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Declining demand for fossil fuels could trigger global financial crisis

Image credit: DT

Falling demand for fossil fuels could result in a “carbon bubble” that could ultimately wipe trillions from the global economy according to a new study.

A group of researchers from universities including Radboud, Cambridge and Macau found that major importers of fossil fuels, such as China and the EU, could benefit from a collapse in prices, but exporters like Russia, the USA or Canada could see their fossil-fuel industries nearly shut down.

If these countries keep up their investment and production levels despite declining demand, the global wealth loss is estimated to be somewhere between $1-4tr, a loss comparable to that which triggered the financial crisis in 2007.

Several major economies rely heavily on fossil-fuel production and exports. The price of fossil-fuel companies’ shares is calculated under the assumption that all fossil-fuel reserves will be consumed.

To do so would be inconsistent with the tight carbon budget set in the 2015 Paris Agreement, which limits the increase in global average temperature to ‘well below 2°C above pre-industrial levels’.

So far, this prospect has not deterred continuing investment in fossil fuels because many believe that climate policies will not be adopted, or at least not in the near future.

However, the study shows that on-going technological change, even without new climate policies, is already reducing global demand growth for fossil fuels, which could peak in the near future.

New climate policies would only aggravate the impact and continuing investment in fossil fuels is therefore creating a dangerous “carbon bubble” that could burst, with massive economic and geopolitical consequences.

With the USA’s withdrawal from the Paris Agreement, the scientists also modelled what would happen if the USA did indeed continue to invest in fossil-fuel assets instead of diversifying and divesting from them. The analysis shows their GDP would be reduced even further.

“With a declining global fossil-fuel demand, fossil-fuel production in the USA is becoming uncompetitive and may shut down,” said Dr Jean-Francois Mercure of Radboud University.

“If the USA remains in the Paris Agreement, it will promote new low-carbon technologies and reduce its consumption of fossil fuels, creating jobs and mitigating its loss of income, despite losing its fossil-fuel industry.

“If it pulls out, it will nevertheless lose its fossil-fuel industry, but by not promoting low-carbon technologies, will miss out on job creation opportunities, while increasing its fossil-fuel imports by not reducing its domestic fossil-fuel consumption. The outcome is therefore worse if the USA pulls out.”

Hector Pollitt, study co-author from Cambridge Econometrics said: “This new research clearly shows the mismatch between the reductions in fossil fuel consumption required to meet carbon targets and the behaviour of investors.

“Governments have an important role to play in emphasising commitments to meet the Paris Agreement to ensure that the significant detrimental economic and geopolitical consequences we have identified are avoided.”

Meanwhile, another study from the University of East Anglia suggests that climate change can be kept in check without resorting to unproven technologies simply by changing the way we live.

Scientists identified a range of ways to reduce energy demand that together could prevent global temperatures rising higher than 1.5C above pre-industrial levels.

They included car-sharing with electric vehicles, greater use of smartphones and other multi-function devices, improving the energy efficiency of buildings and eating less red meat.

Such changes alone over the next 30 years would make it possible to meet the 1.5C target set by the 2015 Paris Agreement, according to the researchers.

Yesterday, a group of 288 institutional investors with a combined $26tr (£19tr) in assets called on G7 countries to phase out the use of coal-fired power plants. 

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