FoReSee- Fossil Resource Markets and Climate Policy: Stranded Assets, Expectations and the Political Economy of Climate Change
One likely consequence of climate policy is the rapid devaluation of fossil resource assets and of parts of the energy infrastructure (stranded assets). The owners of these long-lived capital assets have incentives to delay or even prevent the implementation of climate policy. The FoReSee project investigates how the danger of asset stranding and the reaction of asset owners influence the effectiveness of climate policies. The project develops policy measures that reduce the inertia of the energy system and quantifies distributional effects of different climate policies.
The prospects for stranded assets were examined at various levels model-based and empirically. After studies of the American coal sector and European LNG assets, stranded assets in global natural gas trading and in new coal projects were quantified. Current estimates of fossil fuel producer profits at stake due to climate policies are particularly high. Empirical studies also show that investor expectations do react to climate policy developments, but do not (yet) have an impact on the "green" orientation of innovations. From a theoretical political-economic perspective, it became evident that climate policy uncertainty, which can lead to stranded assets, can be exacerbated by higher income inequality and a stronger general socio-cultural polarization (progressive-conservative) of voters. In addition, trade sanctions to establish a climate club for several countries with ambitious climate goals can be counterproductive. A review of the current literature emphasizes the importance of more future research on the political economy and distributional effects of stranded assets and of a shift of capital-intensive investments in the energy sector from fossil to re-newable projects.
Illustration of project results
One possibility to quantify the risk of asset stranding is to compare the asset utilization between several scenarios of future energy sector and climate policy developments. Indeed, there is high uncertainty how energy markets - globally and in the EU - will develop. Yet, in each scenario, the utilization of fossil assets will be different. Simply speaking, in a scenario with strong and early renewable expansion, existing fossil assets will become stranded soon. In constrast, a scenario with continuation of existing low ambition climate policies will see a further expansion of fossil fuel assets. The scenario cone visualizes the divergence between scenarios which grows the further we look ahead because uncertainty grows.
- Winners and losers of climate policy measures must be taken into account in their design, including compensation payments if necessary.
- The effects of climate policies on financial markets must be taken into account by political decision-makers.
- Climate policy measures should be announced or implemented early and in a binding manner over the long term in order to manage investors' expectations.
- In general, further investments in the fossil economy should be avoided.
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