According to the findings of several major rating agencies, the risk to credit posed by the effects of global warming is significant — but may even still be underestimated. Reports issued by both Moody's Investors Service and Standard & Poor have sought to predict and address the impact of climate change on economic credit ratings of several major countries, but a report by the Center for International Environmental Law (CIEL), an advocacy group in Washington, D.C., is claiming that the risks are not being calculated accurately and could lead to to a global crisis akin to the housing collapse.
Overestimating the Value of Fossil Fuel
"The value of fossil fuel investments in our current dynamic climate change trajectory could deteriorate dramatically just as sub-prime assets became worthless during the credit crisis," said Muriel Moody Korol, senior attorney at CIEL and author of the report. The CIEL report emphasizes that, even while warning of the environmental dangers posed by continuing the use of fossil fuels, the agencies are weighting their value higher than needed when calculating the cost of switching to cleaner energy sources.
"As rating agencies inadequately rated assets then," continued Korol, "they are likely overestimating the value of fossil fuel assets now."
Smaller and Poorer Nations Vulnerable
The agencies, for their part, have insisted that their calculations are sound. They point to severe consequences possible for countries like Bermuda, whose national debt could increase nearly 6 percent overnight by climate change alone.
"We have published, and continue to publish, extensive research on the implications of environmental and climate-related risks for businesses that we rate, and we include environmental, social and governance risks in our methodology for rating companies around the world," said S&P spokesperson John Piecuch. Poorer and smaller nations are described to be particularly vulnerable to the effects of climate change on their GDP.
Two Key Missing Risks
CIEL warns that there are two key factors not being taken into account in current calculations and methodologies:
- "event risk", which is the direct damage caused by climate change, and
- "assets stranding", referring to the possibility that fossil fuels won't be extracted and will be left in the ground.
"Assuming that prices for fossil fuels are going to rise, there's going to come a point — if the industry declines — where you're going to have to reevaluate those assets," said Niranjali Amerasinghe, director of the climate and energy program at CIEL. "This could lead to a potential crash."
As climate change science is still in its infancy, it may be difficult to accurately assess the full impact of environmental factors on global economics. But there is a growing consensus that more attention needs to be paid so as to divert a potential catastrophe.