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Governments, taxpayers face bulk of fossil fuel stranded asset risk: CPI

Governments, citizens and taxpayers, rather than private investors and corporations, face the majority of risk linked assets becoming stranded in the fossil fuel industry, according to a report released Thursday by non-profit group, the Climate Policy Initiative.

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"This risk is concentrated in resource-owning and producing countries, particularly major oil producers," said the CPI, a San Francisco-headquartered independent group which studies financial aspects of global climate policy.

"Governments own 50-70% of global oil, gas and coal resources and collect taxes and royalties on the portion they do not own. Thus it is unsurprising that governments would bear close to 80% of the $25 trillion of value difference for producers under our two scenarios," it said.

The CPI set out two policy scenarios: one where no action is taken on climate change, and one where the International Energy Agency's low carbon goals are achieved.


The IEA has set out pathways to limit the global average temperature increase to two degrees Celsius from pre-industrial levels, by limiting the atmospheric CO2 concentration to 450 parts per million, compared with around 398 ppm in 2014.

The CPI's two scenarios are considered extreme, but they provide benchmarks against which various policy pathways can be measured, the CPI said.

"In reality, any policy solution will fall in between the two extremes," it said.

The CPI's paper examined the impact of a low-carbon transition on the value of investor portfolios when some fossil fuel assets become valueless as they are no longer needed and left unexploited as demand falls, and other assets that continue to produce but lose value as a result of price declines resulting from lower demand.

"Only some of the value at risk would actually be lost in the transition -- most of the value would be transferred from one economic actor to another, or one country to another. For example, a falling oil price may hurt producers but benefit consumers," the CPI said.

Some of the lost value represents lost revenue collected by fossil fuel-producing governments from their own citizens.

"When these transfers are excluded, the total value at risk falls from $25 trillion to $15 trillion," the CPI said.

The CPI looked at the relative costs and benefits of price- or tax-based policies that reduce demand and innovation-based policies including those that support new technology.

A balanced mix of price policies and innovation may be the optimum solution, according to the CPI's analysis.

"Taxes have an initial advantage because they are a more certain policy tool than innovation. Tax revenue can then be channeled to support further innovation -- and the more successful innovation is, the lower taxes will be needed to reach a low-carbon trajectory," the CPI said.

PHASE OUT COAL

"To minimize asset stranding, policymakers could do well to first focus on reducing coal. Reducing coal consumption accounts for approximately 80% of the IEA's projected carbon emissions savings in the move to a low-carbon future, while representing approximately 12% of potential stranded asset value at risk," the CPI said.

Industrialized countries can meet most of their goals by phasing out coal-fired power plants at the end of their operational lives, it said.

However, the problem becomes more acute in fast-developing countries, the CPI warned.

"Constraining coal-fired generation in emerging markets in the face of growing energy demand creates an urgent need to develop alternative energy solutions and improved energy efficiency, especially in China and India," it said.

In oil markets, effective paths to a low-carbon trajectory included reducing demand, for example through consumption taxes or the reduction of fossil fuel subsidies, driven by net consuming nations, investment in alternative fuels and innovation, CPI said.

"Gas has a medium term future as a bridging fuel in power generation, though to minimize stranding, it will need to peak around 2030," it said.

In emerging economies, providing renewable energy subsidies through low-cost debt can reduce the cost to governments and energy consumers by up to 30%, it said.

In developed economies, changing financing and business models can reduce the cost of renewable energy by as much as 20%, making it competitive with fossil fuel electricity generation, it said.

"Governments need to develop strategies to address the budget consequences of phasing out fossil fuel production," the CPI said.

"Ultimately, the global economy needs to address century-old imbalances borne from years of structuring the economy around fossil-fuel derived energy. Policy decisions made today will direct the course of the economy for years to come," it said.

The CPI's stated mission is to help nations to grow while addressing increasingly scarce resources and climate risk.

The group is supported by financier and philanthropist George Soros, and receives support from partners including the Norwegian Agency for Development Cooperation and the World Bank Group.

--Frank Watson, frank.watson@platts.com
--Edited by Jeremy Lovell, jeremy.lovell@platts.com