Responding to calls for more dramatic action on greenhouse gas emissions will hit credit quality in certain sectors, says Moody’s Investors Service.
On April 4, the latest report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) warned that sharp reductions in GHG emissions in the next few years are needed to limit global warming to 1.5 C from pre-industrial levels.
Specifically, it said GHG emissions must drop by over 40%, and that methane emissions must be reduced by 33%, by 2030.
In a new report, the rating agency said it expects the warning to accelerate policy-makers’ efforts to curb global warming over the next few years, starting with the lowest cost options.
“These include the deployment of wind and solar power, electric vehicles, energy efficiency in aviation and shipping, and energy efficiency at homes; they also include changes in consumer behaviour including shifts to more sustainable means of land transportation and reduced household energy demand, among others,” the report said.
“These demand-side changes will lead to a significant reduction in fossil fuel use — particularly coal,” it said.
Low-cost options for reducing methane emissions include limiting so-called fugitive emissions (leaks and flaring) in the oil and gas production process, Moody’s also noted.
Beyond the low-hanging fruit, climate policies will have to undertake harder, more expensive efforts to reduce emissions from certain industrial sectors and agriculture, the report said.
“Realizing the required emissions reductions in these industries will not only require a massive deployment of capital, it also requires the scale up of technologies that are not yet commercially viable — such as hydrogen, biofuels and carbon capture and storage (CCS),” it said.
And if these efforts succeed, they will also have widespread negative credit implications, Moody’s noted.
“Accelerated climate action would have credit-negative effects on carbon-intensive industries and sovereigns in the short term,” the rating agency said in its report.
For instance, existing fossil fuel assets, including infrastructure and untapped reserves, “are at high risk of becoming stranded,” it suggested.
Additionally, factories without CCS capabilities, new fleets of airplanes, and vehicles that rely on internal combustion engines could also become stranded, it said — adding that this “will have significant credit implications for a broad swathe of the industrial economy.”
Yet, at the same time, ignoring the call for climate action carries its own set of negative credit risks, the report said, warning that future warming “will raise physical risks from climate change in the form of extreme weather, which has its own negative credit implications.”
The IPCC report argued that, while steeper emissions cuts will come at a cost in the short term, “successful action will lead to reduced overall costs for the global economy in the longer term — and reduce the many risks tied to global warming,” Moody’s noted.