Bold Climate Fixes Won't Affect Middle-Class Retirement Plans
The oil and gas industries recently experienced a highly profitable year, resulting in record payouts to shareholders. In response, companies like Europe's Shell and BP have scaled back their ambitious low-carbon transition plans, while the sector as a whole has increased investments in new production.
This shift in focus is concerning for climate change, given that the burning of fossil fuels is a major driver of global warming. There is growing worry that these investments may lead the industry and its political allies to resist efforts to avoid "stranded assets" losses, effectively locking in higher production of climate-altering fuels for many years.
The potential impact extends beyond companies to their shareholders, who may form a broad coalition against green energy initiatives, particularly in the United States and the United Kingdom. In these countries, most pensions are invested in capital markets, where oil and gas companies continue to be among the most reliable sources of dividends and share buybacks. Such opposition from influential stakeholders could deter governments from implementing ambitious climate mitigation policies, fearing financial losses for a significant portion of their constituents.
However, recent analysis suggests that high-income governments need not be overly concerned about triggering these financial losses. This is because the burden of stranded fossil fuel assets, such as lower production volumes or sales at lower prices than expected, is likely to fall primarily on the wealthy members of these countries, rather than the broader population.
The key reason for this distribution is that these nations exhibit significant wealth inequality in terms of company ownership. As a result, the majority of stocks and bonds are owned by the wealthy, a pattern that does not significantly differ within the oil and gas sector.
Governments should remain attentive to the potential impact of carbon prices and climate policies on consumers of fossil fuels, such as car owners. However, when it comes to financial investments, compensating the bottom 50 percent and even 90 percent of wealth owners for potential losses would come at a minimal cost compared to other mitigation measures.
Even if oil and gas companies' market values were adjusted lower due to climate policies, our analysis indicates that only a small percentage of these losses would affect the portfolios of the bottom 50 percent of shareholders. For the top 1 percent and top 10 percent, who possess substantial wealth, these losses would be inconsequential, amounting to less than half a percent of their net wealth.
The primary concern stems from the limited wealth of the lower 50 percent and 90 percent. Compensating this segment could be achieved with a fraction of the annual revenue generated by a moderate carbon dioxide emissions price or revenue from emissions trading systems in the U.S. and Europe, respectively.
Some may argue that wealthier investors will exit their fossil fuel investments before their value declines, transferring more losses onto the less affluent. However, our analysis suggests that even if the poor were more likely to own such shares, compensation costs would remain relatively low.
There are indeed several challenges to transitioning away from fossil fuels, including pricing, employment, and community significance in regions heavily reliant on fossil fuel production. While governments must address these concerns carefully, financial losses for investors are not a primary obstacle. Moreover, we argue that even if they were, compensation for socially relevant losses would be relatively inexpensive.
Warnings about pension losses and resistance to measures causing asset stranding are largely driven by the interests of the very wealthy, who have a much greater capacity to absorb losses compared to the general population. In contrast, the consequences of unmitigated climate change will disproportionately affect the poor and vulnerable.
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