PRESENTATION
Kjell Kühne is a tireless advocate for fossil fuel phase out. In 2011, he founded the Leave it in the Ground Initiative (LINGO), dedicated to keeping fossil fuels in the ground and fostering a transition to sustainable living. Kjell's impact extends to academia, where his paper “Carbon Bombs”-Mapping key fossil fuel projects” in the Energy Policy Journal (2022) identified and listed the 425 biggest fossil fuel extraction projects globally (defined as >1 gigaton potential CO2 emissions). With a focus on climate action and intercultural education, Kjell embodies proactive citizenship and innovative solutions for a better world.
In February 2024, we Dr Matthias Kroll, Chief Economist at the World Future Council, he jointly authored a pivotal contribution titled ' Climate Bailout”: a new tool for central banks to limit the financial risk resulting from climate change' which was published in the academic journal International Environmental. This paper advocates for a novel "climate bailout" tool aimed at addressing the risk posed by stranded fossil fuel assets, proposing that central banks purchase these assets from industry actors in exchange for commitments to invest in renewable energy projects. This approach not only aligns with central banks' mandates of financial stability but also offers a solution to mitigate fossil fuel price shock-induced inflation, benefiting economies globally.
I- USD 100 BILLION PLEDGES CHALLENGING
Climate change introduces new challenges to the financial sector, including commitments, such as the USD 100 billion annually for climate finance promised in 2009 that proved very challenging to gather. Despite the urgent need for substantial investments, particularly in renewable energy, viable projects remain scarce, especially in developing countries. Central banks, renowned for their swift crisis response, are proposed as vital in mobilizing resources for a rapid energy sector transition, aligning with their mandate for financial stability amidst climate-related risks.
LEAVIT: Why should we consider exploring alternative funding to support the battle against climate change ?
Kjell Kühne:
The journey of climate finance from the promise in 2009 in Copenhagen which was sort of a substitute for a proper deal on climate to the early 2020s when finally 100 billion were raised
shows that it's not easy to get that money together and yet the 100 billion are vastly insufficient for addressing the need for climate finance both for loss in damage and adaptation and for financing the transition.
So because it's so utterly inadequate in scale we really need new sources of finance and because we need to scale it up greatly one of the natural thoughts is to turn to the most powerful actors in the economy in terms of resource generation which are central banks
and they think in magnitudes that are adequate to the scale of the problem so they should become part of the solution.
II-THE UPCOMING STRANDED ASSET CRISIS
The Carbon Tracker Initiative has been warning about the risks of "stranded assets" for over a decade, referring to fossil fuel resources and infrastructure that may become uneconomical due to the transition away from fossil fuels. The potential amount of stranded assets could significantly threaten financial stability, with different methodologies estimating the financial impact ranging from over USD 1 trillion to as high as USD 44 trillion for all fossil fuel reserves. Additionally, there's a growing concern about "stranded liabilities," such as asset retirement obligations, which can become significant burdens, especially in the event of bankruptcies in the coal and oil industries. Addressing these issues becomes crucial with estimates of climate damages reaching USD 69.6 trillion. Central banks, given their unique economic capabilities and independence, could potentially play a pivotal role in mitigating these risks and facilitating the transition to renewable energy.
LEAVIT: Are the 'stranded assets' argument and transition risks the most compelling factors that could persuade fossil fuel stakeholders to phase out?
Kjell Kühne :
Well, there are different fossil fuels stakeholders, there are of course the companies that extract and sell fossil fuels and they will keep going until they can no longer and then there
are investors who are not necessarily very interested in fossil fuels as such but they
turn to fossil fuels when they can generate profits.
That is still the situation that is why we are still seeing a lot of investments in fossil
fuels in the midst of the climate emergency and that is something that we as a society
have to reorganize because the damages, the externalities associated with fossil fuel burning
are so huge that they are just much, much bigger than any profits generated from fossil fuel
extraction and sale and use.
So the task as a society as I said is to reorganize that in a way that it is not beneficial and
profitable to burn down the house and such reorganization of the rules of the game face very strong resistance from vested interests who are very well versed in the political game and in the framing game of public opinion and the media and so on so they know how to defend their interests and maintain the status quo.
The status quo is suicidal but the fossil fuel interests know how to defend their stakes
in this game and that is what they have been doing and that is why we need a very strong
mechanism that can remove that resistance by status quo vested money interests against
a fast transition and the climate bailout is just such a mechanism because it would
turn investors in fossil fuels into investors and renewables and they would switch sides
so to say in pushing for a faster energy transition.
III- THE CLIMATE BAILOUT PROPOSAL
The climate bailout offers fossil fuel companies a way out of their outdated business model by allowing them to sell their stranded assets while committing to invest in renewable energy (RE) projects. The process involves designated financial institutions, like multilateral development banks (MDBs), purchasing stranded assets and bundling them into "Climate Bailout Bonds" (CBBs) to be resold to central banks. Central banks absorb Climate Bailout Bonds (CBBs) onto their balance sheets, providing financial stability and potential returns if fossil resources are repurposed for non-energy uses.
LEAVIT: What are the primary challenges facing the Climate Bailout Proposal, and how do you plan to advocate for its adoption?
Kjell Kühne
I would say the first challenge has already been overcome and that is the reluctance of central banks to look at climate change as their business and that was a stance defended a couple of years ago by central banks saying this is not for us to solve this is the government's business and climate changes not for us to deal with.
I would also say that this has already been overcome and increasingly a central banks are looking at the reality that there is no economy on a burning planet and there is no financial system on a on a dead planet and you really need to consider these issues as a central bank as well and the network for greening the financial system has been very important in
that regard and developing that narrative and you know technically exploring how central banks can deal with it now in terms of the and that prepares the ground so to say for proposals like the climate bailout.
In terms of challenges for the climate bailout in that context in that new context I would say the biggest challenge is to get central banks to accept taking on potentially stranded assets that will likely lose value in the future at the certain cost the proposal is to take it on at a discount to a market price and even reduce that over time but still the drop in the value of those fossil fuel assets might be even bigger in the future so this will be something on the
balance sheet of central banks that loses value over time and that is something that central banks do not particularly like. It's technically not a problem if public trust in the central bank is stable.
At the moment we have already a situation where central banks are being criticized and so when that trust is undermined and this could be an additional argument against central banks and destabilize them in their function and that is indeed dangerous and worry some for central banks so that is why so far they shy away from something like the climate bailout that would involve taking on a huge amount of assets that will foreseeable lose value.
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