The “net-zero transition” plan to curb climate change may be good for the Earth, but it could have quite a dramatic effect on the global economy.
New research released over the weekend showed that half of the world’s fossil fuel assets could become worthless by 2036 if the world’s countries could pull off a “net-zero transition”. It also warned that an $11 trillion fossil-fuel asset crash could cause a 2008-style financial crisis, but concluded that new opportunities in the renewable space would moot this.
In essence it advised investors to rid themselves of fossil fuels as fast as they could, and to reinvest in clean energy. The research would resonate with South African policymakers, who were weighing up investments in coal-fired plants.
The research from the influential Nature Energies publication predicted a trillion-dollar divestment in fossil-fuel assets. This could trigger a new financial crisis as the stranded assets – infrastructure, property and investments where the value has fallen so steeply they must be written off – piled up due to the divestment.
The new study, titled Reframing incentives for climate policy action, came as the UN climate talks in Glasgow entered their second week, with divestment from fossil fuels a burning issue. The first week of the talks delivered pledges of fossil fuel divestment in order to align with a net-zero target by 2050. Last week, for example, a group of countries that included the US, Canada, Italy and the UK committed to stop the public financing of overseas fossil-fuel projects.
If the world was to meet its target of keeping global warming under 1.5℃, the most ambitious goal in the 2015 Paris Agreement, it meant slashing global emissions by almost half by 2030 and to “net zero” by 2050.
The study warned that investments in fossil fuel companies had become high-risk, even in a seemingly stable oil market. Despite the risk of a crash due to fossil fuel divestment, it concluded that climate policy did not detrimentally influence economic growth.
It stated that countries that were slow to decarbonise would suffer, but early movers would profit from the move away from the carbon economy. Renewables and freed-up investment could more than make up for the losses to the global economy, it said.
In the past, green investment policies were seen as costly to countries who implemented them. But the different scenarios in the study revealed that it was wrong to frame these investments in climate-friendly investments as poor strategic planning.
“Free-riding” nations that did nothing were in for a rude awakening, the report said. Uncompetitive fossil-fuel producers, rather than benefiting from their free ride, would suffer huge risks that their assets would become stranded.
Instead, the new climate policy incentives configurations showed that fossil fuel importers were better off decarbonising, and competitive fossil fuel exporters were better off flooding markets now to rid themselves of uncompetitive assets.
Economic analysts said the weighty report showed that investing in fossil fuels had become a high-risk venture. Fossil fuel companies that refused to diversify were at an even higher risk.
The risk of stranded assets is a real one, and more than one of the scenarios sketched in the Nature Energies article warned it would lead to inevitable losses. Investors were gambling if they put their money in producing far more oil and gas than was required for future demand.
The study’s lead author, Jean-Francois Mercure of the University of Exeter, believed the shift to clean energy would benefit the world economy overall. But to avert the crash, it would need to be handled carefully to ensure a just transition and possible global instability.
“In a worst-case scenario, people will keep investing in fossil fuels until suddenly the demand they expected does not materialise and they realise that what they own is worthless. Then we could see a financial crisis on the scale of 2008,” he told The Guardian.
He warned that oil capitals such as Houston could suffer the same fate as Detroit after the decline of the US car industry unless the transition was carefully managed.
This is not the first warning to investors that still risk investing in fossil fuels. In 2015 Mark Carney, then governor of the Bank of England, warned that “stranded assets” from fossil fuel divestment might pose a threat to the financial system.
The more the world invested in foresight, the less would be regretted in hindsight, he said at the time.
Ratings agency Moody’s found that financial firms across the world’s largest economies had $22 trillion of loans and investments that would be affected by the transition away from carbon.
Bloomberg wrote in an editorial that the shocks of divestment would reverberate far beyond finance, but that it remained unclear if and how companies were planning for this.
Bloomberg said the climate transition would impose costs on producer countries – many of them low- or middle-income – because they would be unable to bear the cost of stranded assets or the loss in future revenues if they cut their output.
South Africa, with its coal-dependent economy, was a case in point, and would need climate finance to be able to mothball its coal power plants and move to renewables. The country’s power plants were a typical example of stranded assets, literally worthless and univestable under the net-zero scenario. They’ll need support from advanced economies in the form of subsidies to keep resources on the ground.
Last week’s watershed multibillion-dollar climate finance deal announcement would definitely assist, and could provide a model for other countries.