Fossil fuels are sub-prime assets, Bank of England governor warned?

And, since I've been cwuel to the septics, I suppose I ought to have a go at the greenies, for balance:

A false balance is abomination to the Lord: but a just weight is his delight.
-- Proverbs 11:1

So (h/t KZ) the Grauniad says:

Open letter to Sir Mervyn King says overexposure to high-carbon assets by London-listed companies risks creating a 'carbon bubble'... The huge reserves of coal, oil and gas held by companies listed in the City of London are "sub-prime" assets posing a systemic risk to economic stability, a high-profile coalition of investors, politicians and scientists has warned Bank of England's governor, Sir Mervyn King.

Or just skip the Graun, and read the letter direct.

Weeeeellll: much as I'd like us to reduce our carbon emissions over the next few decades, I really don't see us managing that by actively deciding not to burn usable assets, to a degree likely to substantially depress their price.

Or, put another way, if the great and the good and the green who signed that letter feel like risking their money by shorting the companies on their list, errm, I certainly won't be joining them.

Refs

* A surprising call from the investment community

More like this

And if anyone was wondering why regulation's being proposed, look at why the US removed the standing regulations to 'free the market' (the commodities market used to be regulated).

http://scienceblogs.com/goodmath/2008/10/credit_default_swaps_gambling…

"... there's no guarantee that the guy who accepts the credit default swap will be able to pay up, there's no guarantee that the person offering the swap actually has the investment that it covers! .... it's a true bet: anyone who thinks that a loan might default can place a bet on it happening. Anyone who thinks that a loan won't default can place a bet on it. And this gambling system goes beyond just loan defaults. There's a whole system of contracts which started as pseudo-insurance, and turned into gambles - for example, if you're worried about the US dollar decreasing in value, there are derivatives which are similar to CDSs which are tied to changes in the exchange rate of the dollar relative to other currencies. So you've got a very complex system which is really a gigantic, unregulated, unverified gambling arena."

and

http://scienceblogs.com/goodmath/2010/04/shocking_fraud_from_financial…

"How could it get worse than this?
It turns out that investment firms were deliberately putting together packages of loans that they knew weren't going to get repaid, in order to provide some of their customers with something that they could bet against...."

So -- bringing this round to the topic -- you can be sure this sort of bet is made on the value of fossil fuels in the ground, the value of longterm coal contracts, etc. etc.

And you can pretty much be sure that any attempt to prop up the price of coal by, say, building ports to ship it from North America to China is partly a side deal to protect such a bet, somewhere, that's one of these secret gambles.

And legal. Nobody knows how many bets are currently riding on default by, say, Greece, or on the value of any particular currency decreasing -- these are private bets between consenting corporations, er, people as it were.

Kind of like climate feedbacks, except not as much paleo record to look at.

Hey, want to bet a planet?

"(...) I really don't see us managing that by actively deciding not to burn usable assets, to a degree likely to substantially depress their price."

Maybe, and what's going on with both fracking and the Canadian oil sands certainly supports such a cynical view. But see Hansen on the consequences. I think he would say that your prior post headline is an entirely apt response.

By Steve Bloom (not verified) on 22 Jan 2012 #permalink

Well, the Scots are going to nationalize the oil, so yeah, it is a wasting asset.

[Don't worry, we're going to suck the North Sea dry before we let them have it -W]

Shorting bad.
Longing good.

[I think that is the conventional view. I've no idea why it is believed, though. The two are essentially symmetrical -W]

By David B. Benson (not verified) on 20 Jan 2012 #permalink

Shorting has a limit, zero.

[True, which limits your profits in money terms. Is that a problem? -W]

FWIW, you also need someone to loan you the stock to short, naked shorts are no longer allowed. See C. Vanderbilt and the New York Central, although admittedly that is only a lemma.

[So what? The other way round, you need someone to loan you the money to buy the stock. Its still symmetrical -W]

Not a problem, but yes, the most you can make is the value of the stock at the time you buy it, but in theory, there is no upper limit if you go long.

FWIW there are also other issues that Eli did not get into

Shorts also are time limited, you promise to deliver on a day certain, so there is less wiggle room if the stock goes wiggle waggle aka natural variability.

Then there are the margin calls on shorts. For example, if you short on margin, if the stock increases in value more than the margin you put up you have to come up with more money (if you play the futures market this is an often thing).

[These are all disadvantages of shorts. None of which explains why people think they are so evil, which was the point -W]

However your last point is silly, some people do have the money to buy the stock without borrowing.

[Oh dear -W]

Margin calls happen for long buys as well.

By David B. Benson (not verified) on 21 Jan 2012 #permalink

Anyone to question Tim Garrett's conclusion that we would need to build one nuclear power plant EVERY DAY in order to stabilise CO2 emissions???

[That appears to be just a one-liner with no backup. I suppose I could go chase down the numbers myself, but I'm unlikely to. I'm not even sure what calculation he is reporting -W]

More in his latest paper:

No way out? The double-bind in seeking global prosperity alongside mitigated climate change

latest sentence from abstract:

If civilization does not collapse quickly this century, then CO2 levels will likely end up exceeding 1000 ppmv; but, if CO2 levels rise by this much, then the risk is that civilization will gradually tend towards collapse.

[That appears to be based on his "wealth = energy use" idea, which I think is not widely accepted -W]

Alex

> nowhere that interprets that proverb
(on plagiarism; the link is to a page meant for gradeschool age homeschoolers, to convince them it's a sin to plagiarize; however we have the Wegman Interpretation as I recall, basically that the good guys can do whatever they need to.)

> assets
Natural experiment in progress: is taking the money now going to be a better choice than whatever the environmental consequences to groundwater turn out to be?

http://realclimateeconomics.org/wp/archives/1168#more-1168

""... south of the Delaware River in Pennsylvania some private landowners are signing fracking leases with gas companies, some are refusing to do so, and where the latter outnumber the former, some towns have begun to pass their own local, anti-fracking laws putting them on a collision course with the state over who has the legal right to regulate. North of the Delaware River in New York there is no fracking, some residents are pleased that what they consider to be an environmental and health hazard has been prevented, while others are complaining that their freedom to contract however and with whomever they please has been stolen from them. We have a classic case of government regulation in one state vs. market freedom in another state."

Oh, nobody shorts _stock_ any more, it got too popular.

There's been far more money made shorting credit default swaps, but the door's closing in 10 months in Europe on that.

http://blogs.law.harvard.edu/corpgov/2011/12/27/europe-restricts-naked-…
---excerpt follows---
... after November 1, 2012.... Short sales of shares and short sales of sovereign debt will be permitted only where the seller has âlocatedâ the share or debt instrument prior to entering into the agreement and has a âreasonable expectationâ of being able to borrow the shares.
---end excerpt---

The "air quotes" are accurate. It's a "reasonable" simulation of "regulation" with its "teeth" pulled.

[Oh dear. Hopefully people will be able to run rings around it without too much trouble -W]

> Oh dear. Hopefully people will be able to run rings around it without too much trouble -W]

Probably. Of course then "sale" should also get the quotes, much as should any description of the "value" created by the market prior to the crash (oh where did all that money go?). Anyway, IIRC Krugman seems to think that the way in which greed has overcome caution to continue the CDS market more or less as was is a stupidity that among other things presents the largest present danger to the Eurozone.

["oh where did all that money go?" - alas, it wasn't money, it was share price mostly, which comes and goes -W]

By Steve Bloom (not verified) on 22 Jan 2012 #permalink

Hi William,

please what is your e-mail address? I can send you the response from Tim Garrett, if you are interested, Alex

[I thought everyone knew my email. wmconnolley (at) gmail dot com -W]