Full Title: Moving to a Low-Carbon Economy: The Impact of Policy Pathways on Fossil Fuel Asset Values
Author(s): David Nelson, Morgan Hervé-Mignucci, Andrew Goggins, Sarah Jo Szambelan, Thomas Vladeck, and Julia Zuckerman
Publisher(s): Climate Policy Initiative
Publication Date: 10/2014
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Some observers worry that a switch away from fossil fuels will not only have a significant cost to the global economy, but could also absorb the investment capacity of the financial system and even undermine the financial system if investors were burdened with worthless fossil fuel investments.
In this paper, we examine the question of stranded assets: What impact would a low-carbon transition have on the value of investor portfolios when: Some fossil fuel assets become valueless as they are no longer needed and are left unexploited as demand falls? Other assets that continue to produce lose value as a result of price declines resulting from lower demand?
Most importantly, we examine how the decline in value would be spread between governments and investors and among various countries, and how both the level of stranded assets and their distribution depends on policy. For this analysis, we have built regional and global economic models for each of the fossil fuel industries — coal, oil, natural gas, and power — as a tool to assess stranding risks for various assets and their owners and investors.