1932

Abstract

Assets in the fossil fuel industries are at risk of losing market value due to unanticipated breakthroughs in renewable technology and governments stepping up climate policies in light of the Paris commitments to limit global warming to 1.5 or 2°C. Stranded assets arise due to uncertainty about the future timing of these two types of events and substantial intertemporal and intersectoral investment adjustment costs. Stranding of assets mostly affects the 20 biggest oil, gas, and coal companies who have been responsible for at least one-third of global warming since 1965, but it also affects carbon-intensive industries such as steel, aluminum, cement, plastics, and greenhouse horticulture. A disorderly transition to the carbon-free economy will lead to stranded assets and legal claims. Institutional investors should be aware of these financial risks. A broader definition of stranded assets also includes countries reliant on fossil fuel exports and workers with technology-specific skills.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-resource-110519-040938
2020-10-06
2024-12-12
Loading full text...

Full text loading...

/deliver/fulltext/resource/12/1/annurev-resource-110519-040938.html?itemId=/content/journals/10.1146/annurev-resource-110519-040938&mimeType=html&fmt=ahah

Literature Cited

  1. Aengenheyster M, Feng QY, van der Ploeg F, Dijkstra HA 2018. The point of no return for climate action: effects of climate uncertainty and risk tolerance. Earth Syst. Dyn. 9:1085–95
    [Google Scholar]
  2. Allen MR. 2016. Drivers of peak warming in a consumption-maximizing world. Nat. Clim. Change 6:684–86
    [Google Scholar]
  3. Allen MR, Frame DJ, Huntingford C, Jones CD, Lowe JA et al. 2009. Warming caused by cumulative emissions towards the trillionth tonne. Nature 458:1163–66
    [Google Scholar]
  4. Andersson M, Bolton P, Samama F 2016. Hedging climate risk. Financ. Anal. J. 72:313–32
    [Google Scholar]
  5. Arezki R, van der Ploeg F, Toscani F 2019. The shifting natural wealth of nations: the role of market orientation. J. Dev. Econ. 138:228–45
    [Google Scholar]
  6. Asheim GB, Faehn T, Nyborg K, Greaker M, Hagem C et al. 2019. The case for a supply-side climate treaty. Science 365:6451325–27
    [Google Scholar]
  7. Baldwin E, Cai Y, Kuralbayeva K 2020. To build or not to build? Capital stocks and climate policy. J. Environ. Econ. Manag. 100:102235
    [Google Scholar]
  8. Bansal R, Kiku D, Ochoa M 2016. Price of long-run temperature shifts in capital markets NBER Work. Pap 22529
    [Google Scholar]
  9. Barreto L, Kypreos S. 2004. Endogenizing R&D and market experience in the “bottom-up” energy-systems ERI model. Technovation 24:8615–29
    [Google Scholar]
  10. Barrett S. 2006. Environment and Statecraft: The Strategy of Environmental Treaty-Making Oxford, UK: Oxford Univ. Press
    [Google Scholar]
  11. Barro RJ. 2009. Rare disasters, asset prices, and welfare costs. Am. Econ. Rev. 99:243–64
    [Google Scholar]
  12. Battiston S, Mandel A, Monasterolo I, Schuetze F, Visentin G 2017. A climate stress-test of the financial system. Nat. Clim. Change 7:283–88
    [Google Scholar]
  13. Belfiori E, Iverson T. 2019. Burn coal? The supply-side case for carbon capture and storage Work. Pap., Colo. State Univ Fort Collins:
    [Google Scholar]
  14. Bertram C, Johnson N, Luderer G, Riahi K, Isaac M, Eom J 2015. Carbon lock-in through capital stock inertia associated with weak near-term climate policies. Technol. Forecast. Soc. Change 90:62–72
    [Google Scholar]
  15. Bettis OD, Dietz S, Silver NG 2017. The risk of climate ruin. Climatic Change 140:109–18
    [Google Scholar]
  16. Bovenberg AL, Heijdra BJ. 1998. Environmental tax policy and intergenerational distribution. J. Public Econ. 67:1–24
    [Google Scholar]
  17. BP. 2017. BP statistical review of world energy June 2017 Rep., BP London: https://www.calculators.io/statistical-review-of-world-energy/
    [Google Scholar]
  18. Bretschger L, Soretz S. 2018. Stranded assets: how policy uncertainty affects capital, growth, and the environment Work. Pap. 18/288, Cent Econ. Res. ETH Zurich: http://dx.doi.org/10.2139/ssrn.3157079
    [Crossref] [Google Scholar]
  19. Brock W, Xepapadeas A. 2017. Climate change policy under polar amplification. Eur. Econ. Rev. 94:263–82
    [Google Scholar]
  20. Brunnermeier MK. 2009. Deciphering the liquidity and credit crunch 2007–8. J. Econ. Perspect. 23:177–100
    [Google Scholar]
  21. Bullard N. 2014. Fossil fuel divestment: a $5 trillion challenge White Pap., Aug. 26, BloombergNEF New York: https://about.bnef.com/blog/fossil-fuel-divestment-5-trillion-challenge/
    [Google Scholar]
  22. Caldecott B. 2017. Introduction to special issue: stranded assets and the environment. J. Sustain. Finance Invest. 7:11–13
    [Google Scholar]
  23. Caldecott B, Harnett E, Cojoianu T, Kok I, Pfeiffer A 2016. Stranded Assets: A Climate Risk Challenge Washington, DC: Int.-Am. Dev. Bank
    [Google Scholar]
  24. Caldecott B, Howarth N, McSharry P 2013. Stranded assets in agriculture: protecting value from environment-related risks Rep., Smith Sch. Enterpr. Environ Univ. Oxford:
    [Google Scholar]
  25. Carattini S, Sen S. 2019. Carbon taxes and stranded assets: evidence from Washington State Work. Pap. 355 Grantham Res. Inst. Clim. Change Environ London Sch. Econ:.
    [Google Scholar]
  26. Carbon Tracker Init. 2011. Unburnable carbon: Are the financial markets carrying a carbon bubble? Rep., Carbon Tracker Init London:
    [Google Scholar]
  27. Carbon Tracker Init. 2013. Unburnable carbon 2013: Wasted capital and stranded assets Rep., Carbon Tracker Init London:
    [Google Scholar]
  28. Carbon Tracker Init. 2017. 2 Degrees of separation—transition risk for oil and gas in a low carbon world Rep., Carbon Tracker Init. London:
    [Google Scholar]
  29. Carney M. 2015. Breaking the tragedy of the horizon—climate change and financial stability Speech given at Lloyds of London Sept. 29. https://www.bis.org/review/r151009a.pdf
    [Google Scholar]
  30. Chakravorty U, Moreaux M, Tidball M 2008. Ordering the extraction of polluting nonrenewable resources. Am. Econ. Rev. 98:31128–44
    [Google Scholar]
  31. Chichilnisky G, Heal G. 1994. Who should abate carbon emissions? An international viewpoint. Econ. Lett. 44:4443–49
    [Google Scholar]
  32. Climate Counts. 2013. Assessing corporate emissions performance through the lens of climate science Rep., Dec., Climate Counts, Durham, NC. http://sustainableorganizations.org/Climate%20Counts%202013%20Carbon%20Study.pdf
    [Google Scholar]
  33. Coulomb R, Henriet F. 2018. The Grey Paradox: how fossil-fuels owners can benefit from carbon taxation. J. Environ. Econ. Manag. 87:206–23
    [Google Scholar]
  34. Coulomb R, Lecuyer O, Vogt-Schilb A 2019. Optimal transition from coal to gas and renewable power under capacity constraints and adjustment costs. Environ. Resour. Econ. 73:2557–90
    [Google Scholar]
  35. Covington H, Thornton J, Hepburn C 2016. Global warming: shareholders must vote for climate-change mitigation. Nature 530:7589156
    [Google Scholar]
  36. Criqui P, Mima S, Memanteau P, Kitous A 2015. Mitigation strategies and energy technology learning: an assessment with the POLES model. Technol. Forecast. Soc. Change 90:119–36
    [Google Scholar]
  37. Delis MD, de Greiff KD, Ongena S 2019. Being stranded with fossil fuel reserves? Climate policy risk and the pricing of bank loans Work. Pap., Univ Zurich:
    [Google Scholar]
  38. Dennig F, Budolfson MB, Fleurbaye M, Siebert A, Socolow R 2015. Inequality, climate impacts on the future poor, and carbon prices. PNAS 112:5215827–32
    [Google Scholar]
  39. Dennig F, Jaakkola N, von Below D 2019. The climate deal: an intergenerational bargain Work. Pap., Univ Bologna:
    [Google Scholar]
  40. Dietz S, Rezai A, van der Ploeg F, Venmans F 2019. Are economists getting climate dynamics right and does it matter? Work. Pap., Grantham Res. Inst. Clim. Change Environ London Sch. Econ:.
    [Google Scholar]
  41. Dietz S, Venmans F. 2019. Cumulative carbon emissions and economic policies: in search of general principles. J. Environ. Econ. Manag. 96:108–29
    [Google Scholar]
  42. ESRB (Eur. Syst. Risk Board). 2016. Too late, too sudden: transition to a low-carbon economy and systemic risk Rep. 6, Advis. Sci. Comm., Febr., ESRB, Frankfurt https://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_6_1602.pdf
    [Google Scholar]
  43. Gener. Found. 2013. Stranded Carbon Assets: Why and How Carbon Risks Should Be Incorporated in Investment Analysis London/New York: Gener. Found.
    [Google Scholar]
  44. Guivarch C, Hallegatte S. 2011. Existing infrastructure and the 2°C target. Clim. Change 109:3–4801–5
    [Google Scholar]
  45. Harstad B. 2012. Buy coal! A case for supply-side environmental policy. J. Political Econ. 120:177–115
    [Google Scholar]
  46. Helm D. 2017. Burn Out: The Endgame for Fossil Fuels New Haven, CT: Yale Univ. Press
    [Google Scholar]
  47. Jaakkola N, van der Ploeg F 2019. Non-cooperative and cooperative climate policies with anticipated breakthrough technology. J. Environ. Econ. Manag. 97:42–66
    [Google Scholar]
  48. Kalkuhl M, Steckel JC, Edenhofer O 2020. All or nothing: climate policy when assets can become stranded. J. Environ. Econ. Manag. 100:102214
    [Google Scholar]
  49. Karp L. 2017. Provision of a public good with multiple dynasties. Econ. J. 127:26412641–64
    [Google Scholar]
  50. Karp L, Rezai A. 2019. Climate policy and asset prices Work. Pap., Univ. Calif Berkeley:
    [Google Scholar]
  51. Karydas C, Xepapadeas A. 2019. Pricing climate change risks: CAPM with rare disasters and stochastic probabilities Work. Pap 19/311 ETH Zurich:
    [Google Scholar]
  52. Keynes JM. 1936. The General Theory of Employment, Interest, and Money London: Macmillan
    [Google Scholar]
  53. Koch N, Bassen A. 2013. Valuing the carbon exposure of European utilities. The role of fuel mix, permit allocation and replacement investments. Energy Econ 36:431–43
    [Google Scholar]
  54. Kotlikoff L, Kubler F, Polbin A, Sachs JD, Scheidegger S 2019. Making carbon taxation a generation win win NBER Work. Pap25760
    [Google Scholar]
  55. Lewis MC. 2014. Stranded assets, fossilised revenues ESG Sustain. Res. Rep Kepler & Cheuvreux, Paris: https://www.qualenergia.it/sites/default/files/articolo-doc/kc_strandedassets_2014.pdf
    [Google Scholar]
  56. Litterman R. 2013. The other reason for divestment. Ensia.com Nov. 5. http://ensia.com/voices/the-other-reason-for-divestment/
    [Google Scholar]
  57. Malova A, van der Ploeg F 2017. Russian oil and gas windfalls and the sustainable fiscal stance. Energy Policy 5:27–40
    [Google Scholar]
  58. Manoussi V, Xepapadeas A, Emmerling J 2018. Climate engineering under deep uncertainty. J. Econ. Dyn. Control 94:207–24
    [Google Scholar]
  59. McGlade C, Ekins B. 2015. The geographical distribution of fossil fuels unused when limiting global warming to 2°C. Nature 517:187–90
    [Google Scholar]
  60. Mechler R, Schinko T. 2016. Identifying the policy space for climate loss and damage. Science 354:6310290–92
    [Google Scholar]
  61. Meinshausen M, Meinshausen N, Hare W, Raper SC, Frieler K et al. 2009. Greenhouse-gas emission targets for limiting global warming to 2°C. Nature 458:72421158–62
    [Google Scholar]
  62. Millar RJ, Fuglestvedt JS, Friedlingstein P, Rogelj J, Grubb MJ et al. 2017. Emission budgets and pathways consistent with limiting warming to 1.5 °C. Nat. Geosci. 10:741–47
    [Google Scholar]
  63. Millar RJ, Hepburn C, Beddington J, Allen MR 2018. Principles to guide investment towards a stable climate. Nat. Climate Change 8:2–4
    [Google Scholar]
  64. Mukanjari S, Sterner T. 2018. Do markets Trump politics? Evidence from fossil market reactions to the Paris Agreement and the U.S. election. Work. Pap. 728, Dep. Econ., Univ Gothenburg:
    [Google Scholar]
  65. Nordhaus W. 2008. A Question of Balance: Weighing the Options on Global Warming Policies. New Haven, CT: Yale Univ. Press
    [Google Scholar]
  66. Oxfam. 2015. Extreme carbon inequality Media Brief., Dec. 2 Oxfam, Oxford, UK: https://www-cdn.oxfam.org/s3fs-public/file_attachments/mb-extreme-carbon-inequality-021215-en.pdf
    [Google Scholar]
  67. Parry I. 2015. The right price. Finance Dev 52:410–13
    [Google Scholar]
  68. Pfeiffer A, Millar R, Hepburn C, Beinhocker E 2016. The ‘2°C capital stock’ for electricity generation: committed cumulative carbon emissions from the electricity generation sector and the transition to a green economy. Appl. Energy 179:1395–408
    [Google Scholar]
  69. Priest T. 2014. Hubbert's Peak: the great debate over the end of oil. Hist. Stud. Nat. Sci. 44:137–79
    [Google Scholar]
  70. Rezai A, Foley DK, Taylor LL 2012. Global warming and economic externalities. Econ. Theory 49:329–51
    [Google Scholar]
  71. Rezai A, van der Ploeg F 2017. Second-best renewable subsidies to de-carbonize the economy: commitment and the Green Paradox. Environ. Resour. Econ. 66:3409–34
    [Google Scholar]
  72. Rogelj J, Popp A, Calvin KV, Luderer G, Emmerling J et al. 2018. Scenarios towards limiting global mean temperature increase below 1.5°C. Nat. Clim. Change 8:325–32
    [Google Scholar]
  73. Rozenberg J, Vogt-Schilb A, Hallegatte S 2020. Instrument choice and stranded assets in the transition to clean capital. J. Environ. Econ. Manag. 100:102183
    [Google Scholar]
  74. Sinn H-W. 2008. Public policies against global warming: a supply side approach. Int. Tax Public Finance 15:4360–94
    [Google Scholar]
  75. Stern N. 2007. The Economics of Climate Change: The Stern Review Cambridge, UK: Cambridge Univ. Press
    [Google Scholar]
  76. Stolbova V, Monasterola I, Battiston S 2018. A financial macro-network approach to climate policy evaluation. Ecol. Econ. 149:239–53
    [Google Scholar]
  77. van der Ploeg F. 2016a. Fossil fuel producers under threat. Oxf. Rev. Econ. Policy 32:2206–22
    [Google Scholar]
  78. van der Ploeg F. 2016b. Second-best carbon taxation in the global economy: the Green Paradox and carbon leakage revisited. J. Environ. Econ. Manag. 78:85–105
    [Google Scholar]
  79. van der Ploeg F. 2018. The safe carbon budget. Clim. Change 147:47–59
    [Google Scholar]
  80. van der Ploeg F, Rezai A 2020. The risk of policy tipping and stranded carbon assets. J. Environ. Econ. Manag. 100:102258
    [Google Scholar]
  81. Wenar L. 2015. Blood Oil Oxford, UK: Oxford Univ. Press
    [Google Scholar]
  82. Witkowski W. 2015. Global stock market cap has doubled since QE's start. MarketWatch Feb. 12. https://www.marketwatch.com/story/global-stock-market-cap-has-doubled-since-qes-start-2015-02-12
    [Google Scholar]
  83. Young P. 2015. The evolution of social norms. Annu. Rev. Econ. 7:359–87
    [Google Scholar]
/content/journals/10.1146/annurev-resource-110519-040938
Loading
/content/journals/10.1146/annurev-resource-110519-040938
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error