Most of the world’s policy makers agreed in the Paris Agreement under the United Nations (UN) Framework Convention on Climate Change, that society should seek to avert the threat of climate change by holding the increase in the global average temperature to 3.6°F (2.0°C) above pre-industrial temperatures. Up to now, 189 out of 197 Parties to the Convention have ratified the agreement. (The US withdrew on Nov. 4, 2020, but President-elect Joe Biden said the U.S. will rejoin when he take office).
The greenhouse gas (GHG) emissions contained in currently owned and exploitable global fossil fuel reserves are around three times higher than the amount of GHG required to raise the atmospheric temperature in 2050 to the proposed 3.6°F limit. To make it simple, a third of oil reserves, half of gas reserves and over 80 percent of current coal reserves globally should stay in the ground to prevent the Earth’s average temperature from rising 3.6°F.
What are stranded assets?
This means we can stop exploring for oil, gas and coal; which will save money for investors, but it also means that the fossil fuel industry is sitting on trillions of dollars in stranded assets, which are investments worth less on the market than they are on a balance sheet, due to the fact that they have become obsolete before the end of their life. For example, new coal plants built today, scheduled to run for 30 years to recoup their costs, do not anticipate a world where renewable energy will be cheaper than coal.
According to The Guardian, the world’s rising reliance on fossil fuels may come to an end far earlier than predicted. Individual investors, banks, pension funds, insurance companies and universities are rethinking their investments in coal, gas and oil because of worries about the inevitable depreciation of stranded assets.
Companies that fail to plan for low-carbon economic scenarios risk decline or even bankruptcy. Therefore, the Task Force on Climate-related Financial Disclosures has developed financial risk disclosure tools for company managers and their boards to let investors, lenders, insurers, and other stakeholders anticipate if or when they are or will be holding stranded assets.
Consider a breakthrough in battery storage technologies within the next 20 years, which could greatly depress use of oil and gas in the transport sector and accelerate demand for electric vehicles (EVs). Current growth of EVs supports this likely proposition. Passenger EV sales jumped from 450,000 in 2015 to 2.1 million in 2019. Sales will continue to rise as battery prices fall, energy density improves, more charging infrastructure is built, and sales spread to new markets. By 2022 there will be over 500 different EV models available globally.
Falling price of renewable energy
The primary reason for the transition out of a fossil fuel economy is because of the falling price of renewable energy sources. According to Bloomberg’s 2019 New Energy Outlook, cheap renewable energy and batteries will fundamentally reshape the electricity system:
- We move from two-thirds fossil fuels in 2018 to two-thirds zero-carbon energy by 2050.
- Solar sees the most growth, rising from 2 percent of the world electricity generation today, to 22 percent in 2050.
- Wind generates 26 percent of the world’s electricity in 2050, compared with 5 percent today.
- Today, wind and solar are the cheapest sources of energy across more than two-thirds of the world. By 2030 they undercut coal and gas almost everywhere.
- Hydro sees very modest growth, and nuclear stays flat.
- Batteries help shift excess generation to times when the wind is not blowing, and sun is not shining. Demand-side flexibility also helps better integrate variable renewable energy.
China leads the way
President Xi Jinping of China recently announced to the UN General Assembly that his country would become carbon neutral by 2060. Responsible for 28% of the globe’s greenhouse gas emissions (double those of the US), China is already a leader in the deployment of clean-energy technologies. Its commitment to reach net-zero emissions in four decades will spur growth in development and manufacturing of technologies needed in the transition. Those efforts will make technologies cheaper for other countries to use and make it more likely they buy from China.