A frequently cited argument against climate action is the potential adverse effect on individuals’ retirement funds and long-term savings stemming from fossil fuel divestment. Yet, a recent study from the University of Massachusetts Amherst reveals that the impact of losing fossil fuel assets would be of limited significance for the wider population.
The research highlights that in developed nations with higher incomes, the burden of financial losses would predominantly fall upon the wealthiest individuals, for whom such losses represent only a small fraction of their overall wealth. Conversely, individuals with lower incomes would face minimal financial repercussions, which could be feasibly addressed through government compensation measures.
Winners and losers
“There’s this big question of who’s winning and who is losing from the transition and from climate change in general,” the researchers explain. “Even though our results are simple, they were not present in research or public debates before. This work is one step forward in understanding the winners and losers from the point of view of the assets that might be at risk in this transition.”
According to their findings, approximately two-thirds of the financial setbacks arising from the forfeiture of fossil fuel assets in the United States would impact the wealthiest 10% of individuals, with half of that proportion affecting the top 1%.
As the top 1% typically possess a diversified investment portfolio, any losses incurred from fossil fuel assets would represent less than 1% of their total net wealth. Remarkably similar outcomes emerged when the researchers replicated their analysis for the United Kingdom and continental European nations.
“Investing in a stranded asset is like buying a rotten apple,” the authors continue. “In this case, the apple is rotten because of climate change. Who owns these rotten apples? We find that the richest 10% of the population owns the vast majority of these assets.”
Financial repurcussions
In contrast, the lower-income segment of the American population would bear 3.5% of the financial repercussions, affecting the poorest half of the country. Due to their relatively lower overall net wealth (assets minus liabilities), the loss of assets represents a more substantial proportion for this demographic. However, researchers project that these losses could be effectively offset by government compensation totaling $9 billion in Europe and $12 billion in the United States.
The researchers outline three potential avenues for governments to generate this sum. One approach involves the implementation of a carbon emissions tax, thereby harnessing revenue from environmentally harmful activities.
Furthermore, governments could renegotiate their existing liabilities with energy companies, utilizing the resulting savings toward compensation measures. Lastly, a modest tax levied on the most affluent individuals could generate sufficient funds to address the losses incurred by the aforementioned groups.
“There’s this idea that it’s the general populace that should be opposed to climate policy that creates stranded assets because their pensions are at risk or their retirement savings or just their savings,” the authors conclude. “It’s not untrue that some wealth is at risk, but in affluent countries, it’s not a reason for government inaction because it would be so cheap for governments to compensate that.”
