Stranded Assets in the Transition to a Carbon-Free Economy

• Published in: Annual review of resource economics Vol. 12; no. 1; pp. 281 - 298
• Main Authors: van der Ploeg, Frederick, Rezai, Armon
• Format: Journal Article
• Language: English
• Published: Palo Alto Annual Reviews 06.10.2020; Annual Reviews, Inc
• Subjects: Alternative energy sources; Assets; Carbon; decarbonization; Environmental policy; Fossil fuels; Global warming; JEL E62; JEL F41; JEL G11; JEL O33; JEL Q33; JEL Q34; JEL Q35; JEL Q40; JEL Q54; policy tipping; stranded assets; Stranded investment; technology
• ISSN: 1941-1340; 1941-1359
• DOI: 10.1146/annurev-resource-110519-040938

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.