The Carbon Ask: effects of climate policy on the value of fossil fuel resources and the implications for technological innovation

Abstract

Strong policies to address climate change will almost certainly require that large quantities of oil, natural gas, and coal remain underground. Because these resources have economic value, action to reduce carbon emissions means that fossil fuel owners and producers, and other entities in the fossil fuel supply chain, will experience a reduction in wealth. They will be on the receiving end of what we call the BCarbon Ask.^We compile disparate data sources, make some simplifying assumptions, and approximate the value of the Carbon Ask for the world as a whole. We find that the value of the world's fossil fuel enterprise in a business-as-usual case, unconstrained by climate policy, is about $295 trillion. In a world with a strong climate policy, the value of these resources drops to about $110 trillion, a decrease of $185 trillion, or 63 %. The Carbon Ask is equivalent to 2.4 years of global GDP. After reviewing the literature on resistance to technological innovation during the past two centuries and examining legal challenges to recent US greenhouse gas regulations, we find it unsurprising that the Carbon Ask creates powerful incentives for many stakeholders-who may be firms, workers, consumers, and governments-to resist policies to speed the development and diffusion of new, more environmentally benign technologies. We also find few precedents for policy-driven, rather than market-driven, technological transformations with a scale and scope similar to decarbonization of the global economy. Keywords Carbon Ask. Stranded asset. Decarbonization. Carbon budget. Emissions budget. Fossil fuel reserves. Fossil fuel resources 1 Additional information on global fossil fuel quantities is contained in a Technical Appendix. We would like to thank Irene Kim for her work as a research assistant. In addition, valuable comments were provided by Gerald Brock, Nancy Augustine, and two anonymous reviewers.

Which Dimension of Corporate Social Responsibility is a Value Driver in the Oil and Gas Industry?

“…Energy companies therefore have strong financial reasons to oppose efforts to leave their valuable assets in the ground (Heede, 2014). Linquiti and Cogswell (2016) mention that such resistance stems not only from losing massive wealth value but also facing the high costs in technology transformation. In addition, a lack of skilled human resources, the poor commitment of O&G staff, a failure to integrate CSR projects in a company's strategic plans, and the inability to involve the beneficiaries of CSR are some of the other challenges that O&G companies experience (Frynas, 2005).…”

Equitable, effective, and feasible approaches for a prospective fossil fuel transition

“…5 And Spain as of very recently (Ioualalen, 2021) 6 The EU ETS is the only globally functioning trading scheme to date. 7 This is not surprising given that the fossil fuel phase-out may cost as much as $200 trillion (Linquiti & Cogswell, 2016).…”

“…7 7 This is not surprising given that the fossil fuel phase‐out may cost as much as $200 trillion (Linquiti & Cogswell, 2016). …”

Conflicting commitments? Examining pension funds, fossil fuel assets and climate policy in the organisation for economic co-operation and development (OECD)

“…As such, more aggressive and immediate action is needed by public and private actors alike to fetter fossil fuel markets and address the climate emergency by Leaving Fossil Fuels Underground (LFFU). LFFU implies a gargantuan loss of revenue, potentially ranging from €10.7 ($12) trillion [11] to €165 ($185) trillion [12] depending on the computational technique. Stranding these fossil resources leaves their accompanying assets stranded by e.g.…”

“…We have not yet computed illiquid assets managed in related real estate and infrastructurethough this is also likely to be substantial. Assuming that fossil fuel resources and infrastructure are globally phased out by 2050, these assets could abruptly devalueperhaps by as much as €165 ($185) trillion on a global scale [12] as the carbon bubble bursts [14]. It would be in the best interest of a pension fund to divest before this devaluation to ensure that their own pensioners are not directly impacted.…”