The Bank of England is conducting an investigation into the risk of fossil fuel companies causing a major economic crash if future climate change rules make their assets worthless.
The concern around the so-called “carbon bubble” is that if governments across the globe meet their target of limiting global warming to 2°C by cutting emissions, fossil fuel firms won’t be able to burn their oil, gas and coal reserves.
The losses in their value could lead to an economic crisis.
In a letter to the Environmental Audit Committee, Mark Carney, Governor of the Bank of England said bank officials have discussed the idea of “stranded” assets if global temperature increase is limited, leaving the majority of proven fossil fuel reserves “unburnable”.
“In light on these discussions, we will be deepening and widening our inquiry into the topic and I expect the Financial Policy Committee to also consider this issue as part of its regular horizon scanning work on financial stability risks”, he added.
The Bank expects to send its first draft report to the Department for Environment, Food & Rural Affairs (Defra) by July 2015.