Pension Fund Losses Should Not Deter High Income Countries from Bold Climate Action

Losses caused by stranded assets are disproportionately concentrated amongst the very wealthy while losses for lower income groups can be compensated by governments at a low cost, says this paper published in the journal Joule. The paper explores the social relevance of wealth losses caused by asset stranding and finds that while some wealth is at risk, the minimal impact on the general public is “no credible deterrent” to bold climate action.

Fears that the reduction of fossil fuels assets may place pension plans invested in capital markets at risk may cause governments to dilute climate ambition, say the paper’s authors. However, the results show that ownership of fossil fuel investments are concentrated in a small group of investors. In the US, the top 1% of wealth holders own 39% of assets and the bottom 50% less than 4%.

The authors – Gregor Semieniuk, Lucas Chancel, Eulalie Saïsset, Philip Holden, Jean-Francois and Mercure Neil Edwards – explore the ownership distribution of assets at risk of stranding in the US, UK, Germany, France and Italy. They combine macroeconomic and financial network modelling data on the value and location of financial ownership to trace losses to the ultimate owners.

The results show that top wealth groups “appear to be protected” by their considerable and diverse overall wealth. Even under the most severe asset stranding scenario, losses do not exceed 1% of total wealth for the top 50%, 10% and 1% of wealth holders in every country analysed. The only exception was the top 1% in the UK which would experience a 2% loss.

For the bottom 50% in continental Europe, losses range from 0.05% to 1% of total net wealth. In the US, that grows to between 4% and 5%, and could reach 12% under portfolio bias scenarios. At these rates of loss, groups with little capital could experience economic hardship, but the cost of compensating losses would be relatively low. Compensating all losses incurred by the least affluent 90% would cost between 0.02 and 0.3% of GDP, depending on the country.

The authors propose a modest carbon tax of US$13 per metric tonne of CO2 equivalent on US emissions which would raise about $74bn per year over the next decade, or a tax on progressive wealth for the top 0.005% of the population which could cover costs in just two-three years in the US and Europe.

The authors recognise the limitations of the study which focuses solely on financial capital ownership in affluent countries. They also say that results should only be taken as a “first-order approximation over possible outcomes”, as they leave aside losses of labour incomes and other macroeconomic impacts which should be analysed in future work. Future research should also use more granular data and consider less affluent, oil-exporting countries.