In mid-October, Bank of England governor Mark Carney sent environmentalists’ pulses racing. Carney revealed what appeared to be a subtle but important shift in how the U.K. central bank views the risk from the effects of climate change — one that could open the door to a bank overseer or financial stability committee identifying carbon as a possible systemic threat to the capital markets.
London-based nonprofit Carbon Tracker has helped popularize the notion of a carbon bubble through reports highlighting scientific evidence that the world has more fossil fuels on its books than can safely be burned without the climate significantly overheating. Reforms to stem carbon emissions would shrink the value of those assets in the same way that mortgage write-downs hurt banks in 2007 and 2008. Environmental advocates have described such carbon as potentially “stranded” on companies’ balance sheets.
In June 2013, as part of its inquiry leading up to last February’s Green Finance report, the House of Commons’ Environmental Audit Committee asked Carbon Tracker research director James Leaton if he thought the BoE was taking the possibility of a carbon bubble seriously enough. Leaton said he wanted to see more from the bank. “For us, climate change would be a very good case study of whether the markets can deal with long-term systemic risk,” he added.
The BoE’s initial response to the Green Finance report wasn’t encouraging. In a July letter to committee chair Joan Walley, Carney said that although the bank acknowledged the issue’s importance, “risks to financial stability from a potential mispricing of carbon assets have not been raised by respondents to the Bank’s biannual Systemic Risk Survey, and have not been cited as a concern by market contacts in the course of the Bank’s regular market intelligence gathering.”
In her response, Walley, Labour MP for Stoke-on-Trent North, said she was surprised that such risks hadn’t come up given that “those who contributed to our inquiry identified a real risk of the value in fossil fuel companies being abruptly readjusted when emissions controls begin to bite.”
Then, in October, Carney made comments at a World Bank seminar on integrated reporting that seemed to support the carbon bubble theory. In reply to a letter from Walley asking for clarification, he noted that the topic of stranded assets had come up in recent talks related to a U.K. government report on how climate change could affect the insurance industry. “In light of these discussions, we will be deepening and widening our inquiry into the topic, and I expect the Financial Policy Committee to also consider this issue as part of its regular horizon scanning work on financial stability risks,” Carney wrote. Carbon Tracker’s Leaton may yet get his wish. — Imogen Rose-Smith
