Investors and Stranded Asset Risk: Evidence from Shareholder Responses to Carbon Capture and Sequestration (CCS) Events

Abstract

As evidence for climate change mounts, the case gets stronger for not developing a large portion of existing fossil fuel reserves, particularly for coal as the highest emitter of CO2 per unit of energy produced. To avoid catastrophic climate change effects, reserves may become unburnable (i.e. “stranded assets”) posing significant risk to fossil fuel investors. Technology in the past has come to the rescue, so investor valuations may depend on investor perceptions for the success of technology in reducing stranded asset risk. We examine whether coal company shareholders perceive coal as such a technologically stranded asset by studying shareholder reactions to news about CCS (carbon capture and sequestration) technology breakthroughs and setbacks. We find a significant positive stock price reaction to CCS breakthroughs, but no reaction for CCS setbacks. The results suggest that investors have embedded stranded asset risk into their valuations, but also recognize the significance of CCS technology development and deployment for the economic prospects of the coal industry.