About half of the world’s fossil fuel assets will be worthless by 2036 as part of a net zero transition, research shows.
Countries that are slow to decarbonize will suffer, but the former will benefit; the study reveals that the renewable energies and the investments released will largely compensate for the losses suffered by the world economy.
It highlights the risk of producing far more oil and gas than necessary for future demand, which is expected to leave between $ 11 billion and $ 14 billion (£ 8.1 billion to £ 10.3 billion) in so-called stranded assets – infrastructure, real estate and investments where the value has fallen so much that they must be written off.
Lead author Jean-François Mercure from the University of Exeter said the switch to clean energy would benefit the global economy as a whole, but should be handled with care to avoid pockets regional misery and possible global instability.
“In the worst-case scenario, people will continue to invest in fossil fuels until suddenly the demand they expected does not materialize and they realize that what they have is worthless. Then we could see a financial crisis of the magnitude of 2008, ”he said, warning that oil capitals such as Houston could suffer the same fate as Detroit after the decline of the US auto industry unless that the transition is carefully managed.
The challenge is evident at the ongoing Cop26 climate conference, where some of the countries most at risk of ending up with stranded assets – such as oil and gas exporters Russia and Brazil – are likely to try to slow down the transition like they did. in previous climate meetings, while those most likely to win – like the fuel-importing EU – are pushing for faster action.
The new article, published in Nature Energy, illustrates how a drop in demand for oil and gas before 2036 will reshape the geopolitical landscape. Current investment flows and government commitments to achieve net zero emissions by 2050 will make renewables more efficient, cheaper and stable, while fossil fuels will be affected by greater price volatility. Many carbon assets, such as oil or coal reserves, will not be burnt, while machines will also be stuck and no longer produce value for their owners.
The most vulnerable assets are those in remote areas or technically difficult environments. The most exposed are the Canadian oil sands, the American shale and the Russian Arctic, followed by deep sea wells in Brazil and elsewhere. Oil from the North Sea is also relatively expensive to extract and is likely to be hit when demand drops.
In contrast, current oil, gas and coal importers such as the EU, Japan, India and South Korea will reap large economic dividends from the transition, as they will be able to use the money. that they save on fuel purchases abroad to invest in their own countries, including money for renewables that will modernize infrastructure, create jobs and improve energy independence.
The situation for the world’s two biggest emitters – the United States and China – is more complex as they have more diverse economies with both significant fossil fuel assets and powerful renewable sectors. The UK is in a similar situation, but as a net energy importer it should benefit overall.
It all depends on the speed and spread of decarbonization, as well as the tactics used by fossil fuel exporters to sell their assets before they lose value. To assess the impacts, the study explored several different scenarios.
The model predicts significant economic benefits for most importers of fossil fuels. According to the researchers, the GDP of most European countries would increase in either of the net scenarios, with gains exceeding lost fossil fuel income.
Benefits vary by country. The UK, for example, would potentially add $ 700 billion to the value of its GDP in a net zero scenario, despite losing nearly half of its fossil fuel assets, worth $ 120 billion. dollars, by 2036. In contrast, the GDP of Norway, which is more dependent on oil exports, could drop 9% unless it diversifies rapidly.
The United States could also face a global blow of $ 3.5 billion and Canada of $ 920 billion over the next 15 years if it does not reduce its economic dependence on fossil fuels. The projected losses in these two North American countries are independent of national climate policies, as they mainly stem from a drop in demand for petroleum products once major markets such as the EU and China have shifted to net zero.
The extent of the stranding of assets will depend in part on low-cost producers, such as Saudi Arabia and the rest of the OPEC group of oil-producing states. If they ramp up production and start a massive sell-off, the prices of other exporters could be scaled back, leading to a sudden collapse. In this scenario, $ 11 billion in global fossil fuel assets would be stranded.
However, if oil producers agreed to a quota system, the effects could be more evenly distributed and weaker overall, even if they ultimately hit $ 11 billion in stranded assets, according to the reports. projections. For a country like Canada, that could mean a 5% drop in GDP from the status quo, compared to 7% in the fire sale scenario – a difference of around $ 400 billion.
OPEC countries are likely to demand heavy compensation for lost income if they accept quotas. Saudi Arabia, for example, would only earn $ 1.3 billion in a quota scenario, compared to $ 1.7 billion for a fire sale.
The study’s authors say a race to the bottom should be avoided at all costs.
“If Saudi Arabia plays one way and the United States another, then we will see economic, financial and political instability around the world, banks fail and changes in capital flows. People need to think very seriously about these transition risks, ”Mercury said, adding that major institutions, including the Bank of England and the Bank of France, were increasingly concerned about the potential dangers to the financial system.
To avoid chaos, he said, oil exporters should diversify their economies as quickly as possible before change is forced on them when importers switch to renewables. Even more important, he said, was a closer engagement between the two sides so that the overall economic benefits of the transition could be shared. “It must be a story of international cooperation and not leaving people behind. “