The industrial revolution was powered first by coal, then, from the mid-19th century, oil and gas. Whole communities grew up around mining, drilling, and refining fossil fuels. Canals and roads were adapted to the task, train networks and pipelines were constructed to get energy to where it was needed. But now, as the transition from fossil fuels continues apace, the infrastructure for extracting and transporting coal, oil, and gas are growing obsolete, and risk becoming “stranded assets”, or assets that have depreciated in value as the market around them has changed.
For instance, with much of the world phasing out coal to meet the goals of the 2015 Paris Agreement, coal-fired power stations are being retired between 10 and 30 years earlier than expected when they were first built. That means decades less income for the companies operating them.
“At some level, who cares if a few capitalists don’t make a profit,” said Gregor Semieniuk, an assistant research professor at the Political Economy Research Institute at the University of Massachusetts Amherst. But financial losses incurred by stranded assets create a problem for the green transition of the economy: “What if the financial losses were so large, that there are such big interest groups behind these that they could derail progress? What if the big oil companies push back? What if the utilities push back?”
Semieniuk and his colleagues have tried to answer this question. How would countries’ commitment to the Paris Agreement affect the financial profitability of oil and gas infrastructure?
The researchers used data on current oil and gas reserves, their costs of production, and prices to calculate the expected losses if the world keeps to its climate commitments. His team estimated that stranded assets could be the source of up to $1trn in losses for investors globally – and much of this will be incurred in the UK. Countries with large financial markets are more at risk, he explains, with investors, including big pension funds, potentially heavily exposed to losses should fossil fuel assets become stranded.
“It’s not easy to transition the capital stock [the amount of shares a company is authorised to issue] in an economy from one system to another,” he said. Investments in oil and gas are expected to make good financial returns. Once they have been made, they create capital stock. It is easier to keep generating profits from fossil fuels rather than transition the capital stock to net zero.
[See also: Asset managers won’t fix the climate crisis]
“If enough people expect that they’re going to be making money off this stuff, this might shape what is possible, because they will make investments based on that,” Semieniuk said. This problem is behind the decisions by countries such as Ghana, who have just granted further rights to drill for oil and gas.
But amid the hubris of net zero, this matter remains under-discussed. “I think the issue is still underestimated,” said Bas Eickhout, an MEP with the Dutch Green Left party. “The European Central Bank is really ahead of the politicians, they are very, very active on stress-testing the banks on their assets, and then also really explicitly looking at fossil assets.”
Eickhout and his colleagues are pressing for action at the political level. “First of all, what is crucial, of course, is predictable climate policies,” he said. These will mean that the value of assets won’t suddenly collapse or spike, creating financial chaos. “That’s one thing where I do think Europe is quite well ahead of other regions in the world and certainly thinking of the UK where the government has a bit of a zigzag move going on,” he said.
In the UK, the National Infrastructure Commission (NIC) has the problem in its sights. “Our principle suggestion is that the debate should start now. And we should get serious about thinking, ‘what is the future of that infrastructure?’”, said Nick Winser, an NIC commissioner. The body recently published a report covering, among other things, the UK’s gas distribution network. The NIC is calling for a plan to decommission this vast system that supplies almost every home and business in the country with gas for heating and cooking.
The NIC backs heat pumps “very strongly,” said Winser, because they are highly energy efficient. The Commission believes, however, that parts of the gas distribution network can be repurposed, with high-pressure transmission pipes used to transport hydrogen and carbon dioxide.
“[We are] the first public body to be brave enough to draw on a map what we think are going to be the important core networks,” he said. More repurposed or new piping would also be needed to connect industrial centres to the energy system. “It’s important to think early and hard about how to transition to a low-carbon heating system and what that means for the… distribution networks that currently use natural gas,” Winser added.
Even in the EU, where a transnational policy framework is in place, there is resistance to the first step of disclosing fossil fuel assets. “There’s a lot of pushback not only from industry, but also from some of the member states who also see that that this might lead to some vulnerability,” said Eickhout.
The European direction will be set after the June 2024 elections to the European Parliament and the appointment of a new EU Commission. “The Green Deal has been a centrepiece of this [current] European Commission, and has made quite some progress on climate legislation,” Eickhout said, but the challenge is to make it an economic and financial framework in addition to an environmental one, a Green Deal 2.0.
In the UK, the erratic climate policies that have characterised the last six months and a looming general election mean the conversation about stranded assets risks being lost in the noise. However, it is one of the many infrastructure challenges the next government will need to deal with – and fast, before the financial consequences start to hit investors and the economy.