Carbon Tracker is leading some of the thinking on Stranded Assets, as recognised by the Generation Investment Management White Paper.
Our carbon bubble analysis has prompted investors to start asking who the winners and losers might be in future climate change scenarios. As people start to try and identify potential stranded assets, here as some suggestions where they might be found.
First it is useful to consider the potential futures we could experience. If global warming is limited to 2 degrees, then this essentially means some fossil fuels have to stay in the ground, and some related infrastructure may become redundant. On the other hand if there is no limit to how much fossil fuel we burn unabated and we head towards 6 degrees of warming then vulnerable sectors will be affected. Agriculture, infrastructure, property and insurance sectors will suffer across asset classes. This is the contradiction Lord Stern observed in his analysis during Durban.
So what are the examples of stranded assets? Well the most carbon intensive fossil fuels are clearly exposed to a low carbon future. If you look at US coal mining companies their product has been superseded by cheaper natural gas. As a result they are now looking to export markets. Dirtier fuels are not always tackled directly on a carbon basis. The US EPA has raised its Mercury emissions standards increasing the costs of producing electricity from coal. These changing market factors have left the brand new Spiritwood lignite plant in Minnesota mothballed before it even started supplying electricity.
There have been a few bets on when solar grid parity will be achieved in different countries. Most commentators agree China could see this milestone by 2015. Some US cities are already there, with more on the way.
Canadian tarsands are a vast resource at the carbon intensive end of the oil spectrum. Some US states have already introduced restrictions on this fuel, and the European Fuel Quality Directive proposes to limit the carbon intensity of fuel imports (whether from tarsands or biofuel). Canada continues to attempt to develop alternative export routes to reach new markets, most recently failing with President Obama denying the Keystone Pipeline this time round.
Canada also provides an example of the power of indigenous communities to determine their future. The strength of legislation in Canada means that when First Nations groups oppose a project, they have a good chance of making their voice heard, as should be the case. Their opposition to the Enbridge Northern Gateway pipeline is one of the reasons the industry is so keen to push through Keystone.
Why is it important if the huge planned expansion of tarsands doesn’t have a market in the future? Because these capital intensive projects take longer than conventional oilfields to return a positive cashflow. An open cast tarsands mine can take 25 years to return to positive cashflow whilst an in situ operation can take 18 years.
Now lets consider what might happen in a warming world. Adaptation continues to be mitigation’s poor relation, and business doesn’t just produce greenhouse gases, it’s a two way street. Assets can be impacted by physical climate change, resulting in literal strandings, not just loss of economic viability.
It is becoming clear how reliant many industries are on water, and investors have started to consider this a real risk. Australia has seen increasingly dry years in the Murray-Darling basin. Agricultural communities have objected to the latest water management plan which aims to reduce the amount of water taken from the river system.
India has already demonstrated it has the capacity to turn coal plants into temporary stranded assets due to simultaneously experiencing water shortages and floods in different part of the country. The closure of a water supply canal and railway supply routes left power stations short of water and coal.
The increasing frequency of severe weather events will only put greater pressure on the insurance industry. The austerity measures put in place by government agencies are threatening adequate investment in flood defences, with warnings in the UK that there is a growing spending gap.
Climate change can also come back to haunt the petroleum industry. Alaskan and Russian oil and gas infrastructure has been built on permafrost in northern regions. If this melts due to warming, the industry will no longer have a solid surface to work from.
So just to recap, 21st Century stranded assets could result due to health concerns, particulates standards, too much water, not enough water, water changing state, community opposition, technology developments, to give a few examples. Oh and obviously there is the carbon price and a potential global climate deal, but even without those in place, it seems many parts of the world are already feeling the pinch.
So which of the assets you have an interest in may become stranded?