growth is affected negatively in producer countries (e.g. USA, Russia), while it is affected positively in importing countries (e.g. EU, China)," Dr Jean-Francois Mercure of Radboud University/C-EENRG explains.

'Free-riding' climate change mitigation: good or bad idea?
With the USA's withdrawal from the Paris Agreement, the scientists also modeled what would happen if the USA did indeed continue to invest in fossil-fuel assets instead of diversifying and divesting from them. The analysis shows their GDP would be reduced even further. Dr Mercure clarifies this point: "With a declining global fossil-fuel demand, fossil-fuel production in the USA is becoming uncompetitive, and may shut down. If the USA remains in the Paris Agreement, it will promote new low-carbon technologies and reduce its consumption of fossil fuels, creating jobs and mitigating its loss of income, despite losing its fossil-fuel industry. If it pulls out, it will nevertheless lose its fossil-fuel industry, but by not promoting low-carbon technologies, will miss out on job creation opportunities, while increasing its fossil-fuel imports by not reducing its domestic fossil-fuel consumption. The outcome is therefore worse if the USA pulls out."

A new financial crisis?
The study findings support the existence of a carbon bubble which, if not deflated early, could lead to a discounted global wealth loss of between 1 to 4 trillion dollars, a loss comparable to what triggered the 2007 financial crisis. "If countries keep investing in equipment to search for, extract, process and transport fossil fuels, even though their demand declines, they will end up losing money on these investments on top of their losses due to limited exports," Mercure explains. "Countries should instead carefully deflate the carbon bubble through investment in a variety of industries and steady divestment. The way in which this is done will determine the impact of the ongoing low-carbon transition on the financial sector."

Hector Pollitt, study co-author from Cambridge Econometrics and C-EENRG, adds: "This new research clearly shows the mismatch between the reductions in fossil fuel consumption required to meet carbon targets and the behaviour of investors. Governments have an important role to play in emphasizing commitments to meet the Paris Agreement to ensure that the significant detrimental economic and geopolitical consequences we have identified are avoided."

Divestment and creative destruction
The process of transition towards a low-carbon economy is now becoming inevitable, as policies supporting this change have been developed and gradually implemented for some time. "New efficiency standards imply that we do more with the same amounts of energy, as older, less efficient technologies are gradually phased out. The transition is therefore irreversible; however its pace can vary according to whether and how new climate policies are implemented."

The scientists conclude that further economic damage from a potential bubble burst could be avoided by de-carbonizing early. "Divestment is a prudential thing to do. We should be carefully looking at where we are investing our money. For instance, much like companies, pension funds and other institutions currently invest in fossil-fuel assets. Following recommendations from central banks, commercial banks are increasingly looking at the financial risks of stranded fossil-fuel assets, even though their possible impacts have not yet been fully determined. Until now, observers mostly paid attention to the likely effectiveness of climate policies, but not to the ongoing and effectively irreversible technological transition. This level of 'creative destruction' appears inevitable now and must be carefully managed," Mercure concludes.

Story Source:  Materials provided by Radboud University Nijmegen.   J.-F. Mercure, H. Pollitt, J. E. Viñuales, N. R. Edwards, P. B. Holden, U. Chewpreecha, P. Salas, I. Sognnaes, A. Lam, F. Knobloch. Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 2018.

Comments

Post a Comment

Popular posts from this blog

An unexpected way to recover from a breakup

Image
Breaking up is truly hard to do. And recovery from a breakup can be even harder. Your friends may counsel you to put the whole thing out of your mind. But new research suggests that repeatedly reflecting on a break-up -- even through participation in a research study -- actually speeds emotional recovery. "Breakups are ubiquitous -- most adults have experienced at least one in their life -- and are typically very distressing," says Grace Larson of Northwestern University. After studying divorce and breakups for years using longitudinal, multi-method designs, Larson and her then-adviser David Sbarra of the University of Arizona wanted to study whether these research techniques on their own were affecting participants. One concern they had was that the studies could be harming participants, Larson says. "At first glance, it might seem like repeatedly reminding participants that they had just broken up -- and asking them to describe the breakup over and over --
Read more

Greek Bronze Age ended 100 years earlier than thought

Image
Source: www.shef.ac.uk The charred remains of Assiros Toumba in Greece. Writing historical fiction set in the Greek Bronze Age?  Or simply enjoy reading this genre'?  Here's a study you may find interesting. C onventional estimates for the collapse of the Aegean civilization may be incorrect by up to a century, according to new radiocarbon analyses. While historical chronologies traditionally place the end of the Greek Bronze Age at around 1025 BCE, this latest research suggests a date 70 to 100 years earlier. www.weather-forecast.com Archaeologists from the University of Birmingham selected 60 samples of animal bones, plant remains and building timbers, excavated at Assiros in northern Greece, to be radiocarbon dated and correlated with 95.4% accuracy using Bayesian statistical methodology at the University of Oxford and the Akademie der Wissenschaften Heidelberg, Germany. Researcher Dr Ken Wardle says, 'These new results tell a story that is totall
Read more

Mood Instability and Your Characters

Image
You're putting together a character who's mood simply bounces all over the place, happy one moment, in a fit of rage the next.  Researchers at King's College London note that this sort of mood instability is part of a number of mental health disorders.  So how do you structure the personality and behavior of a character like this?  Below is the King's College report, along with a brief description from mentalhealth.com, of typical behavior, sometimes in the extreme, of a person who is very emotionally unstable.  This is offered strictly as a guide for crafting character in fiction - and NOT for the amateur diagnosis of the state of someone's mental health.  That is always best left to trained professionals. Another note about emotionally unstable behavior:  as any parent will tell you, this is how adolescents and teen-agers often behave.  It's a normal part of growing up - but it is a matter of degree .  In the extreme, however, this behavior can be diag
Read more

How the lives of Georgian gaolbirds and highwaymen shaped modern Britain

Image
Writing historical fiction requires solid research of available materials and databases.  The key word here is available.   So news of a new publicly accessible database that allows an author to research a very interesting past era is priceless almost beyond words.   I expect some exciting fiction to come out of this announcement. Here's the story, with a link to the source in the attribution. *  *  *  *  * London Lives, a landmark project led by Professor Bob Shoemaker from the University of Sheffield and Professor Tim Hitchcock from the University of Sussex, has uncovered a mass of extraordinary new evidence which reveals how the lives of thousands of 18th-century poor and criminal Londoners helped shape modern Britain. Based on evidence made available in a publicly available database, the study sheds new light on the everyday lives of thieves, prostitutes, vagrants, highwaymen, con-men, paupers and jailbirds, revealing how their daily fight for survival led to t
Read more

Remember faces but not names? You got it wrong.

Image
Source:   Daily Excelsior So, you think you're good at remembering faces, but terrible with names? New research has revealed we are actually better at remembering names than faces The cringe-worthy experience of not being able to remember an acquaintance's name leads many of us to believe we are terrible with names. However, new research has revealed this intuition is misleading; we are actually better at remembering names than faces. With the Christmas party season fast approaching, there will be plenty of opportunity to re-live the familiar, and excruciatingly-awkward, social situation of not being able to remember an acquaintance's name. This cringe-worthy experience leads many of us to believe we are terrible at remembering names. However, new research has revealed this intuition is misleading; we are actually better at remembering names than faces. The authors of the study, from the University of York, suggest that when we castigate ourselves f
Read more