U.S. Treasury Secretary Janet Yellen this week said climate change is already having a major economic and financial impact on the United States that could trigger asset value losses in the future that may “cascade through the U.S. financial system”.
The stark statement echoes much of Carbon Tracker’s central thesis and repeated warnings over the years that climate change poses a systemic risk and that a disorderly transition would create significant shocks to the global financial system, wiping trillions of dollars off asset values.
“As climate change intensifies, natural disasters and warming temperatures can lead to declines in asset values that could cascade through the financial system,” Yellen told the first meeting of the Financial Risk Advisory Committee, a new advisory board set up last October by the Financial Stability Oversight Council to mitigate climate risks to the U.S. economy.
She said: “A delayed and disorderly transition to a net-zero economy can lead to shocks to the financial system as well. Taking climate change into account is prudent risk management. Our work builds on the scientific consensus regarding the projected effects of climate change and is based on a widely accepted understanding of how the financial system works.”
Yellen said there had been a 500% increase in the annual number of billion-dollar disasters over the past five years, compared to the 1980s, even after taking into account inflation.
As far back as the landmark Paris COP in 2015, Carbon Tracker spoke of the need to “correctly price-in the risks associated with high-carbon activities” and “build momentum behind an orderly economic transition and help minimise the destruction in value of some of the world’s biggest companies.”
Our central carbon bubble hypothesis, that is broadly at the heart of all our work, propounds that the rapidly inflating carbon bubble (the extraction and burning of fossil fuels) is a serious threat to financial stability and that we still have just enough time to undergo an orderly transition if we act now. However, any further delay raises the risks and probability of a disorderly one dramatically.
Through our analytical work and during UN climate talks we have repeatedly alerted investors that dangerous climate change also threatens our financial stability, our livelihoods and the fabric of our societies.
During COP26 in Glasgow in 2021, for example, Carbon Tracker again warned about stranded asset risk, saying in a statement: Over $1 trillion of investors’ money in new unneeded high-cost projects is already threatened in the short-term if they are not cancelled in line with the 1.5 C Paris climate target. Trillions more in infrastructure investments are at risk of stranding if we fail to change course in time.”
The switch away from fossil fuels to renewables if not actioned in an orderly and planned way risks stranding at least $100 trillion of assets across financial markets which we specified in Decline and Fall: The Size & Vulnerability of the Fossil Fuel System published in 2020.
They are the 900bn tonnes of coal, oil, and gas, valued by the World Bank at $39tn; supply infrastructure of $10tn and demand infrastructure (electricity, transport, and heavy industry) of $22tn; and financial markets with $18tn of equity (a quarter of the total), $8tn of traded bonds (half the total) and up to four times as much in unlisted debt.
(For more information please contact: Stefano Ambrogi, Head of News & Communications, on 07557916940)
