A report by the Sunrise Project estimates that a fossil fuel-led financial crisis could result in over 18.7 million jobs being lost, requiring a global bailout of $6.3 trillion.
- The report analyses the impact on the market, including jobs and the potential bank bailouts that would be needed, if the fossil fuel stranded asset bubble burst.
- Adopting the ‘one-for-one’ rule for banks that lend to oil and gas companies is a potential solution to avoid a global financial crisis.
- Making it difficult for banks to invest in fossil fuels would not only reduce the severity of environmental and economic consequences, but also accelerate investments in clean energy.
Scenario analysis shows countries with the greatest potential for loss
The Sunrise Project, an Australian climate action non-profit focused on driving the energy transition, analysed the global risk of fossil fuel stranded assets in a new report. Banking on Bailouts: Sizing the social costs when the fossil fuel bubble bursts was commissioned by the Sunrise Project for the One for One campaign.
It bases its projections on two global warming scenarios: a ‘slow transition’ scenario, where the temperature will rise by 2°C by the end of the century, and a ‘no transition’ scenario where global warming will reach a 3.5°C median temperature. In the former, researchers estimated that banks could have global credit exposure of over $1.6 trillion to the fossil fuel industry in 2030, rising to $2.2 trillion in the latter scenario.
In both scenarios, banks in China, Europe, Japan, and the US would account for around 85% of the high-risk credit exposure to fossil fuel assets. This is because they own local, high-cost assets that would be at a competitive disadvantage to lower-cost, Middle Eastern assets, but also from holding large investments in foreign fossil fuel assets.
Job losses in the slow transition are estimated to be 13.6 million, requiring potential government bailouts of $4.9 trillion. In the other scenario, 18.7 million job losses would require a $6.8 trillion bailout. In comparison, job losses in the global financial crisis of 2008 totalled 18 million, with a corresponding bailout of $2.3 trillion.
The report projects that UK, Canadian and American taxpayers will be the worst hit, needing to bail out their local banking industry to the tune of between $9,000 and $16,000 per taxpayer.
Banks’ fossil fuel lending has increased since the signing of the Paris Agreement
Major European and UK banks still provide loans for oil and gas exploration and production, despite their commitment to net zero goals. Indeed, NGO Share Action found that 25 of the top European and UK banks have provided $400 billion in financing to large oil and gas expansion projects since the Paris Agreement was signed.
Based on data from the Global Registry of Fossil Fuels, launched by Carbon Tracker and Global Energy Monitor, producing and using the world’s fossil fuel reserves would equal seven times the remaining carbon budget for a 1.5°C scenario. In the International Energy Agency’s Net Zero by 2050 scenario, there are no new oil and gas fields approved for development beyond the projects that had been committed at the end of 2021.
One-for-one seeks to make it expensive for banks to lend to the oil and gas industry
The Sunrise Project report drew parallels with the global financial crisis of 2008, and the bailout that was required because banks were not adequately capitalised to deal with the housing credit bubble. They argued that governments in many countries with high levels of fossil fuel assets on banks’ balance sheets could face a similar prospect.
Potential changes in financial regulations and government policy heighten the risk of stranded assets and could result in catastrophic losses, requiring bailouts.
Can politicians and central banks be persuaded to implement the one-for-one rule?
The report concluded that a fossil fuel-led financial crisis could necessitate a global government bailout three times larger, and with more job losses, than the 2008 global financial crisis. This could be mitigated by implementing the one-for-one rule, whereby potential losses from exposure to fossil fuel credit risk would have to be absorbed by the liquid assets on banks’ own balance sheets.
Not only would the rule slow the pace of investment in fossil fuels, the report argued, but it would also reduce the environmental and economic crisis by making fossil fuel financing more expensive compared to clean energy. It would, however, require tremendous political will to implement, especially given the strength of the fossil fuel lobby.
For example, Republican-led states with a strong fossil fuel industry presence are pushing back against ESG investing, arguing that it undermines the local energy industry, which is mostly reliant on oil and gas. Meanwhile, the energy crisis in Europe has led to policy uncertainty over the phase-out of fossil fuels, justified by the need for energy security in the near term. The inclusion of natural gas as a bridge and a sustainable fuel in the EU Taxonomy also muddies the waters.
The one-for-one rule provides a viable policy solution to dissuade banks and financial institutions from financing new fossil fuel projects. Whether global economies experience a fossil fuel-led financial crisis with high levels of job loss and required government bailouts, remains to be seen.
What is unquestionable is that the world needs to stop funding new fossil fuel projects, and accelerate investments into developing clean energy alternatives. By creating scenarios and providing estimates of job losses and bailouts, the Sunrise Project has quantified the potential risks of inaction for policymakers, which is hoped will encourage them to act.