Stranded Assets in the Transition to a Carbon-Free Economy

Abstract

Assets in the fossil fuel industries are at risk of losing market value due to unanticipated breakthroughs in renewable technology and governments stepping up climate policies in light of the Paris commitments to limit global warming to 1.5 or 2°C. Stranded assets arise due to uncertainty about the future timing of these two types of events and substantial intertemporal and intersectoral investment adjustment costs. Stranding of assets mostly affects the 20 biggest oil, gas, and coal companies who have been responsible for at least one-third of global warming since 1965, but it also affects carbon-intensive industries such as steel, aluminum, cement, plastics, and greenhouse horticulture. A disorderly transition to the carbon-free economy will lead to stranded assets and legal claims. Institutional investors should be aware of these financial risks. A broader definition of stranded assets also includes countries reliant on fossil fuel exports and workers with technology-specific skills. Expected final online publication date for the Annual Review of Resource Economics, Volume 12 is October 5, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Low‐carbon transition risks for finance

“…The cash flow of industries supplying or using fossil fuels would be impacted. If this impact is unanticipated by investors, their assets would prematurely depreciate or “strand” (Caldecott, 2018), and if the stranding is widespread enough, it could engender financial instability and crisis (Monasterolo, 2020; van der Ploeg & Rezai, 2020a).…”

“…Turning to the low‐carbon transition, we notice how, contrary to this historical perspective, most of the current debate on transition‐related financial risks focuses on the risks developing in sunset industries (carbon‐intensive ones, in this case). For instance, a widespread preoccupation concerns the financial repercussions of asset stranding, that is, the unexpected devaluation or write‐off of assets from the balance sheets of economic agents (Caldecott, 2018; van der Ploeg & Rezai, 2020a). The “focus shift” between past literature on transitions and the current debate leaves us without a well‐defined comprehensive framework to understand and address how low‐carbon transition financial risks develop in sunset sectors and interact with those in sunrise industries.…”

Chinese Overseas Investment Policy: Implications for Climate Change

“…China has been criticized by foreign countries for not giving higher priority to greening the Belt and Road, and the government may be motivated to green overseas investments if it wants to improve its global image. In addition, the Chinese government should consider the financial risks associated with continuing to invest in high‐carbon infrastructure such as coal‐fired power plants that could become stranded if recipient countries decide to decarbonize by mid‐century (van der Ploeg and Rezai 2020).…”

The role of national carbon pricing in phasing out China's coal power

“…Although an agreement on the market mechanism at the global level still remains to be reached, carbon pricing, e.g., carbon tax or carbon market, is being increasingly implemented by regional, national and subnational jurisdictions, and 61 carbon pricing initiatives are already in place or are scheduled for implementation ( World Bank, 2020 ). In this situation, carbon-intensive coal power plants will inevitably be exposed to carbon pricing risk ( Sen and Von Schickfus, 2020 ), and some may even become decommissioned before their normal end of lifetime ( Generation Foundation, 2013 ; IEA, 2013 ; World Bank, 2014 ; van der Ploeg and Rezai, 2020 ). Quantifying the carbon pricing effect on the phase out of coal power and carbon emission can provide practical implications for reshaping future energy investment strategies ( Millar et al., 2018 ) and improving policy design to accelerate energy transition and achieve net zero carbon emission in power sector.…”