How Central Banks Can Address the Financial Risks and Support a Capital Shift Away from Coal

February 22, 2020Published by New Economics Foundation

The stranding of coal-related assets exposes central banks to considerable financial risk and exposes the entire banking system to systemic risk, according to this comprehensive policy brief from Frank van Lerven at the New Economics Foundation. Coal risk is not sufficiently accounted for in current risk analysis, the report finds, yet technological, market, policy and other transition risks are quickly materialising for the sector.

Four out of five EU coal power plants are already unprofitable and by 2030 it will be cheaper to build new renewable energy than to continue to operate these plants. The IPCC estimates that over 80% of fossil fuel reserves – mainly coal – must be left worthless if the world is to keep within the Paris agreement’s 1.5°C target.

This report demonstrates  how central banks can reduce this growing risk exposure by excluding coal-exposed assets from collateral frameworks and asset purchases, and by accounting for coal risks in microprudential capital requirements, macroprudential capital buffers, and more comprehensive stress tests. It ends with eight specific steps towards implementation.

This page was last updated April 22, 2021

Share this article