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Mispriced risk: The fossil fuel industry’s $100 trillion blindspot

ImpactAlpha, June 4 – Negative oil prices. Asset write-downs. Low-cost renewables.

The signposts are clear: the fossil fuel industry is in long-term decline as demand shifts to clean energy. Fossil fuel producers, however, continue to invest in new production despite falling demand and calls to limit emissions and planetary warming. Banks keep financing their efforts.

The price of that denial? More than $100 trillion, according to CarbonTracker. That’s the gap between fossil fuel profits in a “business as usual” scenario that many oil, gas and coal companies cling to ($129 trillion) and those expected in a world of declining demand and prices consistent with Paris goals ($14 trillion). The potential collapse of profits could have widespread impact, according to  Decline and Fall: The Size & Vulnerability of the Fossil Fuel System, a sweeping new analysis by the London-based climate researchers that follows on earlier landmark reports on stranded assets and the carbon bubble.

Mispriced risk. To assess the scope of the risk, the report takes a broad measure of the size of the fossil fuel industry, including $32 billion in physical infrastructure from supply-side oil wells and pipelines and demand-side cars, utilities and petrochemical plants. The upshot: “There is far more risk inherent in the fossil fuel system than is conventionally priced into financial markets,” says energy strategist and report author Kingsmill Bond. 

Bank exposure. CarbonTracker tallied $18 trillion in public equities and $8 trillion in corporate bonds linked to fossil fuels – almost a quarter of the global equity market and 53% of the non-financial corporate bonds. Unlisted or untracked debt could add another $30 trillion in exposure. For example, mining, oil and gas, and utility sectors raised $6 trillion in syndicated loans between 2010-2018, more than they did with corporate bonds. Banks that rely on old models and assumptions “will underestimate the risk they hold on their balance sheets,” says Bond. 

Peak carbon. Technological innovation and government policy is driving peak fossil fuel demand across sectors and countries. COVID-19 has accelerated that. Oil demand could fall by 9% in 2020, according to the International Energy Agency. “Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable,” says Bond.

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