Studies say 50% of fossil fuel assets will be worthless by 2036 – is this a good thing?

What’s happening? Half the world’s fossil fuel assets could be worthless by 2036 as the world moves towards net-zero emissions, according to research from the University of Exeter. The report said producing more oil and gas than required could leave $11tn-$14tn in stranded assets. Countries that fail to adopt cleaner energy will suffer, but those that do will benefit, the report found. It warned that a 2008-style financial crisis was the worst outcome and oil-dependent cities could face the same fate as Detroit after the decline of the US car industry unless the adoption of clean energy is carefully managed. (The Guardian) 

Why does this matter? Despite the International Energy Agency (IEA) warning that to achieve net zero by 2050 there must be no additional fossil fuel investment, billions continue to flow towards fossil fuels. Market Forces analysis has found that leading UK banks provided £8.7bn ($11.7bn) to fossil fuels in H1 2021 and research has also estimated that UK pension funds have £128bn invested in fossil fuels. With 50% of fossil fuel assets potentially becoming worthless by 2036, continued fossil fuel investment could cause a significant crisis.  

Some to be hit harder than others – The report estimates that if no climate action is taken, global fossil-fuel assets will be valued at $23tn by 2036. Under a net-zero pathway, however, such assets will be valued at $14tn by the same date.  

While the world economy is estimated to grow by 3.9% over this time as countries shift to cleaner energy, some nations with heavy exposure to oil and gas will be hit harder than others. Russia, for instance, will see its fossil-fuel assets fall from $3.8tn under a business-as-usual scenario to about $2tn under a net-zero scenario, while its GDP is also expected to fall by 0.8%.  

The risk of stranded assets – A fall in the value of fossil fuel assets can have many consequential effects. A Carbon Tracker report from February this year estimated that decarbonisation and green energy plans could wipe a cumulative $13tn off government revenues in the world’s most oil and gas-reliant countries by 2040. Ratings agency Fitch has also warned that stranded assets could cause a drop in sovereign credit ratings.  

Risk can be reflected in climate action – The nations most at risk from stranded assets could have an incentive to slow the energy transition – something that may be reflected recent participation in COP26. Russia, Japan and China, for instance, did not join the US, the UK and 20 other countries in pledging to stop overseas fossil fuel funding and Russian leadership was absent from the climate conference. China and Russia also did not join 90 other countries in pledging to cut methane emissions. 

Surging cost of capital – The cost of capital for long-cycle oil projects is currently 20% whereas for renewables it is between 3% to 5%, according to Goldman Sachs. The increase can likely be attributed to rising ESG concerns among investors who wish to avoid carbon-intensive investments while avoiding the risk of stranded assets.  

The report initiates action – The research warned how ongoing investment in fossil fuels could cause a 2008-style financial crisis as the demand investors expect to see in the future doesn’t materialise. The warning has initiated action – campaigners, for example, have called on the Shropshire County Pension Fund to divest the $2bn it invests in petrol firms such as BP and Shell. 

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