In December 2014 the Bank of England announced an enquiry to assess the risk of fossil fuel companies causing a global financial crisis – something that could potentially happen if future climate change regulation were to render a significant proportion of their coal, oil and gas assets unusable – and therefore worthless.
If governments agree on realistic targets to limit global warming to 2ºC, the internationally agreed ‘safe’ limit, then around two-thirds of proven fossil fuel reserves would no longer be able to be burned, and the value of fossil fuel companies would be sharply downgraded. As these are among the largest companies in the world, such a devaluing could potentially trigger a major economic crisis.
The UK Parliament’s Environmental Audit Committee is also conducting an enquiry into this area and has warned that most fossil reserves will have to stay in the ground unless carbon capture and storage (CCS) can be developed more rapidly. CCS is still at the research and demonstration stage and is not expected to be ready for large scale deployment until 2030 or later.
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These enquiries are an indication that policy makers and central banks are beginning to take the prospect of large-scale action on climate change seriously. Investors are not yet thought to factor in political action on climate change into their decisions on fossil fuel investments – according to Carbon Tracker, $1 trillion is currently being staked on high cost oil projects that will never see a return if governments fulfil their climate change pledges.
The Bank of England enquiry increases the pressure on fossil fuel companies to disclose how many carbon emissions are contained within their reserves, so that investors can make informed decisions and reduce the risk of large-scale ‘stranding’ of fossil fuel assets.