Potential pension fund losses should not deter high-income countries from bold climate action

Gregor Semieniuk, Lucas Chancel, Eulalie Saïsset, Philip B. Holden, Jean-François Mercure and Neil R. Edwards

Joule, First Published (in press), 22 June
doi: 10.1016/j.joule.2023.05.023

This article written by Lucas Chancel (with Gregor Semieniuk, Eulalie Saïsset, Philip B. Holden, Jean-François Mercure and Neil R. Edwards) in Joule (a scientific journal on renewable energy issues), discusses the impact of an ambitious climate policy involving the closure of fossil fuel production sites.

Beyond the decision to embark on a rapid energy transition, there is the question of the direct and induced cost of this measure. What would be the impact, on what type of population, and should governments provide compensation?

Stopping economic activities and devaluing profitable assets can have major financial and social repercussions, and not just for the owners of these industries. There will be an impact on jobs in the sector, but also on pension funds, which rely on the strength of the financial markets to guarantee pension payments.

The authors specify that they are studying the ownership of financial capital and its distribution in wealthy countries, with the question of the loss of labor income and other macroeconomic impacts to be analyzed in future work.

The modeling made possible by the use of international databases (national accounts, tax data, wealth, etc.) allows the authors to propose a range of scenarios, all of which point to the feasibility of the transition at a relatively modest cost to public finances.

The authors highlight the very high concentration of financial assets in general, and in this sector in particular, held by the richest. Thus, in the United States, out of the $350 billion of assets concerned, only 3.5% are held by the bottom half of the population, and one-third by 90% of the population, while the remaining two-thirds are evenly distributed among the richest 10%. Furthermore, these stranded assets represent only a small proportion of the assets owned by these actors. The worst-case scenario estimates potential losses at around 2% of total wealth.

The impact is greater as a proportion of wealth for low-income households, and varies depending on the country. Several savings- and retirement systems exist, and are sometimes highly exposed to financial market fluctuations.

The authors propose a number of scenarios to assess the compensation, more or less targeted, that governments could offer. They conclude that the effort would be sustainable for public budgets.

Compensating the 50% least well-off households for devalued assets would cost Europe $9 billion, compared with the $15 billion cost of bailing out the German electricity company UNIPER. Compensating all the losses suffered by the bottom 90% would cost between 0.1% and 1.2% of national income, and between 0.02% and 0.3% of the national wealth of the countries taken into account in this study.

The authors propose several means of financing the government compensation, including a tax on carbon emissions.

Finally, the authors argue that a modest progressive wealth tax applied to the wealthiest 0.005% of the population would offset all of the losses induced by fossil assets in just 2 to 3 years. Governments in high-income countries could thus take bold climate action despite strong lobbying from actors involved in the production and distribution of fossil fuels.

Link to the Paper (ScienceDirect) and additional materials
Link to figures and data code