There’s a new meme running wild on the internet that goes something like this.
The world’s energy majors are valued by the market on the basis that coal, oil and gas reserves can be turned into real economic value, making them an attractive punt for investors. However, if tough climate change legislation kicks in through international regulation, then the majors are in trouble and may in fact be massively overvalued. The claim is that we now have a rapidly inflating ‘carbon bubble’ of unburnable fossil fuels. And if the bubble bursts, investors will lose their shirt.
But there are two problems with this argument. First, as economist Richard Tol points out, from the valuation of coal, oil and gas companies it’s clear that the market expects us to be burning fossil fuels some time to come. Share price is after all an estimate of future expectations, not just current value. That’s not to say the market is correct, but prices simply reflect a cold assessment of reality as seen by investors. Based on current valuations, their call is that governments will not enact draconian restrictions on fossil fuel use any time soon.