The Carbon Bubble & North Sea Oil

In March this year, the Left Foot Forward blog claimed that “The fall-out from the carbon bubble bursting could devastate Scotland”. The issue has also been mentioned by Partick Harvie MSP of the Scottish Greens, and raised in a SPICe Research Briefing. What is the “Carbon Bubble” and is Scotland particularly exposed?

In 2011, the Carbon Tracker Initiative issued the first of its reports[1] which warn that the valuation placed on financial assets throughout the global economy are overstated because of the problem of so-called “unburnable carbon”.  This overvaluation is labelled “the carbon bubble” which may “burst” if valuations are corrected. In 2009 at the United Nations Climate Change Conference in Copenhagen, a global temperature target of two degrees Celsius above pre-industrial levels was made international policy. A global mean temperature increase of 2 degrees is considered by some as a threshold separating minor climate change from extreme events such as significant reductions in water availability and food production, and major extinctions of species, biodiversity loss and the loss of important ecosystem services. The Potsdam Climate Institute has estimated that, if we want to reduce the probability of exceeding 2 degrees warming to 20%, only one-fifth of the Earth’s proven fossil fuel reserves can be burned (unless Carbon Capture and Storage technology is used). As a consequence, the global “carbon budget” may only be 20% of worldwide reserves, whilst the rest is “unburnable carbon”.

This then is the basis of the claim that the carbon bubble is of great concern to Scotland: basically it is the claim that any coherent global action on climate change will require Scotland to leave much North Sea oil unexploited – but Scotland needs that oil for its fiscal sustainability, and so Scotland is particularly exposed to the Carbon Bubble issue. There are three main problems however with this claim.

  • Climate scientist James Hansen has outlined[2] how he thinks the world should rationally meet its climate change targets: (high carbon per unit energy) coal use must be phased out by 2030; unconventional fossil fuels (such as coal bed methane, shale oil and gas from fracking, oil from tar sands, and enhanced oil recovery) should not be developed; and fossil fuel exploration should cease. The global carbon budget is covered by declining coal use until 2030 and the total current reserves of conventional oil and gas. The implication of this for North Sea oil and gas is that it is one of the world’s reservoirs of “allowed” fossil fuel resources. The future exploitation of this reservoir under plans consistent with Hansen (2009) may be much lower though than current industry plans which involve enhanced oil recovery and exploration west of Shetland.
  • The bursting of the carbon bubble is a problem for the whole global economy. If carbon intensive energy production is restricted on such a scale before adequate low or zero carbon infrastructure is constructed then economic activity everywhere, and fiscal sustainability everywhere, is imperilled. Indeed, a country with local access to some of the remaining allowed fossil fuel resources, and with relatively high levels of zero carbon infrastructures, is likely to be relatively well placed in such a dystopian world.
  • My own work[3] incorporates the effect that writing off fossil fuel based assets has upon economic activity and hence upon investment in replacement zero carbon infrastructure. This work shows that, if the aim of climate policy is to replace our current carbon emitting productive capacity with zero carbon productive capacity, then it may be that this cannot be done (in a capitalist economy) unless there is continuing investment in fossil fuels, and maybe unless the private sector is deceived as to the extent to which its high carbon assets are worthless. This is because an honest but naive global agreement to limit carbon emissions may trigger an economic collapse through the collapse of the chain of credit that supports the economy. An economic collapse prevents investment in the capital and technology required for the post carbon age. In the context of North Sea oil, this means that while all the reserves may not ultimately be used, at the moment we perhaps should be behaving as if they are going to all be used – so long as we are also investing heavily in zero carbon infrastructures at the same time. This is fairly consistent with current SNP policy.

The Carbon Bubble issue is a serious issue for the global economy and for every country on earth. However, it is not more serious for Scotland than elsewhere. Environmentalists may be concerned about voting for an independent Scotland on the grounds that its finances depend on oil extraction and so independence increases the likelihood of this extraction. My work instead suggests that until our carbon budget is exhausted, the investment level in low or zero carbon infrastructures is the critical metric for welfare, given the problem of climate change. Therefore, these environmentalists should make their minds up about a Yes or a No vote on the basis of which they think enhances low or zero carbon investment levels.



[1] Carbon Tracker Initiative (2011) “Unburnable Carbon: Are the world’s financial markets carrying a carbon bubble?” and Carbon Tracker Initiative (2013) “Unburnable Carbon 2013: Wasted capital and stranded assets”
[2] Chapter 9 of Hansen (2009) Storms of my grandchildren
[3] Comerford & Spiganti (2014) “The carbon bubble: climate targets in a fire-sale model of deleveraging”

About David Comerford

Post-doctoral researcher in economics
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