A higher cost of capital for fossil-fuel assets

“Changes to the cost of capital reflect changes in real and perceived risks by lenders and investors,” says study co-author Ben Caldecott, a professor who directs the UK Centre for Greening Finance & Investment at Oxford University. “We believe it is energy transition risks, including climate-related risks, that are a big driver of these changes in financing costs,” while renewables are benefiting from greater familiarity and experience.

For now, oil and gas have emerged relatively unscathed, seeing only moderate increases in lending costs. Caldecott theorizes this is because of coal’s rapid displacement by natural gas, along with a divestment trend among institutions, activist campaigns against coal, and the industry’s vulnerability to any future carbon pricing or regulation. “We don’t see anywhere near the same coherence or stringency of policy packages targeting oil and gas production or gas-fired power generation as we do with coal,” Caldecott notes.

That may change, though. At least one-fifth of the world’s 2,000 largest public companies have already committed to achieving net-zero emissions, according to the nonprofit Energy and Climate Intelligence Unit. Europe, China, and the US have all announced (with various degrees of certainty) targets to eliminate their net emissions within the next three decades. A push to phase out carbon emissions any faster will force banks to charge oil and gas far more to take their money.

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