How do you know when an idea that was once considered fringe has hit the financial mainstream? When Bloomberg starts including it on its terminals. And when some of the biggest companies in the world -- including ExxonMobil (XOM -0.57%), BP (BP -0.94%), and General Electric (GE -0.60%) -- start pricing it into their models.
This week, financial data and analytics provider Bloomberg launched its Carbon Risk Evaluation Tool, allowing more than 300,000 high-end traders to game out various scenarios showing how potential climate change regulation would affect individual stock prices. If you weren't thinking about the carbon bubble and the risk it poses to oil and coal stocks, you should now.
Stranded assets
The idea behind the carbon bubble is that fossil-fuel companies include hydrocarbon assets in their future valuation estimates. However, if global governments get serious about keeping global warming below 2 degrees Celsius -- the point at which scientists predict that the poop really hits the fan -- regulations will come into effect that make it economically unviable for companies to burn those hydrocarbons, rendering them "stranded assets." This could have a dramatic effect on companies with significant fossil-fuel reserves, particularly those that are already expensive to exploit.
Think that's ridiculous? Major companies such as ExxonMobil, BP, and General Electric are already assuming a carbon price in their financial modeling. They're doing so for purely pragmatic reasons -- they see carbon regulation as a foregone conclusion. Given that ExxonMobil and BP are among the world's top holders of hydrocarbon assets, and General Electric is a huge climate change solutions provider, they all have skin in this game.
In the following video, Fool contributor Sara Murphy offers further details about the carbon bubble and its implications.
