John A. “Skip” Laitner

The idea of stranded assets—that is, existing investments which have substantially less financial value as the result of market conditions impacted by climate change and/or the transition to a low carbon economy—is receiving greater attention in recent years. The implications of “asset stranding” are increasingly important to investors, companies, policy makers and regulators as well as consumers who may be facing higher energy prices and other living costs as a result.

A recent, and perhaps the most complete, review of the emerging problem of stranded assets is an analysis undertaken by the International Renewable Energy Agency (IRENA) commissioned by the German government. With Germany currently holding the Presidency of the G20 nations, their intent was to inform the G20 Energy and Climate Working Groups of the potential impacts of stranded assets on the economy.  See, for example, the IRENA report by clicking here.

The IRENA analysis is a very solid review of nearly 30 past studies on stranded assets. It also documents its own assessment of future impacts by examining two scenarios. The first relates to the accelerated use of energy efficiency and renewables as they might be deployed from today until the year 2050.

According to IRENA, this scenario will deliver greenhouse gas emission reductions that have a “two-out-of-three” chance of maintaining a global temperature change below two degrees Celsius (2°C) above pre-industrial levels. Note that today we are now close to one degree Celsius (1°C) above pre-industrial levels.

The second case assumes a “business-as-usual” scenario that continues until 2030. At that point, however, the deployment of energy efficiency and renewables would then accelerate to ensure a global energy system that remains within the same emissions budget by 2050.

Compared to business-as-usual without climate action, IRENA finds, that if we move reasonably quickly to deal with climate change, the global economy might “strand” only $10 trillion in assets. Under what IRENA then calls the “Delayed Policy Action” scenario, the amount of stranded assets might double to $20 trillion. To put this into context, they note that $20 trillion is approximately 4% of global wealth in 2015. Whew!

The bad news here? Even the IRENA analysis greatly understates the likely economic impact of climate change. That is because another very big contributor to the climate problem— namely, the inefficient use of energy and other resources—will also weaken the global economy by a substantial margin. Indeed, as we’ve noted elsewhere, we seem to live more by waste than ingenuity. With these factors taken together, we are likely to have both a weaker economy and a growing level of greenhouse gas emissions.

One possible translation of the continued inefficiencies? If lagging resource productivity weakens the global economy by a little as 0.3 percent per year in real terms, by the year 2050 we may have an inflation-adjusted GDP that is $30 trillion smaller than otherwise projected.

Depending on assumptions about population growth, future labor productivity and the unemployment rate, by 2050 that could mean something like 500 million more people without jobs throughout the global economy. And that is a very big and very real cost—one that is well beyond the problem of stranded assets alone.