Capital stranding cascades: The impact of decarbonisation on productive asset utilisation

Abstract

This article develops a novel methodological framework to investigate the exposure of economic systems to the risk of physical capital stranding. Combining Input-Output (IO) and network theory, we define measures to identify both the sectors likely to trigger relevant capital stranding cascades and those most exposed to capital stranding risk. We show how, in a sample of ten European countries, mining is among the sectors with the highest external asset stranding multipliers. The sectors most affected by capital stranding triggered by decarbonisation include electricity and gas; coke and refined petroleum products; basic metals; and transportation. From these sectors, stranding would frequently cascade down to chemicals; metal products; motor vehicles water and waste services; wholesale and retail trade; and public administration. Finally, we provide an estimate for the lower-bound amount of assets at risk of transition-related stranding, which is in the range of 0.6-8.2% of the overall productive capital stock for our sample of countries, mainly concentrated in the electricity and gas sector, manufacturing, and mining. These results confirm the systemic relevance of transition-related risks on European societies.

Quantifying the regional stranded asset risks from new coal plants under 1.5 °C

“…Yet simply not building coal plants in the January 2021 pipeline could free up two to three times this amount of capital. To better understand the full financial implications of the energy transition, future research could compare investment gaps and avoided stranded assets over time and for other fossil-based infrastructure, especially outside the electricity sector [14,20] and at scales relevant for local planning and policy [23]. Achieving climate goals will require a substantial mobilization of climate finance and stronger commitments from countries with greater ability and historical responsibility to address the climate crisis.…”

“…Stranded assets are assets that experience a premature or unanticipated decline in value due to changing external factors [17,18]. They not only pose economic risks to project owners but also, if they occur at a large scale, may cause significant damages to the broader financial system and macroeconomy [19][20][21]. These risks only increase with delayed climate action [19] and specifically with continued expansion of fossil fuel infrastructure [22].…”

The Double Materiality of Climate Physical and Transition Risks in the Euro Area

“…carbon tax) and regulations are implemented late with regard to the climate targets and cannot be fully anticipated by investors. In this context, high-carbon firms are expected to experience higher costs and lower revenues, giving rise to "carbon stranded assets" (Leaton, 2011;Ploeg and Rezai, 2020;Cahen-Fourot et al, 2021). Carbon stranded assets, in turn, can lead to large adjustments in asset prices, with potential implications on economic and financial stability (Gros et al, 2016;Battiston et al, 2017;Stolbova et al, 2018).…”

The Role of Green Financial Sector Initiatives in the Low-Carbon Transition: A Theory of Change

“…15 Insufficient supervisory guidance may have negative implications for assessing and managing financial risks, due to the large exposure of investors to high-carbon activities (e.g., fossil fuels, energy-intensive activities). These activities could become carbon stranded assets (Leaton 2011, McGlade and Ekins 2015, van der Ploeg and Rezai 2020, Cahen-Fourot et al 2021, Welsby et al 2021) in a disorderly transition to a low-carbon economy, with implications for financial stability, both at the level of individual financial institutions and of the financial system (Battiston et al 2017).…”