Modelling the financial impact of a global low carbon transition

Research led by Dr Jean-Francois Mercure has contributed to the development of a global model which forecasts the positive and negative impact that a transition to low carbon technology and renewable energy would have on our economy.  This evidence  has informed government climate policies internationally. The model has been developed in collaboration with University of Cambridge, the Open University, SOAS, the University of Massachusetts and Cambridge Econometrics.

Over the past decade there has been increasing debate within the Bank of England and central banks across Europe concerning the possible risk to the financial sector in relation to an energy transition (a global shift from fossil fuels to renewables). There was also growing demand in policy-making for transparency and assessment of risk in order to move forward with decisions surrounding climate policy.

To address this need for evidence-based decision-making, Jean-Francois Mercure’s research models the economic and financial impact of moving away from fossil fuels to renewable energy sources, research that is beginning to shape attitudes towards future fossil fuel investment. The work also quantifies the risks posed to oil and gas companies and job losses in related industries.

He led a paper titled ‘Macroeconomic impact of stranded fossil fuel assets’ published in 2018 which quantified all the coal, oil and gas assets that are unlikely to be used if the world achieves the carbon-neutral objectives laid out in the Paris climate agreement, as well as in the current trajectory of technological change even if no new measures were taken to achieve the Paris Agreement. The research revealed that a move to clean energy and electric transport is already happening, and will result in lower demand for fossil fuels than expected, with an estimated loss of between one and 4tn$ by 2035 due to stranded fossil fuel assets.

This discovery received global media attention and was cited in major newspapers in the UK and abroad. This piece contributes to the body of evidence driving decisions within the Bank of England in relation to climate policy. Jean-Francois is invited to speak in UK government regularly to provide evidence regarding a low energy transition.

Jean-Francois has conducted further research into finding out who owns the financial risk that his 2018 report predicts. Preliminary results have revealed a large amount of the loss will be government-owned, and that certain countries will be affected more than others, while some losses will also be felt in the financial system, investment funds and banks.

Another report by Jean-Francois on a ‘new energy geography’ outlines the reorganisation of the energy sector worldwide. It projects that a shift to renewables will result in a more equal energy distribution worldwide, in contrast to fossil fuel exports which currently mainly come from a select group of countries including those in the Middle East.

The high impact of Jean-Francois’ work has resulted in securing £4.8 million of funding for the Economics of Energy Innovation and System Transition (EEIST) project. Funded by the UK’s Department for Business, Energy and Industrial Strategy (BEIS) and the Children’s Investment Fund Foundation (CIFF), EEIST will inform and assess the costs and benefits of important strategic innovation decisions in driving a sustainability transition, in the UK, EU, Brazil, China and India.

Led by Jean-Francois who will work directly with governments and the UK’s cabinet office, this three-year project involves a consortium of 16 institutions worldwide, including Cambridge, Oxford, UCL and the World Resources Institute.

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