Mitigating Climate Change- Rethinking Fossil Fuels and Stranded Assets

The Intergovernmental Panel on Climate Change released the AR6 Climate Change 2022: Mitigation of Climate Change on 4 April 2022, which assesses the GHG emissions trajectory and the pathways to limit warming to meet the Paris Agreement of below 2°C.

The most important takeaway from this report, prepared by over 250 authors, is that we must reduce our reliance on fossil fuels by scaling up renewables, which are becoming more affordable and available yearly for emissions to decline rapidly.

Although emissions have been sluggish, current policies and operating existing fossil fuel assets will make warming exceed the 1.5°C target. The report recommends phasing out fossil fuel infrastructure and replacing them with renewable sources.

One of the major concerns that people have, especially in developed countries like the United States and European countries, is that ambitious climate actions would have a financial impact on the general public, as it would leave billions of dollars in stranded assets, leading to an economic downturn that will affect the value of their retirement funds or longterm savings.

Studies have shown that the stranding of fossil fuel assets will translate to major investor losses, particularly in OECD countries. They have identified 43,439 global oil and gas production assets valued at US$1.4 trillion.

Stranding these assets before the end of their anticipated economic lifetime will result in future lost profits, and most risks fall on private investors, mainly from OECD countries, exposing their pension funds and financial markets that have invested in them.

A study published in the journal Joule finds that the loss of fossil fuel assets from over 40,000 oil and gas stranded assets will have a minimal impact on the general population. In high-income countries, two-thirds of the financial losses will be borne by the most affluent 10%, of whom the loss accounts for a tiny percentage – less than 2% of their wealth. and because the wealthiest tend to have a diverse investment portfolio, any losses could still make up less than 1% of their net wealth.

Of the estimated $350 billion in stranded assets in the United States, only 3.5% of financial losses will hit the poorest half of the population and one-third of the bottom 90%. The remaining two-thirds split roughly equally between the top 1% of wealth holders and the next 9%. In Europe, overall losses are estimated at around $200 billion, and when they repeated this analysis, it showed the same results.

For the poorest half of the population, the study finds losses ranging from 0.05% to 1% in continental European countries and 4%–5% of total net wealth in the US. However, the bottom half has a significantly low net wealth, to begin with, and losses incurred from their pension contribution exposed to asset stranding, estimated at $9 billion in Europe and $12 billion in the United States, can be easily compensated by the government through carbon emissions tax.

A modest tax on the wealthiest individuals (2% on the net wealth of individuals owning over $100m and 3% on persons owning over $1bn) could also raise enough money to pay for the losses of the bottom half of the population, in about two years in the US and less than three years in Europe, the study notes.

“There’s this idea that it’s the general populace that should be opposed to climate policy that creates stranded assets because their pensions are at risk or their retirement savings or just their savings,” said the co-author Gregor Semieniuk, an economics professor at the University of Massachusetts Amherst.

“It’s not untrue that some wealth is at risk, but in affluent countries, it’s not a reason for government inaction because it would be so cheap for governments to compensate that,” he added.