Stranded assets and reduced profits: Analyzing the economic underpinnings of the fossil fuel industry's resistance to climate stabilization

T.A Hansen

doi:10.1016/j.rser.2022.112144

Abstract

Governments have failed to act at the scale and pace necessary to avert the climate crisis. This paper explores one key constraint on global action to combat climate change: resistance mounted by the fossil fuel industry. The economic losses that the fossil fuel industry is likely to incur as a result of climate stabilization include stranded assets and reduced profits. Using a methodology that emulates the expectations and valuation procedures used by fossil fuel firms, I estimate the magnitude and distribution of wealth losses from stranded assets for the upstream fossil fuel industry (i.e., firms and governments involved in fossil fuel extraction) under 1.8 °C and 1.5 °C climate stabilization scenarios. I also explore the timing of expected future profit losses and compare historical profit margins between fossil fuel and renewable energy firms. Results show that fossil fuel reserves will suffer a devaluation of 37%–50%, amounting to $13-$17 trillion. This implies a strong incentive for fossil fuel producers to continue resisting climate stabilization. Over half (51%–63%) of the reserve devaluation stems not from fuels left in the ground but from price decreases for fuels that will still be extracted and sold during climate stabilization, indicating that even low-cost producers stand to bear large losses. Three-quarters of stranded assets belong to governments, implying formidable political obstacles in nations with nationalized fossil fuel ownership. The profitability analysis reinforces these findings. My results point to strategic demand reduction of fossil fuels as a key strategy for overcoming industry resistance.

Highlights

Governments have far failed to deliver on the Paris Agreement, which commits them to limit the rise in global average temperature to “well-below 2 ◦C′′ above preindustrial levels while striving for 1.5 ◦C [1, 2]
This paper explores one key constraint on global action to combat climate change: resistance mounted by the fossil fuel industry
Using a methodology that emulates the expectations and valuation procedures used by fossil fuel firms, I estimate the magnitude and distribution of wealth losses from stranded assets for the upstream fossil fuel industry under 1.8 ◦C and 1.5 ◦C climate stabilization scenarios

Summary

Introduction

Governments have far failed to deliver on the Paris Agreement, which commits them to limit the rise in global average temperature to “well-below 2 ◦C′′ above preindustrial levels while striving for 1.5 ◦C [1, 2] One reason for this failure is the resistance mounted by the fossil fuel industry, including climate change disinformation campaigns [3,4], anti-climate political lobbying [5], fossil fuel promotional activities [6], and a general refusal to invest substantially in low-carbon technologies [7].,12 The industry’s motivations are economic [8,9,10,11,12]. None of these studies estimate wealth or income in the way fossil fuel firms do, and due to variation in methods and data, the estimates cover an enormous range: $3-$185 trillion [13,14,15,16,17,18]

Methods

Results

Conclusion