��Ī - ��Ī Econometrics

‘Carbon bubble’ coming that could wipe trillions from the global economy – study

fpjl2 — Mon, 04 Jun 2018 12:06:33 +0000

Fossil fuel stocks have long been a safe financial bet. With price rises projected until 2040* and governments prevaricating or rowing back on the Paris Agreement, investor confidence is set to remain high.

However, new research suggests that the momentum behind technological change in the global power and transportation sectors will lead to a dramatic decline in demand for fossil fuels in the near future.

The study indicates that this will now happen regardless of apparent market certainty or the adoption of climate policies – or lack thereof – by major nations.

Detailed simulations produced by an international team of economists and policy experts show this fall in demand has the potential to leave vast reserves of fossil fuels as “stranded assets”: abruptly shifting from high to low value sometime before 2035.

Such a sharp slump in fossil fuel price could cause a huge “carbon bubble” built on long-term investments to burst. According to the study, the equivalent of between one and four trillion US dollars could be wiped off the global economy in fossil fuel assets alone. A loss of US$0.25 trillion triggered the crash of 2008 by comparison.

Publishing their findings today in the journal Nature Climate Change, researchers from ��Ī University (UK), Radboud University (NL), the Open University (UK), Macau University, and ��Ī Econometrics, argue that there will be clear economic winners and losers as a consequence.

Japan, China and many EU nations currently rely on high-cost fossil fuel imports to meet energy needs. They could see national expenditure fall and – with the right investment in low-carbon technologies – a boost to Gross Domestic Product as well as increased employment in sustainable industries.

However, major carbon exporters with relatively high production costs, such as Canada, the United States and Russia, would see domestic fossil fuel industries collapse. Researchers warn that losses will only be exacerbated if incumbent governments continue to neglect renewable energy in favour of carbon-intensive economies.

The study repeatedly ran simulations to gauge the outcomes of numerous combinations of global economic and environmental change. It is the first time that the evolution of low-carbon technologies has been mapped from historical data and incorporated into "integrated assessment modelling".

“Until now, observers mostly paid attention to the likely effectiveness of climate policies, but not to the ongoing and effectively irreversible technological transition,” said Dr Jean-François Mercure, study lead author from ��Ī University’s Centre for Environment, Energy and Natural Resource Governance (C-EENRG) and Radboud University.

Prof Jorge Viñuales, study co-author from ��Ī University and founder of C-EENRG, said: “Our analysis suggests that, contrary to investor expectations, the stranding of fossil fuels assets may happen even without new climate policies. This suggests a carbon bubble is forming and it is likely to burst.”

“Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands,” he said. “For too long, global climate policy has been seen as a prisoner’s dilemma game, where some nations can do nothing and get a ‘free ride’ on the efforts of others. Our results show this is no longer the case.”

However, one of the most alarming economic possibilities suggested by the study comes with a sudden push for climate policies – a ‘two-degree target’ scenario – combined with declines in fossil fuel demand but continued levels of production. This could see an initial US$4 trillion of fossil fuel assets vanish off the balance sheets.

“If we are to defuse this time-bomb in the global economy, we need to move promptly but cautiously,” said Hector Pollitt, study co-author from ��Ī Econometrics and C-EENRG. “The carbon bubble must be deflated before it becomes too big, but progress must also be carefully managed."

One of the factors that may contribute to the tumult created by fossil fuel asset stranding is what’s known as a “sell-out” by OPEC (Organisation of the Petroleum Exporting Countries) nations in the Middle East.

“If OPEC nations maintain production levels as prices drop, they will crowd out the market,” said Pollitt. “OPEC nations will be the only ones able to produce fossil fuels at the low costs required, and exporters such as the US and Canada will be unable to compete.”

Viñuales observes that China is poised to gain most from fossil fuel stranding. “China is already a world leader in renewable energy technologies, and needs to deploy them domestically to tackle dangerous levels of pollution. Additionally, stranding would take a higher toll on some of its main geopolitical competitors. China has a strong incentive to push for climate policies.”

The study authors suggest that economic damage from adherence to fossil fuels may lead to political upheaval of the kind we are perhaps already seeing. “Mass unemployment from carbon-based industries could feed public disenchantment and populist politics,” Viñuales said.

The authors argue that initial actions should include the diversifying of energy supplies as well as investment portfolios. “Divestment from fossil fuels is both a prudential and necessary thing to do,” said Mercure. “Investment and pension funds need to evaluate how much of their money is in fossil fuel assets and reassess the risk they are taking.”

“A useful step would be to expand financial disclosure requirements, making companies and financial managers reveal assets at risk from fossil fuel decline, so that it becomes reflected in asset prices,” Mercure added.

*International Energy Agency. World Energy Outlook (OECD/IEA, 2016).

Macroeconomic simulations show rates of technological change in energy efficiency and renewable power are likely to cause a sudden drop in demand for fossil fuels, potentially sparking a global financial crisis. Experts call for a “carefully managed” shift to low-carbon investments and policies to deflate this “carbon bubble”.

Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands

Jorge Viñuales

Rich

Energy

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What impact will new technology have on tackling emissions?

sj387 — Mon, 21 Oct 2013 09:14:01 +0000

Computational models provide unparalleled insight into current and future demand for water, land and energy, and the impact these demands have on greenhouse gas (GHG) emissions and the environment. What if we could also take into account the fast pace at which new technologies are evolving? This is the aim of a new project in the ��Ī Centre for Climate Change Mitigation Research (4CMR) in the ��Ī’s Department of Land Economy.

Dr Jean-Francois Mercure, who leads the research, asserts that building this factor into models will help understanding of the degree to which improvements in energy-consuming technologies and their adoption can help governments reduce emissions: “Technology comes to life through innovation, timely investments and policy incentives, and so it’s important to include technology diffusion and its pace in energy modelling.

“However, this is challenging and most models today attempt to calculate cost-optimal technology roadmaps based on current technology, which is not necessarily likely to happen, and which disregard the process by which new technology regimes come to existence, but also how old technologies endure.”

Technological change occurs constantly, either following innovations in industrial systems or through evolutions of behaviours, such as in the adoption of electric cars. Earlier this year, with funding from the Engineering and Physical Sciences Research Council, Mercure began work on a computational modelling system that takes into account the profile of technology transitions in the past to project how new transitions could arise in the future.

To do so, he is collaborating with environmental scientists at the Tyndall Centre at the University of East Anglia and at the Open University, policy advisors and researchers at the UK Department for Energy and Climate Change and the Committee for Climate Change, and applied economists at ��Ī Econometrics.

Mercure believes that this will be the first time an energy–economy–environment model at the global level simultaneously considers technology diffusion in all sectors of energy use alongside natural resource constraints and the interaction between sectors.

“If the global power sector is to decarbonise by 2050 without there being significant economic costs then all countries must make a contribution to the development of renewable technologies,” he added.

“Take as an example the solar photovoltaic industry. Large investments in Germany enabled production costs of firms in China to decline significantly in recent years, which could not have occurred without such investments. Technology sectors typically face a classic vicious circle: established technologies thrive because they are established, and emerging technologies see barriers to their diffusion due to the lock-in of established technologies. This will be the case unless an emerging technology is a radical improvement over established technologies, or it benefits from strong policy support and investment. This applies to many other sectors such as mobility technologies, industry and household appliances.”

Professor Douglas Crawford-Brown, Director of 4CMR, is excited by the prospects of this new modelling: “Dr Mercure’s work sits nicely at the intersection of aggregated economic sectors and the decisions of individual investors. He is plotting an intermediate ground in which both theories of investor behaviour and empirical econometrics allow for much greater insights into energy supply and demand.”

Mercure’s recent research has focused on the global electricity sector, which currently emits 38% of global fuel combustion emissions mostly through the use of fossil fuels. The new project will extend the model to all major energy-consuming sectors, including transport, industry (e.g. steel, cement) and buildings (heating, appliances), to model different scenarios of support policies for technological change.

“We want to be able to answer questions about the impact of policy changes on global emissions. Badly coordinated roadmaps of technological change can lead to increases in GHG emissions and so it’s important to know which types of policies will incentivise efficient emissions reductions in order to avoid dangerous climate change.”

New research seeks to take account of the fast pace at which technology is evolving in understanding how to tackle greenhouse gas emissions.

Technology comes to life through innovation, timely investments and policy incentives

Jean-Francois Mercure

Paul Krueger

Car2Go Electric Car Sharing

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‘Carbon bubble’ coming that could wipe trillions from the global economy – study

What impact will new technology have on tackling emissions?

��Ī - ��Ī Econometrics