A financial crash caused by a collapse in the fossil fuel market could lead to a huge bailout bill as governments shore up banks caught holding devalued assets, according to a new report.
Bailout costs could total US$6.8tn by 2030, almost three times the amount spent after the 2008 financial crash, while associated job losses are estimated to reach 18.7 million worldwide.
The findings come in analysis published by One for One, a campaign group that seeks to change capital requirements for fossil fuel holdings.
The value of fossil fuel assets is expected to decline as countries prioritise renewable energy to meet international climate agreements. However, the research shows that banks are expected to hold US$2.2tn in fossil fuel assets by 2030, exposing them and financial markets as a whole to significant risk.
Previous research by Rainforest Action Network has shown that in the five years following the Paris climate agreement, the world’s largest banks have provided US$4.6tn to the fossil fuel industry.
One for One, which is coordinated by the Sunrise Project, is demanding that banks are required to hold one dollar for every dollar invested in new fossil fuel projects. This one-for-one rule would oblige them to finance projects solely from their own funds and bear the risk in the event of a crash in the value of fossil fuels.
The findings have been supported by other organisations, including the Climate Safe Lending Network, and academics.
Joshua Ryan-Collins, economics professor at University College London, said: “Banks and insurers need to have buffers in place to absorb shocks from collapses in the value of oil, gas and coal assets as new regulation kicks in and demand falls as renewables scale up. Enhancing capital requirements for dirty assets should also encourage banks to shift their lending away from unsustainable activity, which in itself would reduce transition risk.”
In the next few weeks, members of the European Parliament are expected to vote on changes to the EU’s capital requirements legislation, as well as Solvency 2, and amendments including provisions for a one-for-one rule have been tabled.
Green Central Banking is funded by the Sunrise Project.
This page was last updated January 12, 2023
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