Ever since Mark Carney, the Governor of the Bank of England, spoke in 2015 before Lloyd’s of London about climate change, the future of the energy industries, and financial stability, finance ministers and central bank governors around the world have underscored climate protection’s systemic threat to the world’s financial system. They worry aloud about the impact of “bursting the carbon bubble” and the “domino effects” they expect to rip through global markets. Yet, they err egregiously by overvaluing fossil assets: from underground reserves of fossil materials to distribution systems like gas grids. They overestimate the danger. They must now put the fossil fuel phase-out into perspective as climate change exacts a human toll that is even greater than the bursting of any carbon bubble. They must understand that the threat to financial stability is rooted in the fossil and nuclear energy industries, in their excessive capitalization and valuation, which is underpinned by subsidies and privileges. And they must deal with the lack of provisions to cover legacy costs.
Not “stranded” but “abandoned”
“Stranded assets” are now a staple theme of any discussion about our economies in the age of energy transformation. “Stranded assets” are what economists call investments that have become worthless. The definition is: Asset stranding results when assets have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities. The first point to note is that nothing about climate change is unanticipated, and climate policy action is certainly not premature, but on the contrary fully predictable and overdue. Thus, there are no stranded assets in fossil energy companies caused by climate policy or the shift to green energy; any write-downs are the consequence of bad investment decisions and unjustified valuations, investments made in willful ignorance of the true costs and risks.
The idea or image behind the term “stranded asset” is that of a beached ship, which might be towed back into deep water to serve its purpose and become profitable again. The language is designed to trick us into thinking that the stuff left behind by dying industries is “stranded” only temporarily, perhaps by government regulation pushed on by environmentalists, and that the “assets” can be put afloat again. In fact, what these industries leave behind are not “stranded assets” but abandoned liabilities.
Not “assets” but “liabilities”
Classic stranded assets can still be found today in South Georgia, an island in the Southern Atlantic Ocean with no permanent inhabitants. It is dotted with abandoned buildings, factories, ships and other paraphernalia of a whaling industry that was once the largest in the world. Occasional visits by photographers remind us of this once thriving activity, a precursor of today’s fossil energy industry, which has abandoned buildings and other infrastructure – various forms of stranded assets – that are picturesque but also highly toxic. The pictures show an abandoned environmental liability left on the shoulders of future generations.
The fossil fuel industries – the coal, oil, and gas industries – are much larger and could leave us with legacies much more difficult to bear than whaling, including the overheating of the planet, the acidification of the oceans, and sea-level rise, or a quasi-eternal legacy cost of radioactive waste and areas of the planet rendered uninhabitable by nuclear contamination. It is beginning to dawn on those finance ministers that the shift from fossil and nuclear energy, which is happening all around them, is no longer just desirable. The “green power shift,” the transformation towards renewable and sustainable energy, is now also unstoppable, because it is economically self-sustaining and self-accelerating. Moreover, it is doable in all countries and regions; it is self-replicating. In a wise move, the G20, a group of major industrialized and emerging economies, has asked the Financial Stability Board (FSB), an international body set up to ensure the stability of the global financial system, to propose ways of improving the transparency of climate-related risks and disclosure rules for the benefit of investors, creditors, and underwriters.
All kinds of abandoned liabilities
The green energy shift will very likely dot the landscape with unwanted industries, infrastructure and costly legacies as physical and social blights. They are liabilities, a fallout from the bursting of a financial bubble, but not assets. It is worth looking at them in detail.
Devalued financial assets can be written off, they are mere “paper losses,” and the resulting insolvencies are manageable. Financial systems may come under stress, but they can cope. The industries affected are moribund anyway, and while social consequences in the affected communities need to be considered, the industries do not merit saving. It is better for the Earth's climate if they close early.
Abandoned industries are a well-known consequence of earlier changes in technologies and industrial patterns. Just think of those ghost towns that tell a story of past glory, abandonment and decay, however picturesque they may look to modern-day tourists. Industrial brownfield sites may look ugly, but in populated and especially urban areas they can be turned into opportunities, first as creative spaces and later for housing or businesses. Abandoned industries present environmental, social, economic and fiscal challenges. When large companies close, unemployment rises, and tax revenue goes down as demand for social services goes up. That is what policies need to address.
The looming demise of the fossil and nuclear power industries may leave much abandoned. That is one of the concerns motivating the Lakota in their opposition to the Dakota Access Pipeline in South Dakota. Whatever the merit of the pipeline in the short or medium term, there are no effective provisions to ensure that it will be removed once it is no longer in use, or that any contamination of the ground or the water is remedied immediately.
Abandoned grid infrastructure is a liability in a class of its own, especially in remote areas, such as the Canadian Arctic. Industrial installations, pipelines, ports, railroads and roads, or trans-shipment terminals are left behind, criss-crossing the landscape and threatening natural resources like water as they decay and release toxins. This liability stays for decades if not forever.
Fight intentional dumping of liabilities on taxpayers
Unfunded liabilities and legacy costs are the result of company insolvencies that in effect dump the long-term cost of decommissioning, dismantling, cleaning up and reclaiming on the state and future taxpayers. The experience in many industries, from mining to nuclear power plants, shows that the accounting rules and the obligations to make provisions or accruals for legacy costs are not enforced, and that in too many cases the clean-up does not happen.
Abandoned liabilities are not just the result of bad decisions in the past, they are the possible consequence of current decisions, especially of investments in an industry with a doubtful future and in the absence of effective enforcement of remedial action in remote locations.
Here is the challenge for the ministers of finance and leaders meeting the G20: Establish not only disclosure rules for climate-related risks, but also rules to ensure that legacy costs are borne by investors and sufficient funds are set aside and secured to meet future needs.
Thanks to Sonja Thielges and Paul Hockenos for comments.