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Stranded Assets Risk ‘Regional Pockets of Misery’ without Smart Transition Off Fossil Fuels

Governments will have to coordinate efforts on the road to a net-zero economy to make sure the countries that move first and fastest don’t get most of the benefits, leaving lagging governments to cope with trillions of dollars’ worth of stranded fossil fuel assets, a new report warns.

“The shift to clean energy would benefit the world economy overall, but it would need to be handled carefully to prevent regional pockets of misery and possible global instability,” reports The Guardian, citing lead author Jean-François Mercure of the University of Exeter.

Mercure’s study states that the drive to transform energy systems is changing the geopolitics that shape the energy industry. The common perception of climate action as “economically detrimental” is increasingly inaccurate, with renewable technologies, government policies, and investment flows all advancing to replace existing infrastructure, much of which will be rendered “worthless” by 2036. 

The study models several scenarios to determine possible economic outcomes. One of them shows a business-as-usual scenario—where no climate action is taken—where the value of global fossil assets rises to US$25 trillion by 2036. But if countries take action to implement net-zero policies, the value of those assets drops to $14 trillion, writes The Guardian. 

This will have varying impacts in different places, depending on whether a country continues investing in fossil fuels and how stakeholders react to fluctuating values. Regions that are remote or technically challenging—like the Canadian tar sands/oil sands and the Russian arctic—stand to lose the most, while energy importing countries will save money on overseas fuel purchases. 

The extent of stranded assets will be heavily influenced by low-cost fossil producers like Saudi Arabia and other OPEC countries, which may spark a “global fire sale” and collapse of global oil and gas markets by ramping up production to sustain revenues. Quotas could be introduced to distribute losses more fairly and maintain stability, though OPEC countries would be expected to demand hefty compensation for lost revenue in that case. But entire economies may crumble if the net-zero transition is not executed collaboratively and strategically.

“If Saudi Arabia plays one way and the U.S. another way, then we will see economic, financial, and political instability worldwide, banks going bust, and changes in capital flows. People need to think about these transition risks very seriously,” Mercure told The Guardian. He added that major banks and other institutions are becoming increasingly concerned about the potential impacts on the global financial system. 

Mercure and the other authors of the study say “a race to the bottom should be avoided at all costs,” reports The Guardian.

The study recommends a global effort to develop comprehensive plans for regional development and economic diversification away from fossil fuels. But obstacles to that plan are already materializing at COP 26 in Glasgow, with some of the nations most at risk, like Russia and Brazil, working to slow the transition while countries that could benefit try to quicken the pace.

But Mercure stresses that there needs to be closer engagement to prevent chaos. “This needs to be a story of international cooperation and not leaving people behind,” he said.