MPs issue stark ‘carbon bubble’ warning to investors and finance world

Stock markets are at risk of serious instability because fossil fuel assets can become overvalued when the need to tackle climate change is factored in, a committee of MPs has said.

The overvaluation of fossil fuel reserves, which research suggests are “unburnable”, risks creating a ‘carbon bubble’ that would threaten financial stability, according to the environmental audit committee’s latest report on green finance.

Chair of the committee Joan Walley MP said, “The UK government and Bank of England must not be complacent about the risks of carbon exposure in the world economy.

“The record-breaking extreme weather events causing chaos across the globe should be a wake-up call. The transition to a low-carbon economy will be much more painful if we wait until there is a climate crisis before recognising that more than half of the world’s fossil fuel reserves will have to remain in the ground.”

The report says that the scale of green investment is still too small, and that the Green Investment Bank should be given more power to borrow in order to increase its investments.

The committee also calls on the government to implement a clear and stable policy framework to boost investor confidence.

“The government could help insulate consumers against rising energy bills and support jobs in the home improvement industry by reducing the interest rate on green deal loans in line with the more attractive Help to Buy scheme”, Walley said.

The report also suggested that the Bank of England’s Financial Policy Committee should seek advice from the independent Committee on Climate Change, in order to assess risks related to a carbon bubble.

It has been estimated that in order to keep global warming under a 2C threshold, 60-80% of oil, gas and coal reserves will need to stay in the ground.

Speaking this week, UN climate chief Christiana Figueres said, “Those corporations that continue to invest in new fossil fuel exploration, new fossil fuel exploitation, are really in flagrant breach of their fiduciary duty because the science is abundantly clear that this is something we can no longer do.”

Update: James Leaton, research director at the Carbon Tracker Initiative, whose research into stranded assets and unburnable carbon is at the forefront of the carbon bubble debate, said, “We welcome the recommendation to make a link between the Climate Change Committee and the Bank of England. This is essential to ensure we have a resilient financial system going forward.

“London has an opportunity to lead financing the energy transition – at present it risks being left holding the toxic assets rather than having a significant stake in green growth. Old business models clearly need updating to respond to the green finance challenge – companies are not explaining how they are adapting to investors at present.”

Further reading:

Investors warned of ‘stranded’ carbon assets and working condition risks

Al Gore: world risks creating carbon bubble akin to financial crisis

Report says investing in fossil fuels is a ‘very risky decision’

Fossil fuel firms are failing to address the low-carbon imperative

Majority of Britons unaware of ‘carbon bubble’ investment risks