A market crash driven by the overvaluation of fossil fuel assets could cost the UK £674bn and cause up to half a million job losses unless drastic financial safeguarding measures are adopted, a new report has warned.
New research released today by the One for One campaign has warned the UK government could end up shelling out over £670bn in taxpayer’s money – or £9,780 per taxpayer – to keep banks afloat in the event of a fossil fuel asset crash, which the group warned could occur as early as 2030.
As such, the One for One campaign is calling for stronger financial regulations to safeguard against the systemic risks presented by fossil fuel financing and ensure investors treat fossil fuels as one of the highest risk classes of assets.
The group argued that for each pound used to finance or insure new fossil fuel projects, banks and insurers should have to hold one pound to cover potential losses – hence the campaign’s name.
“Banks continue to pour money into climate-destroying fossil fuels and when it all goes wrong we will be left to pick up the bill,” said Hilal Atici, strategy director of the Financial Regulation Program at the Sunrise Project, which is backing the new campaign.
Atici warned that without proper regulation, markets are heading for an “out-of-control financial collapse” that would then require multibillion dollar taxpayer-funded bailouts.
“The One for One rule will ensure that banks making high-risk fossil fuel investments shoulder that risk themselves,” she added. “It will protect us from a financial crash and also put an emergency brake on fossil fuel financing.”
As world leaders prepare to meet next week at the Davos World Economic Forum to discuss “Cooperation in a Fragmented World”, the campaigners behind the new research have called for coordinated action from governments and financial regulators to address this “critical weaknesses” in the global banking and insurance rules.
The research revealed that financial institutions globally are expected to hold an estimated £1.8tr in “risky” fossil fuel assets by 2030. It predicted that banks could require a $4.9tr bailout if the fossil fuel market crashed that year.
The campaigners warned that this sum is more than double the $2.3tr which was needed in the 2008 financial crisis, while 13.6 million jobs would be put at risk worldwide.
Investors have long argued that investment is new fossil fuel projects are required during the transition towards net zero emissions, insisting that they will be able to wind down their investments in fossil fuel assets over time as the global economy transitions towards clean tech alternatives.
But a growing number of analysts and investors fear that the valuations of many fossil fuel assets are based on the assumption demand for carbon intensive fuels will continue for decades to come and that the goals of the Paris Agreement will be breached. Consequently, assets could quickly become stranded if governments do deliver on their climate goals and demand for fossil fuels falls faster than expected – a scenario that could pose a major threat to financial stability if the value of fossil fuel assets collapses.
The One for One campaign’s analysis is based on the assumption that between now and 2030 the world will begin to move on to a decarbonisation trajectory in line with the Paris Agreement goal of keeping temperature increases below 2C, leaving many fossil fuel assets hugely overvalued.
Under a worst-case-scenario, the report warns £904bn could be required to bail out UK banks at a cost of £13,500 per taxpayer, which is more than the bailouts from the 2008 financial crisis and the 2020 coronavirus crisis combined. On a global scale the research warns governments may need to bail out banks with up to $6.8tr, putting 18.7 million jobs at risk.
The researchers also noted that its modelling was based solely on transition-related risks and does not take into account the physical impact of climate change on overall financial stability.
“Regulators are recognising that no matter how much more analysis central banks produce, fossil fuel expansion will always be incompatible with the global financial stability that they are obligated to maintain and protect,” said James Vaccaro, executive director of the Climate Safe Lending Network, which is also supporting the new campaign.
“The financial system is enabling energy companies to make short term profits at the expense of the whole of society, destroying our ecosystems and imperilling millions of the most vulnerable people around the world in the process. The One for One rule, which will make sure the risks of climate change are priced into capital costs, offers the most pragmatic and prudent approach to maintaining a climate-safe economy for the future.”
The One for One campaign was developed by the Sunrise Project and has secured support from Finance Watch, ShareAction, the New Economics Foundation, Fridays for Future Europe, SumOfUs, and the Climate Safe Lending Network.
