If climate policies follow strategy set out in Paris and ratchet up over time fossil fuel companies could be putting trillions of dollars at risk
Most observers of the energy and climate sector are well-versed in the stranded asset theory by now. First promoted by analyst non-profit Carbon Tracker in 2011, it posits that oil, gas and coal projects could quickly prove uneconomic if the low-carbon transition gathers enough speed to curb much of the market demand for fossil fuels in the coming decades. As such, continued investment in fossil fuel extraction and industries risks creating a 'carbon bubble'.
Such 'stranded assets' are a major concern, not just for the companies themselves but their shareholders too. Investors are taking the threat seriously, demanding more information than ever before on energy giants' vulnerability to climate risk, while finance chiefs are examining how resilient the financial system itself would be to a sudden and severe climate-related market shocks.
Carbon Tracker has focused much of its stranded assets research in recent years on quantifying exactly how much capital is at risk for energy giants under different demand scenarios. Today it releases new research that assesses the capital energy giants risk by assuming climate policies will continue on their current pathway, rather than get more ambitious over time.
It concludes that more than $1.6tr in capital is at risk of going to waste if energy firms plan future projects in line with current climate policies already announced by governments, instead of preparing for a scenario where governments act further to avoid dangerous global warming, as anticipated under the Paris Agreement.
Under current climate policies pledged by governments in the run up to the 2015 Paris climate conference, the world is on track to curb emissions at a rate that is expected to result in around 2.7C of warming above pre-industrial levels by 2100. But the Paris Agreement saw nations commit to limiting warming to "well below" 2C, and the structure of the treaty allows for nations to ratchet up their national commitments to meet this goal over the coming years. A major climate summit is planned for next year in New York, where UN chief António Guterres intends to encourage nations to do exactly that in the hope of prompting a surge of fresh climate ambition before 2020.
So while Andrew Grant, author of the report and senior analyst at Carbon Tracker, concedes that currently getting onto a below 2C trajectory presents a "very significant challenge" for the global economy, it is important for both the energy companies and their stakeholders to understand what it might involve - and how much such an uptick in policy ambition could realistically cost them in wasted investments.
"I do think for individual companies those that are more conservatively managed or are willing to manage their businesses as if heading for a lower [fossil fuel] demand scenario… are likely to be those that are more resilient and generate the highest returns," he tells BusinessGreen.
To crunch the numbers, Carbon Tracker compared demand for fossil fuels under a 1.75C scenario with demand in a 2.7C world, looking at oil, gas and coal production through to 2035 and capital investment through to 2025. It found oil faces the biggest threat, with $1.3tr of future spending at risk under the lower temperature scenario. High cost projects are most vulnerable, with new oil sands rendered uneconomic and only a handful of new Arctic and heavy oil investment able to go ahead.
Meanwhile, $228bn of future investment in gas is also at risk if policies are ratcheted up, with half of potential future spending on gas development under threat of becoming uneconomic and no need for new LNG capacity for at least 10 years.
Finally coal faces a $62bn capital risk, including $41bn of investment in China and $10bn in the US. No new coal mines will be viable anywhere in the world other than in India, the repot argues.
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