There are, we are told, only two options. Either we stop burning fossil fuels before our carbon-dioxide emissions drive the planet's average temperature up 2 degrees Celsius, in which case we will push the world into the biggest recession ever, or we continue to burn fossil fuels and push the planet into runaway warming, with lethal consequences for a large part of the human race.

OPINION: The 2008 bank crash that triggered the current recession was caused mainly by reckless investment that created a bubble in house prices. When the bubble burst, hundreds of billions of dollars of investments suddenly became worthless. The losses were so great that they nearly brought the whole banking system down.

This time, the problem is a carbon bubble. The market valuation of the world's 200 biggest oil, gas and coal companies is about US$4 trillion (NZ$4.7t), a figure based on the assumed value of their confirmed reserves that are still in the ground or, more precisely, a figure based on the assumption that these companies will be able to sell those reserves to customers who want to burn them.

On the strength of that assumption, the fossil-fuel companies have been able to take on US$1.5t of debt and, last year alone, they spent US$647 billion in the search for even more oil, gas and coal reserves.

But what if they are not able to sell all their reserves? What if the need to avoid runaway warming forces governments to curb the burning of fossil fuels, so that much of the reserves has to stay underground forever?

This is the focus of a new report titled Unburnable Carbon 2013.

The report's authors, the Grantham Research Institute at the London School of Economics and the Carbon Tracker Initiative, have the support of organisations such as HSBC and Citibank, rating agency Standard and Poor's, and the International Energy Agency.

Their conclusion is that if we are to have a 50 per cent chance of stopping the warming before it hits 2C, then at least two- thirds of the currently listed fossil fuel reserves will have to stay in the ground.

If they cannot be burnt, then they have no economic value. Therefore, the market valuation of the fossil-fuel companies is three times higher than it should be.

The report assumes that rationality will prevail and that, at some point, a limit will be imposed on the burning of fossil fuels.

In this new reality, the debt burden of the fossil-fuel companies will become unsustainable and there will be a financial meltdown that dwarfs 2008's. Global warming will be held to 2C, but at the cost of the mother of all recessions.

The other option is that no controls are imposed on burning fossil fuels and the carbon bubble does not burst until the warming breaks through the 2C limit and triggers the natural feedbacks that will carry us inexorably up to a rise of 6C.

That implies mass death and possibly civilisational collapse by the end of the century, but the fossil-fuel reserves will retain their assumed value in the meantime and there will be no financial crash.

This is the scenario that the market is betting on and, at present, most of the evidence supports that wager.

The ideological and commercial interests that oppose action on climate change have triumphed in the United States and Canada, and without the Americans, decisive action is hard to imagine.

The denial campaign has not explicitly defeated science elsewhere, but four years of recession in Europe have had much the same effect, sapping the will of governments to spend money on fighting climate change.

Last week, for example, the European Parliament refused to fund a scheme to rescue the carbon emissions trading scheme, once the centrepiece of the European Union's climate strategy.

In big, rapidly developing countries like China and India, the race for growth takes priority over cutting carbon emissions and, just when you think things couldn't get worse, along comes shale gas to expand the fossil-fuel reserves even further.

It's a grim choice: either financial meltdown if we act decisively to halt climate change, or physical meltdown if we don't.

There is, however, a third option. In fact, it's the likeliest outcome by far.

First, we continue to increase our emissions at the current rate of 3 per cent a year for the next couple of decades, and the fossil fuel industry thrives.

Then, when it's already too late and we have crossed the 2C limit, the actual warming, which always lags the growth in emissions by a decade or more, frightens us into taking action at last.

So we lurch into a crash programme to cut fossil-fuel use and the market wakes up to the fact that a lot of those reserves will have to stay in the ground. If you liked the sub-prime mortgage fiasco in 2008, you'll love this one.

It's not either Disaster A or Disaster B. It's first one and then the other, interlocking and mutually reinforcing. And Disaster B will mean there's no money left to do anything about Disaster A.

Gwynne Dyer is an independent journalist whose articles are published in 45 countries.

- Taranaki Daily News