In the wake of the burgeoning push to find project financing for new types of greener energy projects and innovations, Badar Chaudhry, senior vice-president, unit manager, energy sector, Mashreq Bank, is raising the critical question– how to avoid a potentially financially crippling surge in stranded fossil fuel assets, notably coal and oil
A US$900bn red flag
The cost of writing off stranded assets could reach US$900bn worldwide – or one-third of the current value of big oil and gas companies – if governments aggressively tried to meet the limit of 2°C, according to the Financial Times’ Lex. Consider the financial burden of this figure amid lower oil prices, the economic strain of the COVID-19 pandemic, and the cost of the energy transition. Wood Mackenzie expects a minimum of US$30trn to US$40trn of investment to put the world on a 2°C or lower pathway.
Of course, the potential financial strain will differ from region-to-region. For example, oil and gas will remain a central part of the Middle East’s energy basket up to 2050. This is not a failure, but crucial to sustaining energy security as the world finds its greener footing. That the ‘last drop of commercial oil’ will very likely be from a Middle Eastern well, reduces the region’s immediate risk of stranded assets, but the risk must still be factored in, as the renewable portfolio matures. The combined shares of oil and gas as a part of the region’s energy mix, will fall from 98% in 2018 to 61% in 2040 with a rapid scenario, 37% in a net zero scenario, and 79% in a business as usual (BAU) scenario, according to BP Outlook.
How to mitigate the risk of losing the billions of dollars invested in existing fossil fuel infrastructure
One route is to continue business as usual and risk the hyperbole image of stranded assets – a bleak landscape with rusting infrastructure en masse creaking in the wind – becoming an expensive reality in the next few decades.
Another route is one of proactivity, which sees legacy infrastructure getting a reboot to make it more aligned with the Paris Agreement goals. Broadly speaking, this means embracing a circular carbon economy (CCE), which in turn, includes bolstering energy efficiency within legacy infrastructure, updating human resources skill sets and applying the digital tools of the 4th Industrial Revolution (4IR) to help maximise value and relevance.
This is an undeniably vast and complex task, but it is our best chance at stabilising the environmental and economically human-induced elements of climate change. Improving energy efficiency and switching to renewable energy will address 55% of global greenhouse gas (GHG) emissions, detailed the Ellen McArthur Foundation. But by adopting circular practices, the world can reduce a significant proportion of the remaining 45%.
The systems-based approach of a circular carbon economy combines economic opportunity with better environmental and societal outcomes, by addressing the multitude of factors impacting the energy transition, such as water scarcity, loss of biodiversity and packaging pollution among others. All parties across industries must focus on lowering the carbon microscopes of their supply chains – both linear and interconnecting – to redefine environmental efficiency from production to the end user and back again. Climate finance plays a vital role in this positive disruption, as it starts with educating stakeholders about what greener finance means and how to leverage it.
Plus, the price tag of this route is far less than that of the stranded assets or the catastrophic impacts of unmitigated climate change. Payback margins are increasingly appealing in today’s economic environment. For example, the Global Commission on Adaptation (GCA) calculated that every dollar invested in building climate resilience could result in US$2 to US$10 of net economic benefits.
Domino effect
Let us not forget that the value of a circular carbon economy goes far beyond ticking off sustainability options in the energy transition. It also directly links to lower resource scarcity and geopolitical tensions. The Ecological Threat Register 2020 results show, that 141 countries are exposed to at least one ecological threat between 2020 and 2050. The 19 countries with the highest number of threats have a population of 2.1billion. This mean a minimum of 20% of the global population by mid-century would be significantly affected.
The economic fallout alone of this global ricochet of disruption – something the world has already witnessed with COVID-19 – would be life-changing for many more billions of people. We have the solution for reducing the risk of stranded assets via a circular carbon economy at our fingertips. Now we just need to proactively reach for it.
