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'Carbon bubble' will jeopardize global financial stability, UK MPs warn

07 March 2014
'Carbon bubble' will jeopardize global financial stability, UK MPs warn

LONDON: The UK’s Environmental Audit Committee (EAC) has warned of the risk to international financial security posed by a ‘carbon bubble’, and calls for greater green investment to avert it.

The Green Finance report by the EAC, a select committee of the House of Commons in UK Parliament, argues that a ‘carbon bubble’ is being created by the global financial markets due to the over-valuing of fossil fuel assets of large companies, and this presents a real risk to financial safety.

The report recommends that the UK government should work with companies to ensure that reporting requirements provide investors with all of the information they require to assess carbon risk, and develop the standard reporting requirements further”.

To ensure that the 2C cap on global temperature rise is adhered to, between 60% and 80% of fossil fuel reserves of listed companies will have to stay in the ground, last year's Carbon Tracker Initiative argued.

EAC's MPs would like closer collaboration between the Bank of England’s Financial Policy Committee and the independent Committee on Climate Change, so that the latter could effectively monitor financial risk. The report details that “robust regulatory frameworks, policy certainty and ongoing commitment to green investment is vital.”

Committee chair Joan Walley MP, said: "The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy. Financial stability could be threatened if shares in fossil fuel companies turn out to be overvalued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilizing the climate.”

The findings of the EAC come just weeks after a study by the Green/EFA group of the European Parliament found that pension funds in Britain are particularly vulnerable to the ‘carbon bubble’.

The European parliamentarians stress that this damage can be mitigated by “ambitious climate and energy policies leading to a quick and decisive transition to a low-carbon economy”.

Greater Green Investment 

The UK's current low carbon investment stands at less than half of the £200 billion (US$334 billion) that is necessary for the realization of its 2020 emissions reduction targets, the EAC also noted. However, the British MPs are adamant that clean energy be prioritized going forward.

In 2012, the renewable energy sector in Britain received a significant boost with the establishment of the Green Investment Bank. To date the Bank has provided loans to facilitate the expansion of LED lights which local authorities will repay through the energy savings that result.

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By Alana Ryan

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