In part one of this two-part article, we look at the so-called ‘carbon bubble’ – assets priced based on 'unburnable' fossil fuels.

Part 1 | Part 2

The 'carbon bubble' and path dependency

To stand any chance of keeping global warming below dangerous levels, a large percentage of fossil fuel reserves need to stay in the ground unburned. Lord Stern endorses an estimate of 60-80% of current reserves being unburnable, assets which support share values of around $4 trillion, about 27% of US Gross National Income ($15 trillion), or about 5% of Gross World Product ($85 trillion). As Jason Moore highlights, there have been energy transitions before: "from peat and charcoal (1450s–1830s), to coal (1750s–1950s), to oil and natural gas (1870s–present)" - however the difference is these have been additive, whereas a transition to renewables must be eliminative. That means leaving these resources in the ground amounts to writing off many hundreds of billions of dollars’ worth of assets, and that's before taking into account all the infrastructure that depends on fossil fuels - refineries, manufacturing processes, power plants, airports and conventional agriculture.



Additive energy transitions (source)

Furthermore, capital is not just a lump of money, it's a lump of money in motion, money making money. That means writing off the current value of already invested wealth would involve writing off all the future wealth that capitalists in the petrochemical industries hope to own in the future as a result of their investments. Not to mention the other capitalists selling products to petrochemical companies. It is hard to imagine these capitalists writing off that wealth voluntarily. As Karl Marx puts it, with unintended valence as the ice caps melt, "Après moi le déluge! [after me, the flood] is the watchword of every capitalist and of every capitalist nation."

So a huge amount of capital is bound up with fossil fuels, creating a strong path-dependency for capitalist development. While a capitalism based on renewable energy is theoretically conceivable, there's no easy path between the present reality and the hypothetical green alternative. Nevertheless, some discussion of unburnable fossil fuels has begun to enter policy-making circles, framed around the notion of a 'carbon bubble'. The argument goes as follows: to meet the internationally agreed warming limit of 2 degrees, large amounts of fossil fuels must go unburned. But firms stock prices are valued on the basis those reserves can be burned. Therefore, these firms are artificially overvalued - there's a carbon bubble, much like the sub-prime bubble. As an recent editorial in a climate change journal put it:

Nature Climate Change editors wrote:

By consistently overvaluing the fossil fuel assets of companies, the argument goes, the world's financial markets are with gusto busily inflating a 'carbon bubble', which, if burst, could spell ruin for investors. It is no surprise then that individuals, corporations and pension fund holders are beginning to wake-up to the risk and either starting to divest from fossil fuels or seriously considering it. Even the World Bank has stopped lending for new coal-fired power plants.

The most obvious objection here is that while the sub-prime bubble arose out of endogenous crisis tendencies within capitalism, any mechanism to leave fossil fuels in the ground would be politically determined. That is, it would be undertaken voluntarily by the state, either unilaterally, or as part of a multilateral agreement such as the supposed Kyoto Protocol successor which is meant to be agreed in Paris in 2015. In other words, the carbon bubble only becomes a bubble if policymakers legislate it such. It's hard to see why states would create such an economic crunch voluntarily.

Leave it in the ground!

The most vaunted proposed mechanism for leaving fossil fuels in the ground came from the Ecuadorian government. They proposed that in return for leaving oil reserves under the Yasuni National Park untouched, the world pay Ecuador half of the estimated value of the reserves up front. This proposal was positively received by mainstream environmentalists as well as Marxist radicals. However, it wasn't so well received by the rest of the world: nobody offered to pay. It later transpired that during the proposal, Ecuador had been secretly negotiating extraction concessions with China. Whether or not this was evidence of duplicity, or simply pragmatic contingency planning, the failure of the Yasuni proposal seriously damages the prospects for leaving fossil fuel reserves unexploited.

If states aren't willing to pay to leave resources in the ground, they're certainly not going to just write them off. The passage from Marx quoted earlier continues: "capital is reckless of the health or length of life of the labourer, unless under compulsion from society" (our emphasis). Marx was discussing the struggles over the length of the working day in Victorian England, but the argument applies just as pertinently to the health of the ecosystem. We are skeptical that policymakers alone will take the steps necessary to provide 'compulsion from society' to constrain capitalists. The state may intervene, but only if the state itself is compelled by some big push.

Aufheben argue that when it comes to climate change, there are two principal capitalist fractions. The incumbent fossil capitalists are exemplified by the fossil fuel interests who've funded the climate change denial PR. The green capitalists on the other hand are spearheaded by sections of finance capital, especially the reinsurance industry. It is important to recognise that both these fractions exist, and that their material interests diverge somewhat when it comes to climate policy. But given the required asset write-offs and developmental path-dependency, it's hard to see how the green capitalists could gain ascendency, except perhaps by harnessing social movements into a reformist program at the expense of the fossil capitalists.

In order to move from the current fossil-fuel dependent development path to a renewable one, a significant period of economic contraction, stagnation, and restructuring would be required. There are few historical precedents for such a rapid and dramatic reorganisation outside of wartime. Perhaps the closest historical parallel is with the struggles over the abolition of slavery in the US. There are of course major historical differences between 19th century and present-day capitalism. We don't want to collapse these, but we do think it's worth looking at previous instances where large amounts of capital have been written off due to a change of development path. As Doug Henwood puts it, "the liberation of the slaves after the Civil War was probably the greatest expropriation of capital in history." In part two of this article, we will explore the abolition of slavery as an historical analogy to bursting the carbon bubble.