Global Financial Watch

Fight against global warming poses huge global financial risks

COP21 about more than climate change

Ambitious plans to fight global warming by lowering CO2 emissions pose huge risks to the global financial system and could trigger another financial crisis in a world that has not yet recovered from the 2008 crisis.

It is also not the only risk the financial system faces. Even more reason for concern is that it is not even discounted in the International Monetary Fund’s (IMF) latest Fiscal Monitor report “Now Is the Time Fiscal Policies for Sustainable Growth”.

The report kicks off with the statement, “Fiscal risks remain significant in both advanced and emerging market and developing economies”. In the advice it dishes out it relies heavily on the decline in the oil price and how it should be used as an opportunity to restructure fiscal policies.

It, however, seems to be based on the assumption that as far as the use of fossil fuel, especially oil, to provide in the world’s energy needs is concerned, it will remain ‘business as usual’.

Optimism among climate change activists is growing that a breakthrough will be made at the 21st December Conference of Parties (COP21) in Paris in the pursuit of slowing down global warming.

The goal of the Convention is to reduce greenhouse gas emissions to limit the global temperature increase to two degrees Celsius above pre-industrial levels.

In the meantime, however, another perspective is emerging of the implications for global financial systems and emerging economies, including Sub-Saharan Africa, which are heavily dependent on oil and other resource exports. It might also, with the decline in the global oil price, have implications for fracking gas exploration plans for the Karoo.

The International Energy Agency has now warned that two thirds of all known global energy reserves will become ‘fictional’ if a binding deal is reached to limit CO2 levels to 450 particles per million by the end of this century. The implication is that two thirds of all assets on the books of coal, oil and gas companies will become worthless. The price tag could be as high as $6 trillion – the amount of money that went into oil, gas and coal investments since 2007, based on non-realising assumptions.

Against this background the members belonging to the organisation representing the world’s largest economies, known as the G20, have embarked on a joint investigation into the global financial risks that would be triggered by a 2 ºC deal at COP21.

It would leave these companies with ‘stranded assets’, which will become unrealisable under conditions created by such a deal.

The Telegraph reported that the G20 has asked the Financial Stability Board in Basel to convene a public-private inquiry into the fallout faced by the financial sector as climate rules become much stricter. All member countries have agreed to co-operate or carry out internal probes.

The World Bank is also carrying out its own review of energy assets in its portfolio, and is studying ‘sovereign risk’ for the most vulnerable carbon-based economies.

The problem is exacerbated by the fact that energy companies have committed $1,1 trillion over the next decade to projects that require an oil price of above $95 to just break even.

Implications for Africa

Buoyant economic growth in Sub-Saharan Africa in recent years came mainly on the back of emerging new oil producers in the region. Production from conventional oil fields peaked in 2005 and since then no new big project has come on stream at a break-even point below $80 per barrel for Brent oil.

At the same time, big strides have been made in the development of alternative, mostly renewable technologies, in competition to fossil fuel. Unless similar strides are made in the development of technologies aimed at capturing carbon emissions, the fossil fuel industry will facing an increasingly uphill battle for survival.

In its recent report on the economic outlook for Sub-Saharan Africa, the IMF said the region’s economy looks set for another year of solid growth, but at a slower rate, especially due to the sharp decline in oil prices. For some oil importing countries the advantages of the declining oil price are countered by the decline in prices of other commodities they export.

The report states: “In a context of tightening global financial conditions, the large fiscal and current account deficits that prevail in some countries could leave them vulnerable to a potential reduction in external financing. An uneven global recovery and domestic security-related challenges are also risks to the outlook.

“Against this backdrop, and beyond the immediate effects of the current shock, further progress toward diversification and structural transformation remains crucial to sustain high and inclusive growth, generate jobs for the rapidly growing young population, and foster integration into global value chains.”

However, in the broader overall picture, a binding deal at COP21 would hardly be helpful in Africa’s efforts at economic diversification.

by Piet Coetzer

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