The future global economic exposure to fossil fuel assets that could become stranded by the energy transition has doubled in the past five years from $1.4 trillion to $2.28tn by 2040.
The UK is expected to be the ninth country globally to experience the heaviest losses per capita from stranded fossil fuel assets, making it more exposed than the US, Italy or France.
About $141 billion (£113bn) of that total could be wiped from the UK economy from stranded fossil fuel assets, according to a new study by UK Sustainable Investment and Finance Association (UKSIF) and Transition Risk Exeter (TREX).
Oil, gas or coal reserves, together with associated infrastructure and investments, are expected to lose economic viability before their operational lifetimes conclude due to climate policies, technological changes, and shifting market conditions.
In a warming scenario between 2.5°C and 2.9°C, climate-intensified natural disasters may lead to $12.5tn in economic losses by 2050, the study predicts.
The study estimates that the financial loss from stranded fossil fuel assets alone amounts to about $3,279 per UK adult. They warned that individual savers will shoulder the cost of the UK’s “outsized exposure” to fossil fuels.
James Alexander, chief executive of UKSIF, said: “With asset stranding presenting a material risk to the long-term health of the UK economy, including the retirement savings of millions of people, it is clear that a carefully controlled transition away from fossil fuels is both an environmental and a financial imperative.
“Too many oil and gas companies are betting on demand that will not materialise in a decarbonising world, and the public are at risk of paying the bill. The surest way to offset the risk of losses posed by stranded assets is to invest in industries that will thrive as fossil fuels decline.”
Alexander called on the UK government to demonstrate global climate leadership by implementing decarbonisation policies and fostering investment in growth industries such as renewable energy.
An estimated 13% of the total loss forecast in the UK is expected to derive from pension funds.
While many pension funds operate exclusions in line with environmental, social and governance policies, they could also be on course to lose $19bn to 2040.
About 17% of the £88bn of fossil fuel assets held by UK pension funds, equating to £15.2bn, is at risk of stranding by 2040 if current policies and pledges are fulfilled, the study said.
This would mean 0.5% of the UK’s £3tn pension pot could be stranded, equal to a 13% share of the UK’s projected economic loss from the redundancy of fossil fuel assets.
The UK economy is disproportionately exposed to stranded fossil fuel assets, with potential losses for UK pension savers reaching tens of billions of pounds by 2040, according to the researchers.
The analysis traced the complex web of financial ownership of fossil fuel assets and tracked the exposure of end beneficiaries, including individual investors, pension funds and governments, to gauge the risk of these assets becoming stranded.
Phil Holden, senior lecturer in Earth Systems Science at The Open University, said: “The scientific community has long warned that fossil fuels must be rapidly phased out to avoid the most drastic impacts of climate change.
“But the accelerating transition, powered by increasing economic advantages of renewables, is creating a new urgency — to rapidly divest from exposure to fossil fuels.
“This problem is becoming worse by the week. Oil and gas exploration may appear attractive in the short run, but the longer extraction remains misaligned with the global decarbonisation trajectory, the more dramatic the economic realignment needed.”
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