Disclaimer

Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Thursday, June 7, 2018

The carbon bubble

(Source: Your Pension and the Carbon Bubble)



A recent analysis reported in The Guardian argues that the carbon bubble will burst before 2035.


Plunging prices for renewable energy and rapidly increasing investment in low-carbon technologies could leave fossil fuel companies with trillions in stranded assets and spark a global financial crisis, a new study has found.

A sudden drop in demand for fossil fuels before 2035 is likely, according to the study, given the current global investments and economic advantages in a low-carbon transition.

The existence of a “carbon bubble” – assets in fossil fuels that are currently overvalued because, in the medium and long-term, the world will have to drastically reduce greenhouse gas emissions – has long been proposed by academics, activists and investors. The new study, published on Monday in the journal Nature Climate Change, shows that a sharp slump in the value of fossil fuels would cause this bubble to burst, and posits that such a slump is likely before 2035 based on current patterns of energy use.

Crucially, the findings suggest that a rapid decline in fossil fuel demand is no longer dependent on stronger policies and actions from governments around the world. Instead, the authors’ detailed simulations found the demand drop would take place even if major nations undertake no new climate policies, or reverse some previous commitments.

That is because advances in technologies for energy efficiency and renewable power, and the accompanying drop in their price, have made low-carbon energy much more economically and technically attractive.

[Read more here]

For coal, it's going to happen long before 2035.  At the end of 2017, solar provided 1.9% of the world electricity, wind 5.6%.  Solar has been growing at 40% per annum for nearly 3 decades, and there seems every reason to believe that it will continue to grow at that rate for the next 10 at least.  Perhaps it could even accelerate as the cost of storage declines.  Wind is growing more slowly (20% per annum) , but will likely continue to grow because (a) wind gives power 24/7, (b) a grid with a mixture of wind and solar is more stable and requires less backup/storage than a grid dominated by solar and (c) wind is still one third the price of coal and continues to decline in price, though more slowly than solar.  Hydro provided 16.4% of total demand in 2018.  Hydro (though not pumped hydro) is unlikely to grow rapidly.  All the best big dam sites have been taken.  So I've assumed only modest growth in hydro (3% per annum).

World electricity demand is growing at 3-ish % (there's no demand growth in developed countries, even declining demand, but varying demand growth in developing countries).  I've increased that by 1% in 2022 and 2023 and by 2% in 2024 and 2025 in my forecasts to allow for the growth of electric car charging.

Using these assumptions, fossil fuel demand for electricity generation (i.e., mostly coal, because gas will still be used for firming and peaking power for a couple of years longer) peaks in 2020, falls slightly in '21 and '22, and then starts to plunge.  By 2025 the supply of electricity generated from fossil fuels will be falling by 8% per annum.  Which means demand for fossil fuels for electricity generation will be falling as fast.

What about demand for petroleum and diesel for land transport?  That's a bit slower.  Cheap EVs will only be available from 2020 on.  As a quick and easy estimate, petrol/diesel demand will fall by 1% per year for every 10% share of new sales EVs have.  But EVs could make up 50% of sales by 2025.

Markets look ahead.  By '21 or earlier  it will be obvious to everybody in the market place what's happening and what's going to happen.  At that point share prices will start to plunge, debt defaults by fossil fuel producers will rise, hitting the banks, and the carbon bubble will pop.  Long before 2035.

Gird your loins.

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