How finance connects fracking in Lancashire and the ratification of the Paris Agreement

Our economies must be decarbonised – but fossil fuel companies won't go down without a fight

Image: Mary Crandall

Two significant events this week show a world in a tug of war contest.

Firstly, the government overturning Lancashire county council’s rejection of a fracking site, paving the way for shale company Cuadrilla to drill in the county. Secondly, the European Parliament ratifying the Paris Agreement, committing nations to limit global temperature rise to 2°C. Two apparently contradictory events, pulling in opposite directions.

As an economist, I see how finance plays a crucial role in this contradiction and the battle we now find ourselves in.

The fossil fuel industry needs to undermine action on climate change. They are currently sitting on a very large ‘carbon bubble’, a vast overvaluation of fossil-related assets. This is because the ratification of the Paris Agreement means that 75 per cent of known fossil fuel reserves have to be kept in the ground if we are to stay within the two degree global warming limit.

Banks, pension funds and insurance companies have significant fossil-related assets on their books and McKinsey and others have estimated that 30-40 per cent of fossil fuel companies’ value could be threatened by this carbon bubble.

Even Mark Carney, governor of the Bank of England, has got in on the act, issuing warnings to the financial sector about the ‘stranded assets’ they face from a shift to a low carbon economy. No surprise then that fossil fuel companies are seeking to undermine decarbonisation and want us to keep our foot on the gas.

The fossil fuel lobby knows that the Paris Agreement is signed and sealed, but not delivered and that climate action will require huge financing. If they can put the brake on that by continuing to pump fossil fuels into the economy, they believe they can sit hard enough on the bubble to deflate it.

Decarbonising our economy is of course a huge challenge, but it is the only way we will meet the targets set in the Paris Agreement. But with decarbonisation comes great opportunity.

Humanity’s journey into the fossil fuel era was marked by the enclosure of common resources, monopoly control, and a growth in inequality. Finding ways to develop and invest in renewable resources offers a wonderful opportunity to do things differently.

Financing our decarbonisation is a chance to create not just a new green economy but also to revolutionise the way we use finance. If we fund the transition through public banking and through community ownership we can enable the value of money creation to be reinvested for the public good, and the value of renewable energy to accrue to local communities.

A large-scale public bank would allow borrowing for public investment at cheap rates with interest payments going back into the public sector, preventing leakage to private investors.

The German KfW bank already provides such a sustainable finance model. It has had a key role in financing the country’s Energiewende community energy programme, providing long-term loans at favourable interest rates to local authorities and social enterprises to invest in improving energy efficiency and expanding renewable energy.

Furthermore, in both Germany and Denmark, renewable energy capacity – especially wind power – is funded through community investment, providing a safe savings opportunity to support pensions and providing a good income stream.

It is also time to reclaim quantitative easing (QE) from the wealthy elites and to herald a new Green QE programme. This would work in a similar way to conventional QE, whereby a central bank creates new money to pump into the economy but this money would be used specifically to boost green sectors of the economy and help the transition to a low carbon economy.

Private finance will also inevitably play an important role in financing the transition so it is important that it is properly regulated and focused. London has launched a Green Finance Initiative; Luxembourg and France have followed suit. China too and Bangladesh are working on green finance.

There’s a veritable climate finance race going on with countries vying to be the first to turn their capital markets the greenest, the fastest. Investing in climate solutions instead of climate problems is becoming a trend. Small wonder the frackers are worried.

There is a growing demand for investments that contribute to weaning ourselves off fossil fuels, promote energy efficiency and invest in social objectives. We urgently need to give up on financing the fossil fuel dinosaurs of   yesteryear and base finance decisions on the needs of the climate, the environment and local communities.

That way finance can be used to achieve not only greater sustainability but also greater equity.

Molly Scott Cato is Green MEP for the South West of England 

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