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Stranded Assets and Reduced Profits: Analyzing the Economic Underpinnings of the Fossil Fuel Industry's Resistance to Climate Stabilization

Fossil Fuel Company Losses through Climate Stabilization

In “Stranded Assets and Reduced Profits,” Tyler Hansen estimates the economic losses that fossil fuel companies—both publicly and privately owned firms—are likely to incur through a successful global climate stabilization project.  Phasing out fossil fuels as energy sources is the most important requirement for climate stabilization to succeed. Hansen estimates wealth losses from stranded assets for both private firms and governments to be about 37–50 percent of their current valuation, amounting to between $13-$17 trillion. He discusses an approach to strategic demand reduction for overcoming industry resistance to climate stabilization.

>> Read article published in Renewable and Sustainable Energy Reviews Journal

Abstract
Governments have failed to act at the scale and pace necessary to avert the climate crisis. This paper explores one key constraint on global action to combat climate change: resistance mounted by the fossil fuel industry. The economic losses that the fossil fuel industry is likely to incur as a result of climate stabilization include stranded assets and reduced profits. Using a methodology that emulates the expectations and valuation procedures used by fossil fuel firms, I estimate the magnitude and distribution of wealth losses from stranded assets for the upstream fossil fuel industry (i.e., firms and governments involved in fossil fuel extraction) under 1.8 °C and 1.5 °C climate stabilization scenarios. I also explore the timing of expected future profit losses and compare historical profit margins between fossil fuel and renewable energy firms. Results show that fossil fuel reserves will suffer a devaluation of 37%–50%, amounting to $13-$17 trillion. This implies a strong incentive for fossil fuel producers to continue resisting climate stabilization. Over half (51%–63%) of the reserve devaluation stems not from fuels left in the ground but from price decreases for fuels that will still be extracted and sold during climate stabilization, indicating that even low-cost producers stand to bear large losses. Three-quarters of stranded assets belong to governments, implying formidable political obstacles in nations with nationalized fossil fuel ownership. The profitability analysis reinforces these findings. My results point to strategic demand reduction of fossil fuels as a key strategy for overcoming industry resistance.

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