Details of Award
NERC Reference : NE/S017119/1
Financial risk and the impact of climate change
Grant Award
- Principal Investigator:
- Professor NR Edwards, The Open University, Faculty of Sci, Tech, Eng & Maths (STEM)
- Co-Investigator:
- Professor J Vinuales, University of Cambridge, Land Economy
- Co-Investigator:
- Dr P B Holden, The Open University, Faculty of Sci, Tech, Eng & Maths (STEM)
- Co-Investigator:
- Dr J Mercure, University of Exeter, Geography
- Co-Investigator:
- Dr G Semieniuk, SOAS University of London, Economics
- Grant held at:
- The Open University, Faculty of Sci, Tech, Eng & Maths (STEM)
- Science Area:
- Atmospheric
- Earth
- Freshwater
- Marine
- Terrestrial
- Overall Classification:
- Unknown
- ENRIs:
- Environmental Risks and Hazards
- Global Change
- Natural Resource Management
- Science Topics:
- Climate & Climate Change
- Environmental economics
- Financial economics
- Abstract:
- In 2015, the Governor of the Bank of England issued a stark warning that both the impacts of climate change and those of climate policies could have pronounced effects on the UK's financial and insurance industries. At the core of climate-related impacts, there is a dilemma: while climate policy seeks to avoid long-term physical damages from climate change, it may also negatively affect financial markets as the valuation of fossil fuel-related financial assets falls. Such assets could become effectively 'stranded' by the transition to environmental sustainability. The financial risks arising from the transition and the stranding of fossil-fuel assets have been termed 'transition risks'. The adoption of climate laws and policies, including the 2008 Climate Change Act in the UK, has supported the development and uptake of low-carbon technology, significantly reducing the demand for fossil fuels worldwide. This change in demand, together with the expectation of more stringent climate policies in the future, is rapidly changing the market outlook for fossil fuel-related industries and associated physical and financial assets. Companies could invest in oil wells, refineries or tankers that, in a scenario of low demand, may fail to generate the expected return and thus become stranded. If the risk of asset devaluation is underestimated by investors, a climate bubble - which may already exist - could grow significantly, the bursting of which could lead to panic selling and a propagation of losses across the financial network, potentially triggering financial instability as severe or worse than that experienced worldwide in 2007. This project aims to develop a robust characterisation, quantification and communication of climate-related transition risks, thus addressing a key objective of the UK Climate Resilience programme. To achieve this, we will improve and apply a set of software tools and a consultative analytical procedure to assess the risks to the UK's financial and economic stability of a rapid transition to a low-carbon economy, and its impact on the real economy, jobs and income. We have recently developed a new computer model of the energy-economy-environment system uniquely well suited to this problem. The potential global loss in value of fossil-fuel assets we estimated to be $1-4tn, and its impact on the macroeconomy potentially twice as large. Our model represents the first of a new generation designed to assess the impacts of detailed climate policy packages on global and national economies. The model simulates the uptake of key low-carbon technologies in the most emissions-intensive sectors (power generation, road transport, household heating, industry and land-use). To address the issue of financial contagion, triggered by fossil-fuel asset devaluation, we will map out the network of ownership of fossil-fuel assets to create a form of "fossil-fuel financial geography". Focusing on the largest privately and state-owned companies and covering most of the global value at risk, we will gather data on the distributions of both their physical fossil-fuel assets and the main investors in their financial assets, thus mapping the principal linkages between fossil-fuel assets and financial actors. Using this map, together with our modelling toolkit, we will explore the vulnerability and resilience of the UK's economy and financial sector, and investigate the magnitude and distribution of potential impacts. Our ultimate goal is to identify and explore risks and assess strategies and responses that could reduce climate-related transition risks and improve the UK's economic resilience.
- NERC Reference:
- NE/S017119/1
- Grant Stage:
- Completed
- Scheme:
- Directed (RP) - NR1
- Grant Status:
- Closed
- Programme:
- UK Climate Resilience
This grant award has a total value of £226,001
FDAB - Financial Details (Award breakdown by headings)
| DI - Other Costs | Indirect - Indirect Costs | DA - Investigators | DI - Staff | DA - Estate Costs | DI - T&S |
|---|---|---|---|---|---|
| £85,495 | £52,017 | £43,771 | £25,465 | £8,929 | £10,323 |
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