Carbon Tracker: Stranded Assets Are a Growing Risk for Fossil Fuel Energy Investors

Oil, gas and coal companies are at risk of losing trillions of investment dollars in the coming years if they do not start transitioning away from fossil fuels, says at the financial think tank, Carbon Tracker.

According to its latest report, analysts project that energy companies will be looking at a loss of about $1.6 trillion in investment dollars in the next 17 years if they continue to base their operations on current emissions policies.

“There is a clear danger zone above a 2°C scenario where excess capex (capital expenditure) and CO² emissions need to be avoided,” the analysts warned, noting that the ‘carbon budget’ proposed by the International Energy Agency is set to limit the earth’s temperature to 2 C and the concentration of greenhouse gasses to 450 parts per million of CO2. It also calls for capping “long-term temperature increase at 4°C” by lowering further emissions by 2050.

Carbon Tracker analysts point out that further expansion of the fossil fuel-based energy sector through new investments such as shale gas and coal mining puts the effort of limiting staying below the 2°C threshold at risk. But just as importantly, they stress, it opens up the possibility of “stranded assets” -- investments that are lost or devalued by changing policies, regulations and energy appetite. Last year’s drop in renewable energy prices, which plummeted below oil prices is one example of such a shift that was propelled by global markets. But policies that are later implemented to cut fossil-fuel dependence and to meet that 2050 threshold could also put investors’ dollars at risk.

And oil and gas investors shouldn’t be fooled by the fact that they have a lower impact on carbon emissions than coal, researchers warn. Financial risk still abounds for investors looking to squeeze by tighter emission regulations and declining markets in the future.

‘Stress tests’ are critical tools for nations and companies alike
Carbon Tracker sets out a series of “stress tests” to help companies, institutional investors, governments and advisors determine whether their investments will be in line with recommended policies set by agencies like the IEA. It points out that a number of companies and organizations have already implemented the “2°C stress test” and are taking steps to ensure their mission and policies support long-term reduction of greenhouse gasses. In the United Kingdom, the Environment Agency Pension Fund began divesting its investments in fossil fuel energy in 2015 to show its support for the IEA’s guidelines.

In the United States, an increasing number of cities and organizations are divesting as well. In January, New York City announced its plans to pull its money out of the fossil fuel market. Its announcement followed a similar statement by the state of New York, which also was invested in oil and gas stocks.

But analysts note that it’s companies in countries like the U.S. and Russia, which have opened the door to increased capital expenditure in fossil fuel energy that run the greatest risk of creating a stranded asset scenario for investors. The Trump administration’s recent rollback of regulations directed at reducing carbon emssions and the decision to expand oil and gas exploration in the Outer Continental Shelf (OCS) may pose unique challenges for investors as global energy development turns toward more sustainable, renewable options.

Image: Flickr/Carbon Visuals