Seminar

Exeter Sustainable Finance Centre: Assessing Transition Risks in Global Energy Markets

Finance

Speaker:Jean-Francois Mercure, Geography/GSI, Exeter
Date: Tuesday 25 May 2021
Time: 14:00 - 15:00
Location: Online via Zoom (link available from J.Lashkor@exeter.ac.uk)

Further details

Abstract A key aim of climate policy is to progressively substitute renewables and energy efficiency for fossil fuel use. The associated rapid depreciation and replacement of energy-related capital may entail profound reorganization of regional and global industry value chains, international trade, and geopolitical power. We present evidence confirming that the transformation of energy systems is well under way, and we explore the economic, geopolitical and financial implications of the new, emerging, energy geography. First, given the economic impacts of structural change implied by the ongoing transition, the framing of climate policy as a prisoner’s dilemma is a poor description of political motives. Instead, a new game emerges in which each country seeks to minimize the impacts of structural change. Fossil fuel importers have an incentive to decarbonize, competitive exporters have an incentive to flood markets, and uncompetitive exporters face the detrimental impacts of fossil-fuel-related post-industrial decline. Second, we explore the consequences the economic shock to fossil fuel-related companies has on their financial position, as well as on the financial position of their investors and ultimate owners, establishing a financial geography of fossil fuel-related transition risks. Risk owners are distributed unequally across the globe in absolute value and relative to GDP. In some countries a large share of risk is owned by state-owned fossil-fuel companies, leading to socializing the risks, while in others, pension funds own the risk. We discuss the implications for various types of financial institutions and for governments of various nations.