Is the carbon bubble ready to burst?

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Recently, media reports have raised the concern for U.S. oil and gas investors about whether the potential carbon asset stock prices constitute a bubble, but a new report from the University of California, Davis suggests that this is not the case. The study found instead that investors' in U.S. oil and gas companies base their expectations for future cash flows on all possible scenarios, not just negative ones that crop up in the media.

Credit: Spiff/Wikimedia Commons

Credit: Spiff/Wikimedia Commons

For the study, researchers analyzed how U.S. oil and gas company stock prices reacted to media coverage about the potential consequences of unburnable carbon for fossil fuel companies.

The study examined the stocks of the 63 largest U.S. oil and gas companies that trade on the major U.S. exchanges. Most of them disclosed significant oil and gas reserves in their financial statements. As a result, there was a higher likelihood that these companies' stock prices might be affected by investors' perceptions about the consequences of unburnable carbon.

The researchers studied 88 stories from 59 print media outlets, most from 2012 and 2013, and an initial story in 2009 published in the scientific journal Nature. Each story was considered a separate event that could potentially affect stock prices, with researchers measuring the average effect.

U.S. oil and gas stock prices dropped about 2 percent after the original 2009 Nature story (a total value of $27 billion). The ensuing widespread coverage had little impact on the U.S. oil and gas companies' stock prices, which dipped by a half percent collectively.

Researchers for the UC Davis study found that there was a limited negative impact on stock prices of fossil fuel companies in response to the original science disclosures. These disclosures found that only a fraction of the world's oil, gas, and coal reserves could be emitted if global warming by 2050 is not to exceed 2 degrees Celsius above pre-industrial levels. Subsequent media stories have suggested that the value of burnable carbon reserves held by big oil and gas companies could diminish rapidly as alternative energy resources replace fossil fuels.

The study provides market evidence refuting the prediction that there is a carbon bubble about to burst, according to the researchers.

"It's essential that the media interpret accurately the meaning of results from science, but that does not seem to have happened with media reports about unburnable carbon," said Paul A. Griffin, a professor of management at UC Davis and co-author of the report.

Under a scenario offered by former Vice President Al Gore and others, climate change regulations could force fossil fuel companies to leave large reserves of oil, gas and coal in the ground -- untouched in order for the world to avoid global warming. The companies' oil and gas reserves, which are a large component of their assets and market value, could be stranded as "unburnable" and potentially worthless.

"This important energy policy issue needs a full debate and additional analysis, so that pension funds do not simply dump their oil and gas company investments for the wrong reasons," said co-author Amy Myers Jaffe, executive director of energy and sustainability for UC Davis, and a global expert on energy policy, geopolitical risk, and energy and sustainability.

For more:
- see this report