Macroeconomic impact of stranded fossil fuel assets

Macroeconomic impact of stranded fossil fuel assets, a major global study finds that rates of technological change in energy efficiency and renewable power are likely to cause a sudden drop in demand for fossil fuels, with major implications for the global economy.

The study, published in Nature Climate Change and co-authored by Cambridge Econometrics’ Director Hector Pollitt and Principal Modeller Unnada Chewpreecha, finds that low-carbon technology diffusion, energy efficiency and climate policy may be substantially reducing global demand for fossil fuels.

This trend is inconsistent with observed investment in new fossil fuel ventures, which could become Stranded Fossil Fuel Assets (SFFA) as a result.

The researchers used E3ME (a global economy–environment simulation model) to study the macroeconomic impact of SFFA.  The modelling suggests that SFFA would occur as a result of an already ongoing technological trajectory, irrespective of whether or not new climate policies are adopted, because low-emission solutions are simply becoming more cost-effective.

The loss would be amplified if new climate policies to reach the 2°C target of the Paris Agreement are adopted and/or if low-cost producers (some OPEC countries) maintain their level of production (‘sell out’) despite declining demand; the magnitude of the loss from SFFA may amount to a discounted global wealth loss of US$1–4 trillion.

There are clear distributional impacts, with winners (for example, net importers such as China or the EU) and losers (for example, Russia, the United States or Canada, which could see their fossil fuel industries nearly shut down), although the two effects would largely offset each other at the level of aggregate global GDP.

The study was completed by an international team of researchers and was widely covered in the press.

 

Further information

‘Carbon bubble’ could wipe trillions from global asset values – Cambridge Econometrics coverage.

‘Carbon bubble’ could spark global financial crisis, study warns – Guardian coverage.

Chilling ‘carbon bubble’ study warns dramatic decline in demand for fossil fuels could wipe TRILLIONS from the global economy – Daily Mail coverage.