It’s a carbon tax.
A new report by consultants at Oliver Wyman shows that the world’s financial sector stands to lose $1 trillion if governments adopt a carbon tax as they attempt to shift to a low-carbon economy.
Countries like Canada have already attempted to adopt forms of a carbon tax and a carbon border is being considered by the European Union. The border would apply a carbon tax on products from countries that have less-aggressive carbon pricing than the EU.
By the Numbers
Policy shifts toward low-carbon economies, climate-linked credit risk and the fear of a carbon tax could all create potential losses for the financial sector.
Here are some of the top factors and their potential costs to the industry:
- Oliver Wyman’s analysis found that if carbon taxes were imposed at a level of $50 per ton of carbon dioxide in power generation and oil and gas, two of the most polluting industries, then estimated credit losses of between $50 billion to $300 billion would occur in both sectors.
- When examined across all industries, a carbon tax could result in losses as high as $1 trillion.
- The risk of credit defaults in the power generation and oil and gas sectors increased by two or three times for the firms most impacted.
- Given that half of all signatories to the 2015 Paris Agreement say they are actively considering a carbon tax, the risk of financial losses and credit defaults is real.
Some Specifics
In order to reduce losses, finance firms need to calculate and reduce their exposure to dirty industries such as oil and gas, and invest in sustainable energy.
“Our analysis shows that there are strong commercial reasons to act – the financial risks are material and need to be incorporated into decision-making,” James Davis, a partner at Oliver Wyman, told Reuters.
Some investors are already making the switch. In February, JP Morgan announced that it will end fossil-fuel loans for Arctic oil drilling and phase out loans for coal mining. Instead, it will offer $200 billion in environmental and economic development deals to help support green energy projects.
Even if fossil fuel companies can find investors, they might have a hard time finding insurance. In 2017, Willis Towers Watson (WTW), Zurich, SCOR and AXA announced they would limit their coverage of coal mining and generation.
They were joined by Allianz, Swiss Re, Munich Re and Generali in 2018 and in 2019 Chubb, and AXIS Capital announced they would restrict fossil fuel underwriting as well.
Recommended Reading
A carbon tax isn’t the only way climate change can result in losses for the financial sector. A recent report found that it will cost $479 billion if the earth loses these six natural processes.