Oil, gas and coal reserves - as well as the infrastructure and investments underpinning fossil fuels - may “lose economic viability” before the end of their expected operational lifetimes, according to a report published on Thursday.
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Alastair Marsh
The transition to a low-carbon economy has the potential to leave assets worth $2.3 trillion (R42trl) stranded by the end of the next decade, according to a new analysis.
Oil, gas and coal reserves - as well as the infrastructure and investments underpinning fossil fuels - may “lose economic viability” before the end of their expected operational lifetimes, according to a report published on Thursday by the UK Sustainable Investment and Finance Association together with Transition Risk Exeter. UKSIF and TREX cite climate policies, technological changes and shifting market conditions as likely causes of the slump in value.
Though vast, those losses are considerably smaller than the economic destruction that would follow if the world abandons its efforts to slash greenhouse gas emissions, the report also said.
The energy transition will result in “a mounting risk of value erosion for fossil fuel assets,” according to UKSIF and TREX.
“Too many oil and gas companies are betting on demand that won’t materialize in a decarbonizing world, and the public are at risk of paying the bill,” said James Alexander, the CEO of UKSIF. “The surest way to offset the risk of losses posed by stranded assets is to invest in industries that will thrive as fossil fuels decline.”
The report’s authors singled out Britain as a country that’s “disproportionately exposed” to stranded fossil fuel assets. UK fund managers’ financial losses as a result of stranding may reach $150.5 billion by 2040. And $19bn - equivalent to roughly 17% of UK retirement savings invested in fossil fuels - are at risk of being stranded by 2040, the report said.
“There will be value destruction for some companies if policies change and consumer demand pushes them to transform,” said Lucie Pinson, the founder of climate nonprofit Reclaim Finance. “But the extent to which that happens is going to depend on the amount of climate action we are willing to take today and if we are really committed to the goals we’ve set.”
The UK is the fourth most exposed country to stranded asset risk for what UKSIF and TREX call “ultimate owners.” The US, Russia and China make up the top three.
To be sure, such assumptions are based on current green transition policies, mid-term action plans to cut emissions and long-term net zero targets. And for now, many jurisdictions are backsliding on their climate ambitions. Delays in cutting emissions will likely come at a cost, said Phil Holden, a senior lecturer in Earth Systems Science at the Open University.
“Oil and gas exploration may appear attractive in the short run,” he said. “But the longer extraction remains misaligned with the global decarbonisation trajectory, the more dramatic the economic realignment needed.”
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