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Europe’s banks in $1-tril risk from ‘carbon bubble’: report

Two new studies highlight the supposed risks of long-term investment in fossil fuels  

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By John McGarrity

Investors that ditch coal and gas for lower carbon energy will avoid big losses down the line, according to two new studies released today, further grist for the mill in a growing global campaign to shun financing for fuels blamed for climate change.

The first of the studies, which was released today in Brussels, said financial institutions including banks and pension funds could see $1 trillion of assets in fossil fuels at risk if the world agrees to slash emissions of greenhouse gases to avoid runaway climate change.

“The most vulnerable financial institutions include two of Europe’s largest banks in France and a number of sizeable pension funds in the United Kingdom and the Netherlands. Yet again for other Member States, such as Germany, a lack of transparency has hidden their carbon exposure,” said the report, which was commissioned by Green Party MEPs.

The carbon bubble concept refers to the overvaluation of remaining fossil fuel reserves in the scenario that major emitters go low carbon, which would require these commodities to be left in the ground, rendering them stranded assets.

Another report, authored by an Australian think tank, said investors wouldn’t lose out if they ditched holdings in companies that produce fossil fuels.

Green groups say a growing global divestment campaign will make it increasingly difficult to finance new coal mines and export terminals, while technological leaps and lower costs in renewable technology will price out oil and gas and dent demand.

Meanwhile, the UN is cranking up pressure on the private sector to play its part in encouraging countries to agree an ambitious carbon reduction treaty at high-level talks in Paris at the end of 2015.

“Corporations that continue to invest in new fossil fuel exploration and exploitation are really in breach of their fiduciary duty because the science is abundantly clear that is something we can no longer do,” said the UN’s climate chief Christiana Figueres told reporters in London today.

Flaws

Critics of the ‘carbon bubble’ and ‘stranded assets’ scenarios say the concepts are based on highly wishful thinking and a false premise – that the world will overturn decades of weak action by agreeing big cuts in carbon through slashing use of coal, oil and gas in less than a generation.

Richard Tol, a UK-based economist who specialises in climate and energy, adds in a blog:  “Fossil fuel companies are among the largest companies in the world, but their total market capitalization is small relative to the total stock market. Even if they were wiped out completely, the world economy would shrug its shoulders and move on.”

Moreover, estimates from the IEA and the US Energy Department of the world’s future energy mix suggest coal will still have a high share in 2035, when overall energy consumption will be much higher, meaning the payback for many coal investments will remain attractive.

Although many US and European banks and pension funds have reduced exposure to investment in coal – in part because of low prices and dwindling returns in the commodity– investors from developing countries that are awash with cash are viewed as less likely to have doubts about the ethics or financial wisdom of investing in fossil fuels.

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