Sir Mervyn King warned of economy destabilisation

Sir Mervyn King, the Governor of the Bank of England has recently been warned by a coalition of politicians, investors and scientists that the economy could potentially be destabilised by sub-prime oil coal and gas assets that are being held by companies listed in the City.

The warning was delivered in an open letter to the Governor telling him that the drive to a greener economy could mean that certain types of fossil fuels lose a great amount of value in the future. The letter highlighted that this could be a significant problem for pension funds as well as institutional investors.

A climate change summit was recently held by the United Nations and nearly 200 of the world’s nations stated that they would be reducing greenhouse gas emissions within the next three years. This limit means that only around 20 percent of the world’s current fossil fuel reserves would be used and this poses an economic problem.

James Cameron, an investment manager and adviser to the Prime Minister has stated, “These assets have a very high carbon content and while they are bad for the environment it is important we don’t ignore their impact on the prosperity of this country.

People don’t understand the risk involved with high carbon products. The risks are there because climate change is such a strong issue that there are going to be legal restrictions on their use. It is also important to bear in mind that situations such as the catastrophe at Deepwater Horizon can destabilise an entire sector.”

The Financial Policy Committee was established in 2011 with the mandate of reducing and removing systematic risks present in the financial system in the UK and also enhancing its resilience.

The chairman of the committee is Mervyn King and the letter to him highlights how the largest companies in the FTSE 100 are reliant on high carbon assets. The letter also highlights how these companies are responsible for around one quarter of the entire FTSE’s market capitalisation.

Another report has recently been published that highlights how 16 companies listed in London have significant stores of coal. The report estimates that if these were burned around 45 billion tonnes of carbon dioxide would be released. This is a problem because this would use up the entire U.K.’s carbon allowance for nearly a century.

The letter also highlights how there is currently no monitoring by regulators of how much carbon investments are classed as being safe. This means that it is not currently known what level is regarded as safe for the stability of the financial system. The letter concludes that there should be an immediate investigation by the Financial Policy Committee into the issue.

Climate Change Capital is headed by Ben Caldecott and he has commented, “There could be an enormous amount of harm done to our economy by this level of overexposure to assets which are very high in carbon.

It is possible in the future that we will see a very rapid shift in their value and this can destabilise the economy. We saw a similar destabilisation take place with the sub-prime housing crisis and regulators must act now to prevent a similar sort of thing happening in a few years.”

The Chief Executive of the WWF in the UK is David Nussbaum and he has commented, “What is clear is that we cannot use all the fossil fuels that are stored. If we were to use all the carbon rich products that currently exist in the financial market then the impact on the world would be significant. However, if these are not used and it is clearly going to have an effect on the economy.”

Similar concerns have also been raised in the United States and some institutional investors have recently commented, “It is very important we take immediate action so we can understand the long-term effects of the situation and manage their eventual and serious impact.”