Whack-A-Mole

How patchy global carbon markets channel fossil fuel finance

The introduction of a carbon tax, or the launch of an emissions trading scheme (ETS) has a powerful impact on lending to fossil fuel companies, according to recent research.

The introduction of a carbon price tends to result in financial institutions reallocating funds away from domestically domiciled fossil fuel producers, and towards oil, gas and coal companies located elsewhere.

The research findings have important implications for policymakers. In the absence of a global push towards a uniform carbon price, banks may seek to circumvent domestic carbon prices by channelling capital to those jurisdictions where environmental stringency is low, or scrutiny of companies active in fossil fuels is non-existent.

The analysis could also be important to investors in fossil fuel companies and the underlying energy commodities. Understanding which country will introduce a carbon tax or ETS next means that investors can factor in the likelihood of lower funding available to fossil fuel companies domiciled in that jurisdiction.

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