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

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A 2021 study in the journal Nature discovered that to be able to avert the worst impacts of climate change, the majority of the world’s known fossil fuel reserves must remain untapped. Based on the study, 90 percent of coal and nearly 60 percent of oil and gas should be kept in the bottom to be able to maintain a 50 percent chance that global warming won’t exceed 1.5 degrees Celsius above preindustrial levels.

Because the world transitions from greenhouse-gas-emitting activities to help keep well below 2 C (and ideally 1.5 C) in alignment with the Paris Agreement on , fossil companies and their investors face growing financial risks (referred to as transition risks), like the prospect of finding yourself with massive stranded assets. This ongoing transition will probably significantly cut back fossil fuel extraction and coal-fired power plant operations, exacting steep costsmost notably asset value losseson fossil-energy producers and shareholders.

Now, a fresh study in the journal Climate Change Economics led by researchers at the MIT Joint Program on the Science and Policy of Global Change estimates the existing global asset value of untapped fossil fuels through 2050 under four increasingly ambitious climate-policy scenarios. The least-ambitious scenario (“Paris Forever”) assumes that initial Paris Agreement greenhouse gas emissions-reduction pledges are upheld in perpetuity; probably the most stringent scenario (“Net Zero 2050”) adds coordinated international policy instruments targeted at achieving global net-zero emissions by 2050.

Powered by the MIT Joint Program’s style of the planet economy with detailed representation of the power sector and energy industry assets as time passes, the analysis finds that the global net present value of untapped fossil fuel output through 2050 in accordance with a reference “No Policy” scenario ranges from $21.5 trillion (Paris Forever) to $30.6 trillion (Net Zero 2050). The estimated global net present value of stranded assets in coal power generation through 2050 ranges from $1.3 to $2.3 trillion.

“The more stringent the , the higher the quantity of untapped fossil fuels, and therefore the bigger the potential asset value loss for fossil-fuel owners and investors,” says Henry Chen, a study scientist at the MIT Joint Program and the study’s lead author.

The global economy-wide analysis presented in the analysis offers a more fine-grained assessment of stranded assets than those performed in previous studies. Firms and finance institutions may combine the MIT analysis with information on their very own investment portfolios to assess their contact with climate-related transition risk.

More info: Yen-Heng Henry Chen et al, An economy-wide framework for assessing the stranded assets of energy production sector under climate policies, Climate Change Economics (2022). DOI: 10.1142/S2010007823500033

Citation: Stranded assets could exact steep costs on fossil energy producers and investors (2022, August 20) retrieved 21 August 2022 from

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