By TechThop Team
Posted on: 20 Aug, 2022
As a result of a study published in Nature in 2021, most fossil fuel reserves must remain untapped to avert the worst impacts of climate change.
To maintain a 50 percent chance that global warming won't exceed 1.5 degrees Celsius above preindustrial levels, 90 percent of coal and nearly 60 percent of oil and natural gas must remain in the ground.
According to the Paris Agreement on climate change, fossil fuel companies and their investors face growing financial risks as the world transitions away from greenhouse-gas-emitting activities to keep global warming well below 2 C. This includes the prospect of stranding massive amounts of assets.
As a result of this transition, fossil fuel extraction and coal-burning power plants will be significantly reduced, resulting in steep losses in value for fossil-energy companies and shareholders.
According to a new study published in Climate Change Economics by MIT researchers on the Science and Policy of Global Change, under four increasingly ambitious climate-policy scenarios, the current global asset value of untapped fossil fuels will be over 2050.
Assuming the Paris Agreement promises of greenhouse gas emission reductions remain in place for all time, the least-ambitious scenario assumes global net-zero emissions by 2050, while the most ambitious scenario includes coordinated international policy instruments.
According to the study, a reference “No Policy” scenario has a net present value of $21.5 trillion to $30.6 trillion for untapped fossil fuel output through 2050 based on the MIT Joint Program's model of the world economy and detailed representation of the energy sector and energy industry assets. Coal power generation stranded assets are estimated to total $1.3 to $2.3 trillion by 2050.
According to Henry Chen, a researcher at the MIT Joint Program and the study's lead author, more stringent climate policies result in more untapped fossil fuels, resulting in higher potential asset value losses for fossil fuel investors and owners.
As a result of the global economy-wide analysis presented in this study, stranded assets are assessed at a finer level than in previous studies.
When assessing their exposure to climate-related transition risk, firms and financial institutions may combine MIT analysis information with details from their investment portfolios.
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