Losses from fossil fuel stranded assets ‘could reach $30.6tn’
MIT research shows the estimated asset loss for investors under four net-zero scenarios depending on the global climate policy adopted.
A new study has estimated that the global net present value (NPV) of stranded assets in fossil fuels could be $30.6tn under a scenario where net zero is achieved by 2050.
A stranded asset is a fossil fuel resource that cannot be burned, or infrastructure, such as power plants, that ceases to be used before the end of its anticipated economic lifetime.
The study was led by researchers at the MIT Joint Program on the Science and Policy of Global Change. It estimated the current global asset value of untapped fossil fuels through to 2050 under four climate policy scenarios, ranging from the least to the most ambitious, that are then compared to a “no policy” reference point.
The four scenarios, in order of ambition, are: Paris Forever, Global Action Post Paris, Deep Cuts Post 2070 and Net Zero 2050.
The overall study found that, unsurprisingly, the more rigorous the climate policy, the higher the asset loss for investors. Under the most stringent scenario (Net Zero 2050), the global untapped fossil fuel output is estimated to be $30.6trn. In comparison, under the least-ambitious scenario (Paris Forever), the figure is said to be $21.5trn.
Henry Chen, MIT Joint Program research scientist and the study’s lead author, noted that these estimates would be much lower if other climate policies were used as a reference point.
“If Paris Forever with all the nationally determined contributions considered is taken as a reference scenario, the additional stranded assets to achieve Net Zero 2050 would be much lower – $9.1trn,” he told Net Zero Investor.
The research also found that the fossil fuel sector most vulnerable to climate policies was coal, with an estimated global NPV of stranded assets of $2.3trn under the Net Zero 2050 scenario. This is due to the volume of coal plant capacity that will be unutilized.
The study added: “The stranded value of coal under Global Action Post Paris is already 98% of that under Net Zero 2050, while for gas and oil, the numbers are 69% and 89%, respectively.”
It also demonstrated that China has the most risk of having stranded assets in coal power generation compared to other countries, with NPV losses ranging from $270bn to $642bn in the Paris Forever and Global Action Post Paris scenarios, respectively.
Chen also noted that Middle East countries are most at risk of having stranded assets when there are serious climate policies globally, as they currently rely heavily on fossil fuel exports.
He added that Paris Forever would be the most likely outcome at the moment out of the four climate scenario’s studied, which is also the main scenario for MIT’s Global Change Outlook.
“Recently we’ve seen some net-zero goals announced by countries such as the US, EU, and China.
“However, achieving a carbon-neutral world around the middle of the century would require the public support for serious and sustainable climate policies and a global concerted effort, which are not easy since in most countries there are often other policy goals with higher priorities,” Chen said.
Commenting on the study, Gireesh Shrimali, head of transition finance research at the Oxford Sustainable Finance Group, told Net Zero Investor that the methodology and findings of the paper “appear reasonable”.
However, he also highlighted the use of the no-policy scenario as the baseline, and suggested that the numbers would be smaller if current policies or nationally determined contributions were considered as the baseline instead.
“The best way to mitigate the stranded asset risk is to create a transition plan that aligns the future investments to low-carbon mitigation pathways, such as net-zero 2050,” Shrimali said.
An example, he said, is the UK Transition Plan Taskforce, which was launched by the UK Treasury to develop a gold standard for climate transition plans.
Chen added: “How big the number of stranded assets is also depends on people’s expectation for the future and their investment strategies today – less investment on fossil fuel intensive industries today would reduce the stranded assets in the future when more aggressive climate policies are in place.”