‘Climate Bailout’

A New Tool for Central Banks to Limit the Financial Risk Resulting from Climate Change

April 8, 2024Published by International Environmental Agreements

In this paper, researchers propose a climate bailout mechanism that would enable companies to sell fossil fuel assets to central banks before they become stranded, on the condition proceeds are reinvested in renewable energy.

The tool would provide a viable route to decommissioning high-risk fossil fuel assets and help stabilise related inflation, say authors Matthias Kroll of the World Future Council, and Kjell Kühne from the Leave It in the Ground Initiative.

To achieve climate goals and protect the financial system from systemic climate risks, the bulk of identified fossil fuel resources must remain underground, while renewable energy must be massively upscaled. However, the lack of bankable renewable opportunities and the financial incentive for fossil fuel companies to delay the green transition is impeding this process, say the authors.

The climate bailout framework utilises the economic power of central banks and multilateral development banks (MDBs) to address the impending “stranded asset crisis”.

This crisis includes both the sudden loss of value of these assets and “stranded liabilities” – the gap in resources to retire assets sustainably after a company goes bankrupt.

In California alone US$9bn is needed to plug up roughly 100,000 oil wells, but only $100mn is currently available for this task. The paper also mentions two areas in the global south – the Niger Delta in Nigeria and Lago Agiro in Ecuador – that have suffered substantial financial and environmental damage due to the lack of institutional and legal means that would oblige fossil fuel companies to clean up after themselves.

The climate bailout tool will bring financial burdens of asset retirement obligations and climate damages “into a more structured process where the bill will be paid”, state the authors.

The mechanism has six key steps:

  1. identify eligible companies;
  2. set a price and determine the quantity of assets the central bank plans to buy;
  3. MDBs buy the asset and set the conditions for the selling company to invest in new and additional clean energy projects or infrastructure that benefit the local jurisdiction;
  4. MDBs bundle the assets into novel climate bailout bonds (CBB);
  5. MDBs sell the CBBs to central banks and take responsibility for ongoing implementation – enforcing sanctions against companies that fail to deliver on their commitments;
  6. central banks keep the asset on the balance sheet on the condition that the raw materials will not be burned and only used if an alternative and environmentally sound use for them is found in the future.

The price set by MDBs should be directly linked to the extent of carbon savings, say the authors, and should be sufficient to persuade companies to sell before an asset’s end-of-life but not be so high to offer fossil fuel companies profits that could create new moral hazards.

While companies from both the global north and south would be eligible, the authors envision banks in the global north as the primary purchasers, allowing them to unlock renewable investment for the global south without overburdening their national budgets.

Finally, the authors state that while the mechanism is compatible with central banks’ financial stability mandates, formal or informal approval from local legislatures would likely be needed.

9 April 2024: this article was updated to provide additional details on the asset purchase price set by MDBs.

This page was last updated April 15, 2024

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