During the recent COP27 of Sharm-el-Sheikh the need for finance in the energy transition was emphasized once again; we need 4 trillion dollars per year ($4.000.000.000.000) until 2030 if we are to meet the 2050 CO2-targets.
While a lot of money in the absolute sense, it is only a fraction of global GDP (4.2%), especially when you consider that doing nothing will cost between 11 and 14% in damages.
While a lack of climate finance is one issue, the continued investment in fossil fuels and related industry is another.
In addition to their climate impact, these investments are also a great threat to the financial system.
A study published in 2018 has already shown that a large share of the investments at that time were not going to yield more than their investment value.
A decade ago this notion was still up for discussion, as the value of fossil fuels and related industry was heavily subject by government policy.
In the case of fossil fuel and industry investments, the situation is a bit different (see image below). It is not the price that goes up but rather the fundamental value that goes down.
If this were to happen with the volume of capital currently circulating in the fossil fuel industry we can prepare for another financial crisis, about 2 or 3 times as large as the crisis from 2008.
Enough reason to sound the alarm, from both a climate and financial perspective.
Why does the market fail to anticipate this gloomy prospect? And what can we do to change this?
That will be the overarching theme of my research project.
The project has four distinct phases on which I’ll briefly elaborate below.
To align finance flows with the climate targets a transformation of the financial system is required.
In order to imagine such a transformation, we first need to have a clear picture of the system under transformation.
In the first phase of my research project I will be using transition sciences to describe the financial system.