Warning: Investors Are Not Prepared For the Carbon Bubble To Burst
Kingsmill Bond, an energy strategist with Carbon Tracker, shares his thoughts with Worm Capital on the energy transition—and its ramifications on the global economy.
In our view, the biggest economic disruption of our modern era will be the transition from fossil fuels to renewable energy. This is a historic event that we believe is unfolding rapidly. The result of this disruption should have profound positive societal effects—clean energy, reducing our dependence on fossil fuels, new jobs, etc.—but there will be extreme consequences as well. Many long-term investors (including index funds, pension funds, and retirees) who are too slow to divest could suffer economic damage through poor shareholder returns. Further, over the next decade, we believe many fossil fuel-linked companies will suffer severe write-downs, layoffs, and, more than likely, outright bankruptcies.
This may sound like an extreme position to take, but there is increasing evidence that the renewable energy revolution is accelerating. Our economy is reaching peak demand for fossil fuel. The catalyst? A plummeting drop in the cost of renewables that will have cascading effects through a variety of industries. We recently wrote a case study about the impact of electric vehicles on the internal combustion engine industry. In it, we document the negative impacts of this transition on traditional auto-makers, car dealerships, and rental car firms.
The conclusion is clear: In times of rapid disruptive innovation, incumbents are almost never safe.
Recently, we had the opportunity to speak with a trailblazing researcher on the front lines of the coming energy transition. Kingsmill Bond, CFA, is an energy strategist with Carbon Tracker, a financial think-tank that has consistently publishing some of the most comprehensive, if not shocking, analysis on the effects of what they have been called the “carbon bubble ” since the not-for-profit research house’s founding a decade ago. In a recent report, for instance, Carbon Tracker concluded that financial markets face a risk of $2.2 trillion of stranded fossil fuel assets—a number that should make you sit upright.
In our conversation, Kingsmill Bond noted that the incumbent fossil fuel operators are now at least talking about the energy transition; but few are making the necessary investments to pivot to a low-carbon world. In September 2019, Carbon Tracker noted that oil and gas companies have “approved $50 billion of investment since 2018 in major projects that undermine climate targets—and threaten shareholder returns.”
“I think write-downs across the fossil fuel sector are completely inevitable,” Bond tells us. “You’re talking about a sector with fixed assets of about $25 trillion, which is now being challenged for the first time in its history by a superior, cheaper, cleaner technology.”
Click here for an edited transcript of our conversation.
