HomeEarthStranded assets could exact steep costs on fossil energy producers and investors

Stranded assets could exact steep costs on fossil energy producers and investors

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According to a 2021 study published in the journal Nature, in order to avoid the worst effects of climate change, the majority of the world’s known fossil fuel reserves must remain untapped. According to the study, 90 percent of coal and nearly 60 percent of oil and natural gas must be kept in the ground to ensure that global warming does not exceed 1.5 degrees Celsius above preindustrial levels.

As the world moves away from greenhouse-gas-emitting activities in order to keep global warming well below 2 degrees Celsius (and ideally 1.5 degrees Celsius) in accordance with the Paris Agreement on climate change, fossil fuel companies and their investors face growing financial risks (known as transition risks), including the possibility of massive stranded assets. This ongoing transition is likely to significantly reduce fossil fuel extraction and coal-fired power plant operations, exacting steep costs on fossil-energy producers and shareholders, most notably asset value losses.

A new study published in the journal Climate Change Economics by researchers at the MIT Joint Program on the Science and Policy of Global Change estimates the current global asset value of untapped fossil fuels through 2050 under four increasingly aggressive climate-policy scenarios. The least ambitious scenario (“Paris Forever”) assumes that the initial Paris Agreement pledges to reduce greenhouse gas emissions are kept in perpetuity; the most stringent scenario (“Net Zero 2050”) adds coordinated international policy instruments aimed at achieving global net-zero emissions by 2050.

The study, which is based on the MIT Joint Program’s global economy model with detailed representation of the energy sector and energy industry assets over time, finds that the global net present value of untapped fossil fuel output through 2050 relative to a reference “No Policy” scenario ranges from $21.5 trillion (Paris Forever) to $30.6 trillion (Net Zero 2050). The global net present value of stranded assets in coal power generation is estimated to be between $1.3 and $2.3 trillion through 2050.

“The more stringent the climate policy, the greater the volume of untapped fossil fuels, and thus the greater the potential asset value loss for fossil-fuel owners and investors,” says Henry Chen, the study’s lead author and a research scientist at MIT Joint Program.

The study’s global economy-wide analysis provides a more fine-grained assessment of stranded assets than previous studies did. Firms and financial institutions can use the MIT analysis in conjunction with information from their own investment portfolios to determine their exposure to climate-related transition risk.

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