UK facing £675bn market crash from stranded fossil fuel assets

The UK economy is “particularly at risk” from an oncoming fossil-fuel-led financial crisis that could create almost 14 million job losses globally and see banks requiring a £4trn bailout, unless new safeguarding measures are introduced for financing of new fossil fuel exploration and extraction projects.

UK facing £675bn market crash from stranded fossil fuel assets

This would also cause almost half a million job losses and cost each UK taxpayer around £10,000

The warning comes from a new report from the One for One campaign, which outlines that the global economy could suffer from a market crash driven by the overvaluation of fossil fuel companies, projects and assets as early as 2030.

The report warns of the “growing risk of a fossil fuel stranded asset bubble” that could see the value of oil, gas and coal projects wiped out as demand drops. One for One cites climate mitigation policies, changing consumer preferences and technological developments as reasons that the value of fossil fuel assets could plummet by 2030 as nations strive to start delivering on net-zero policies.

Globally, this finance crash could cause more than 13.6 million job losses and a global £4trn bailout of banks still funding the fossil fuel industry. The report notes that banks and insurers continue to finance new fossil fuel projects through a range of mechanisms, including lending, insurance, and both direct and indirect investment.

This has significant ramifications for the UK, which is “particularly at risk in the coming fossil fuel-led financial crisis due to the dominance of the financial services sector”, according to the report.

Under a “no transition scenario” where net-zero pledges aren’t built upon with action on decarbonisation and the average temperature limit surpasses  3.5C by 2050, the UK Government will have to deliver a £900bn bailout due to a fossil fuel valuation crash – more than the combined government bailouts from the 2008 financial crisis and the 2020 coronavirus crisis.

Under a slow transition scenario, where net-zero is realised by 2050, the bailout could still be as high as £675bn. This would also cause almost half a million job losses and cost each taxpayer around £10,000.

One for One has laid out new policy demands for a 1,250% risk weighting for capital requirements to be applied for all financing of new fossil fuel exploration and extraction projects. This would mean that for every pound invested in the sector, financial institutions have an equitable sum to cover the cost of risk. The campaign also calls for a 150% risk weighting to apply to existing fossil fuel assets.

Stranded asset bubble

Previous research from Carbon Tracker warned that the global stock markets are supporting projects and companies that consist of three times the level of fossil fuels that could be burned by 2050 while keeping the global temperature increase to 1.5C.

The research states that the “embedded emissions” of all oil, coal and natural gas reserves listed on global stock markets – the amount of emissions they would generate if extracted and burned – would wipe out any chance of the world keeping to the Paris Agreement’s more ambitious 1.5C pathway. Scientists have repeatedly stated that aiming for 1.5C is necessary to attempt to avoid the worst physical, social and economic impacts of the climate crisis.

The report also emphasises that, despite national commitments to net-zero, the embodied emissions of fossil fuel companies listed on stock exchanges are rising. It states that they are currently 40% higher than 10 years ago.

Previous Carbon Tracker research states that oil and gas firms risk wasting £1.8trn on stranded assets by 2030.

Separate research reveals that the world’s 60 largest banks collectively have $1.35trn invested in fossil fuel assets at risk of sharply falling in value over the coming years.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie