The UK Climate Change Committee (CCC) has reported on its recommended targets for the UK to reduce its greenhouse gas emissions to net zero by 2050. We applaud their recognition that the right technologies exist to meet these targets – and that costs can be manageable – though further policy support is required. These targets, should they be met, would help put the UK at the forefront of national decarbonisation. The UK currently emits approximately 1% of global CO2.
But aren’t we ignoring the elephant in the room? It’s hiding in plain sight. The UK is a service-based economy with a world scale financial market in the City of London. The City remains one of the largest global centres for financing fossil fuel – it plays host to, amongst others, BP, Shell, Glencore, Anglo American, Russian oil and gas companies such as Gazprom and Rosneft. The world’s largest energy company, Saudi Aramco, has just raised $US12bn via UK debt markets. Indeed, the City has entwined its prospects with that of fossil fuels – BP & Shell distribute large dividends, mainly derived from non-UK activities, to UK investors and separately, the UK has been competing with Wall Street, Hong Kong and Singapore, in bidding for Aramco’s full IPO. Depending on how it’s measured, the City’s hosting of these companies means that it currently supports, at minimum, somewhere in the order of 15% of potential global CO2 emissions.
The City of London’s global impact is not acknowledged meaningfully in UK carbon budgets nor decarbonisation targets. Yes, there might be some recognition of the daily transportation of City bankers and fund managers, alongside the energy for heating their offices and their photocopying of documents, but this is very small beer. This is not to accuse CCC of false accounting; they can only consider matters they understand to be within the scope of the UK Climate Change Act and as set out by the Secretary of State. The focus tends to be on the geographical location of the end-user’s CO2 emissions. IPCC analysis and other nations’ carbon budgets may be calculated on a similar basis – the Paris Climate Agreement is built around nationally determined budgets and decarbonisation commitments.
The UK and City issue illustrates, though, there is a big loophole in any understanding of climate risk; and one that unintentionally prevents direct and adequate climate scrutiny of global fossil fuel companies’ ongoing hydrocarbon projects and their respective financing arrangements. This lack of accountability in turn creates a barrier to global decarbonisation and the energy transition. Climate risks and externalities may not be appropriately priced, nor attributed. There remains a large excess of fossil fuel reserves over what is burnable within climate-safe limits. To unwind these phenomena, drawing out a more effective framework of costings of fossil fuel activity is required. As an important step, alongside existing carbon budget calculations, there needs to be an associated approach to measuring and understanding the carbon and climate consequences of the international financing of fossil fuels.
The UK should be well placed to broker enhanced international thinking in this regard. Acting in this manner would cement the UK’s reputation in pursuing international climate leadership and reduce the risk that it is decarbonising at home whilst financing carbon activities abroad.
Author: Senior Advisor Mike Knight