Sep 30, 2015
In a speech described as "milestone," the governor of the UK's central bank warned Tuesday that investors face "potentially huge" risks from assets of "literally unburnable" fossil fuels if the world is to keep global warming under the 2 degree Celsius threshold.
Bloomberg describes Bank of England governor Mark Carney as "the most prominent figure yet from the world of finance to set out his concerns on how climate-related issues could destabilize financial markets in the years to come."
He told investors gathered at Lloyd's of London, "The challenges currently posed by climate change pale in significance compared with what might come."
Carney said that climate change can affect investors in three ways: through physical risks like flooding, liability risks that could "hit carbon extractors and emitters," and risks from the transition "towards a lower-carbon economy."
He said that "once climate change becomes a defining issue for financial stability, it may already be too late," adding that "earlier action will mean less costly adjustment."
"Take, for example, the IPCC's estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels."
"That budget amounts to between 1/5th and 1/3rd world's proven reserves of oil, gas and coal," he said.
"If that estimate is even approximately correct it would render the vast majority of reserves 'stranded'--oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics."
"The exposure of UK investors, including insurance companies, to these shifts is potentially huge," he continued.
Carney also told attendees that their "motives are sharpened by commercial concern as capitalists," and that "financing the de-carbonzation of our economy is a major opportunity for insurers as long-term investors."
The Bank of England made similar statements this year, with official Paul Fisher telling the Economist's Insurance Summit 2015 in London in March, "One live risk right now is of insurers investing in assets that could be left 'stranded' by policy changes which limit the use of fossil fuels."
"As the world increasingly limits carbon emissions, and moves to alternative energy sources, investments in fossil fuels and related technologies--a growing financial market in recent decades--may take a huge hit," Fisher said at the time.
Previous reports have warned of the "carbon bubble," or financial risks of fossil fuel investment.
London-based Carbon Trackerfound in a 2013 report on "stranded assets" that at least two-thirds of the world's estimated coal, oil and gas reserves have to remain underground to keep the 2C degree goal.
Reacting to Carney's statement, Carbon Tracker Initiative founder Mark Campanale said that the talk was an "important milestone."
"This is a major international microprudential regulator clearly setting out for the first time how climate risk is a material financial risk," Campanale stated. "We share a common acknowledgement that a declining 'carbon budget' to two degrees will mean that fossil fuels will need to stay in the ground."
And keeping them in the ground can be and must be done, a new report by Greenpeace has found. The organization states that an energy system run on 100% renewable power can be achieved by 2050, and that further investments in fossil fuels are unrecoverable.
"The solar and wind industries have come of age, and are now cost competitive with coal," stated Greenpeace's Sven Teske, the lead author of the report. "It is very likely they will overtake the coal industry in terms of jobs and energy supplied within the next decade. It's the responsibility of the fossil fuel industry to prepare for these changes in the labor market and make provisions. Every dollar invested in new fossil fuel projects is high risk capital which could end up as stranded investment."
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