The Bank of England is conducting an investigation into the risk of an economic crash if fossil fuel companies were prevented from using their coal, oil and gas assets because of climate change considerations.

On the same day that a new round of global climate change negotiations begins in Lima, Peru, the U.K. Central bank told its Parliament of its plan to investigate the “carbon bubble.”

Last year, Bank of England governor Mark Carney warned that fossil fuel companies cannot burn all of their reserves if the world is to avoid catastrophic climate change.

If the world comes to a binding agreement a year from now in Paris to limit global warming to 2C by cutting carbon emissions, many fossil fuel companies will be left with assets they cannot use, so-called “stranded assets.”

Concern over economic collapse

The Bank of England has been concerned about the economic impact of this scenario, and will be working with Britain’s financial policy committee to study whether a carbon bubble will lead to economic collapse.

“In light of these discussions, we will be deepening and widening our enquiry into the topic,” Carney said in a letter to the U.K. Environmental Audit Committee.

Among the concerns raised by the central bank is the impact of proven oil, gas and coal reserves considered unburnable because they would push the world past the 2C goal for carbon emissions.  It also will study the insurance risk and costs of global warming.

Major financial firms such as Citibank, HSBC and Moody’s have also begun to study the impact of a carbon bubble and stranded assets. Thinktank Carbon Tracker helps financial companies and fossil fuel companies get the risk in hand.

“Fossil fuel companies should be disclosing how many carbon emissions are locked up in their reserves,” Carbon Tracker CEO Anthoy Hobley said. “At the moment there is no consistency in reporting so it’s difficult for investors to make informed decisions.”

Exxon, Shell say assets not stranded

ExxonMobil agreed earlier this year to publish a “Carbon Asset Risk” report describing how it assesses its financial risks from climate change, but its report downplayed the risk of a carbon bubble saying it doesn’t believe its assets will be stranded. Shell also has denied it is a carbon risk.

In today’s environment of falling oil prices, many companies are already hesitating to invest in new oil and gas projects, especially if they are unconventional developments which can be more expensive.

And any progress toward a climate change agreement in 2015 could also discourage investment.

Pledges from the world’s top carbon polluters — China, the U.S. and the European Union — to limit their emissions in the next 10-15 years promise some progress ahead of the Paris talks in 2015.

“This sends an important signal for the rest of the world to come forward as early as possible with their own contributions,” EU negotiator Elina Bardram said Sunday in Lima. “We have 12 months and the clock is ticking.”

The previous emissions treaty, the 1997 Kyoto Protocol, covered only industrialized countries, but emissions today are rising mainly in the developing world and there is  pressure on countries to strike agreements ahead of time so the pact is truly global.

Lima climate change talks

A key issue in Lima will be to define what information countries should provide when they present their formal pledges early next year, so that they can be compared against each other.

The overall goal of the talks is to keep global warming below 2 degrees C (3.6 F) compared to pre-industrial times. But some scientists say that goal is becoming unrealistic. Global average temperatures have already gone up about 0.8 C (1.3 F), and carbon emissions continue to rise every year.