“Stranded” assets, economic models and their linkage to the climate crisis

Despite the Conference of Parties (COP) at Paris ending on a perceived “no-winners or losers” note in December 2015, the world continues to grapple with the challenge of rising emissions and deep divisions over allocations of the remaining carbon budget to limit the rise in global average temperature by the end 2100 to the 2 degree C target agreed upon in Copenhagen in 2010. It is no secret that with current emission rates and the complete lack of leadership displayed by the biggest historical emitters – the US and other western countries, the remaining carbon budget could well be exhausted by around 2035.[1]

Given the scientific data available, most of which ironically comes from the west, what exactly is holding back the much required strong political action at the global scale to cut back emissions? A lot of the blame is pinned on the lack of a “strong political will” on the part of the developed (Annex I) and developing countries (non-Annex I). While this may be true to an extent, it fails to address the processes and economic systems in place which have created the environment of weak political action.

The notion of stranded assets that has dominated discussions pertaining to the available carbon stock has played a big role in the failure to shift away from fossil fuels.[2] In looking at these valuable natural resources as financial assets alone, their importance is only partly accounted for in economic value or exchange value in the short-term. The other important aspect of these assets – their intrinsic natural value and environmental attributes(forests and vegetation under which a large chunk of these resources lie)including their value as natural “carbon sinks” are disregarded completely.A not too visible outcome of considering the unused stock of fossil fuels as investments or stranded assets that need to be utilized is the manner in which the lives of future generations are discounted.[3] By choosing short-term financial and economic benefits over adverse long-term climate change impacts, the higher discount rates applied by staying invested in fossil fuels disregards the principles of inter-generational equity and climate justice.[4] Favouring short-term profits over long-term public investments and mitigation measures, goes against the goals of the climate agreement.

This tendency to seek market-based solutions – Clean Development Mechanism (CDM) and emissions trading schemes (ETS) and market-driven interest rates among others – to alone deliver meaningful and effective results downplays the seriousness of the crisis. The author of the landmark Stern review on climate change, Lord Nicholas Stern, has called climate change a result of the greatest market failure that the world has seen.If markets have played a significant role in the crisis, is it then right to seek solutions within that framework alone to deliver the results needed to curb temperature rise below 2 degree C by 2100? If corporations’ current market values and balance sheets have already accounted for these stranded assets, any effective and meaningful emissions cuts will result in a significant impact on these valuations that also account for expected future consumption and use.[5] Therein lies the problem. This notion of stranded assets, balance-sheet valuations and market interest rates only accounts for the financial assets – profits, capex and financial returns. It does not account for the severe social impacts, environmental impacts and other negative externalities which will hit the planet and affect the poorest and marginalized the most. Ironically, a majority of those affected will continue to remain non-market participants. While the hardest impact will be felt by the poor, the well-off sections of society too will face the consequences of increasing heat waves,intense storms, water shortages and other unforeseen events expected in the latter half of the century. The severity of the climate crisis requires solutions which have never been sought before. A crisis of such proportions which threatens the existence of civilization on the planet cannot be addressed without undertaking radical reforms and solutions.

We should certainly strive to mitigate and minimize the impact of climate change on investments and assets by undertaking all possible measures (including market based solutions).The economic assets created today will also play an important role in the mitigation and adaptation strategies of the future generations. But looking at these economic assets from a short-term,consumption oriented view alone goes against the stated goal to limit temperature rise below 2 degrees C. This goal cannot be achieved by allowing such asset bubbles (carbon bubbles in this case) to remain on paper and diverts the risk impacts entirely on the future generations.Disregarding the ethical aspects of the debate and searching for financial opportunities alone in this planetary crisis will only dig civilization into a deeper hole.


[1]1000 billion tonnes-https://www.carbonbrief.org/carbon-briefing-making-sense-of-the-ipccs-new-carbon-budget


[3] Social Discount Rates and Discounting for Climate Change


[5] Wasted Capital – http://www.carbontracker.org/report/unburnable-carbon-wasted-capital-and-stranded-assets/


About pattysmullings

Occasional freelance writer, full time corporate slave. An idealist by choice, pragmatist by compulsion. Generally write on travel, environment, politics, movies and current affairs.
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