New Energy World™
New Energy World™ embraces the whole energy industry as it connects and converges to address the decarbonisation challenge. It covers progress being made across the industry, from the dynamics under way to reduce emissions in oil and gas, through improvements to the efficiency of energy conversion and use, to cutting-edge initiatives in renewable and low-carbon technologies.
Potential pension fund losses should not deter high-income countries from bold climate action
5/7/2023
News
An argument sometimes cited against climate action is that fossil fuel investment losses could impact people’s retirement or long-term savings plans. However, a recent study suggests that the loss of fossil fuel assets would have a minimal impact on the general populace. Most financial losses would be borne by the most affluent individuals in high-income countries, for whom the loss makes up only a small percentage of their total wealth. As a result, governments should not be deterred from taking bold action to help mitigate climate change and meet net zero emissions targets.
Shutdown of fossil-fuel production sites before available reserves are depleted is seen by many as a necessary consequence of climate change policy. However, it could also lead to a loss on investment and stranded assets.
Governments in rich, Western countries may water down their climate policies for fear of the social repercussions of such asset stranding as these policies impact oil and gas companies. In particular, pension plans invested in capital markets that are already underfunded could be at risk of falling even shorter of meeting their present and future pay-out obligations.
The current push to expand fossil-fuel investments in both Europe and the US as a result of the reduced gas supplies from Russia, following Russia’s invasion of Ukraine, only serves to underscore the worry of diluted climate ambition. As the valuations of oil and gas companies soar, their importance for the health of pension savings only grows.
To date it has been unclear how socially relevant such asset stranding would really be. However, in a new paper recently published in the journal Joule, researchers argue that governments should not be deterred by the risk of stranded fossil-fuel assets as their findings suggest that the loss of fossil fuel assets would have a minimal impact on the general populace, with most financial losses borne by the most affluent individuals in high-income countries, for whom the loss would make up only a small percentage of their total wealth.
Meanwhile, the financial loss of lower-income individuals would be minimal and feasible for governments to compensate through mechanisms such as a carbon emissions tax on industry or a modest tax on the wealthiest individuals.
The researchers found, for example, that in the US some two-thirds of the financial losses from lost fossil fuel assets would affect the top 10% of wealth holders, with half of that affecting just the top 1%. This 1% tends to have a diverse portfolio of investments and, as a result, the study found that any losses from fossil fuel assets would make up less than 1% of the group’s net wealth. Similar results were found for Europe and the UK.
In contrast, the study found that some 3.5% of financial losses would impact the poorest half of US citizens as fossil fuel assets tend to make up a larger proportion of wealth for this group. However, because the group’s overall net wealth (assets minus liabilities) is significantly lower, the researchers estimate that these losses could be ‘compensated’ by some $9bn in Europe and $12bn in the US if governments imposed a carbon emissions tax, or renegotiated their current liabilities to energy companies and used the amount that they saved, or if they rechannelled funds raised from placing a modest tax on the wealthiest individuals.
