About half of the world’s fossil fuel assets will be worthless by 2036 under a net-zero transition. This could mean a fossil fuel asset crash in the amount of $11 trillion.
Countries that are slow to decarbonize will suffer, reports The Guardian, but early movers will profit; according to a new study that finds that renewables and freed-up investment will more than make up for the losses to the global economy.
The new study, Reframing incentives for climate policy action, was published on Thursday, November 4, 2021, in the journal, Nature Energy.
The study highlights the risk of producing far more oil and gas than required for future demand, which is estimated to leave $11 – $14 trillion in so-called stranded assets – infrastructure, property, and investments where the value has fallen so steeply they must be written off.
Lead author, Jean-Francois Mercure of the University of Exeter, said the shift to clean energy would benefit the world economy overall, however, this shift must be handled carefully to avoid “regional pockets of misery and possible global instability.”
“In a worst-case scenario, people will keep investing in fossil fuels until suddenly the demand they expected does not materialize and they realize that what they own is worthless. Then we could see a financial crisis on the scale of 2008,” he said, reports the Free Press Journal.
The study notes that as already seen at COP26, there will be challenges to reaching net-zero, particularly with the oil and gas exporters, Russia and Brazil.
They will likely try to slow down the transition as they have done at previous climate meetings, while those most likely to gain – such as the fuel-importing EU – are pushing for faster action.
The study also illustrates how a drop in demand for oil and gas before 2036 will reshape the geopolitical landscape. Looking at current investments and government commitments, reaching net-zero emissions by 2050 will make renewable energy more efficient, cheaper, and stable, while fossil fuels will be hit by more price volatility.
That price volatility will likely include carbon assets, such as oil or coal reserves, basically left unburned, as well as the machinery stranded, and no longer able to produce value to its owners.
Mentioned in this context are the Canadian oil-sands, U.S. shale, and the Russian Arctic, as well as the deep offshore wells in Brazil and elsewhere. North Sea oil is also relatively expensive to extract and likely to be hit when demand falls.
Conversely, current oil, gas, and coal importers like the EU, Japan, India, and South Korea, will end up with hefty economic dividends from the transition because they will be able to use the money they save on overseas fuel purchases to invest in their own countries – using the money for renewables, modernizing infrastructure, creating jobs and improving energy independence.
As for the world’s two largest greenhouse gas emitters, the U.S., and China – it may be a bit more complicated, owing to their diverse economies with both fossil fuel assets and big renewable sectors.
Bottom line? There is evidence confirming that the transformation of energy systems is well underway, so it would be economically detrimental to continue investing in fossil fuels.
