Andrew Simms: Cars, aviation, steel … the stranded assets risk spreads far beyond fossil fuel firms
In an article looking at the issue of “stranded assets” Andrew Simms, from NEF (New Economics Foundation) considers the current position of diesel cars, after the “dieselgate” furore. He considers the view of “clean diesel” is almost as tarnished as “clean coal.” Some sectors may become less relevant and may need to be revalued, as we adjust to a low carbon economy (as argued by Mark Carney, the governor of the Bank of England). Andrew argues that renewed impetus and optimism surrounding the Paris climate talks and the steady build-up of national commitments to reduce emissions could start shifting the confidence line for investors wherever the economy is vulnerable to carbon targets and legislation. “The aviation sector, whose big planes, once built, tend to hang around for decades, looks especially vulnerable. Why invest in expensive kit, such as a new London runway, if it soon ends up sitting largely idle, another carbon stranded asset. Carney called for companies to disclose both their current emissions and what, if any, plans they have to make the transition to a zero carbon business model. (Aviation’s plan consists largely of future trading carbon credits with other sectors).
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Cars, aviation, steel … the stranded assets risk spreads far beyond fossil fuel firms
By Andrew Simms
8.10.2015 (Guardian)
VW is paying the price of revelations that ‘clean diesel’ is as much a lie as ‘clean coal’ – in a low-carbon economy 100s of energy intensive industries will have to reinvent themselves or become similarly exposed. What could be the cost of potentially stranded assets in the manufacture of diesel vehicles?
Imagine you invested heavily in glam rock silver spandex clothing just as punk music happened. You’d suddenly be left with a lot of shiny stuff you couldn’t shift. It would be a ‘stranded asset’ – the victim of an unanticipated devaluation due to shifting fashion (though you might argue it was always a liability).
Increasingly, mainstream acceptance that money poured into fossil fuels risks becoming trapped in similarly stranded assets, raises the intriguing possibility that the logic might leak out and touch other parts of the economy which are heavily dependent on the same fossil fuels.
Responding to the emissions rigging crisis embroiling the German car maker Volkswagen, the Financial Times speculated that Europe’s focus on diesel “may have driven its car industry up a technological dead end”.
If so, not withstanding VW’s multi-billion legal liability for deceiving regulators, there is another calculation waiting to be done, of the potentially stranded assets in the manufacture of diesel vehicles. In the UK their share of the new engine market rose from under 10% to over 50% in less than a decade, and a sudden reawakening of concern about their health impacts could see them fall from favour even quicker.
But why stop there? There’s a strong case that private motor vehicles per se, produced and driven at their current scale, are also a technological dead end whose assets, sooner or later, are set to become stranded.
Mark Carney, the governor of the Bank of England recently argued that one way in which climate change will affect financial stability is through the revaluation of assets as we adjust to a low carbon economy.
In spite of a rather half-hearted introduction, the new charge on plastic bags in England, for example, could see the assets of a few packaging companies heading for the stranded basket. Places such as New Delhi and Bangladesh have already managed to ban plastic bags outright.
Renewed impetus and optimism surrounding the Paris climate talks and the steady build-up of national commitments to reduce emissions could start shifting the confidence line for investors wherever the economy is vulnerable to carbon targets and legislation.
The aviation sector, whose big planes, once built, tend to hang around for decades, looks especially vulnerable. Why invest in expensive kit, such as a new London runway, if it will soon ends up sitting largely idle, another carbon stranded asset.
Carney called for companies to disclose both their current emissions and what, if any, plans they have to make the transition to a zero carbon business model. With those words ringing in my ears, if I were an actuary – one of those quiet but useful figures in the City whose job it is to see risks on the horizon – I would pull up the full list of energy intensive industries, from steel and aluminium to cement and chemical companies, and start playing hunt the potentially stranded asset.
If the Paris meeting is to mean anything, the world will shift inevitably from an economy of linear, material throughput and waste, to a circular economy as frugal and clever at material capture and reuse as an ecosystem. As it does so, those industries which do not reinvent themselves could find themselves as stranded as those silver spandex playsuits.
In an article on why the Volkswagen scandal was worse than the one which destroyed the energy company, Enron, David Bach of Yale Management School, pointed out how “clean diesel”, it turns out, is as much a lie as “clean coal”. Politicians and regulators allowed themselves to be swept up in that lie to the point where it destroyed the reputation of Europe’s economic powerhouse for straight-talking, technical efficiency almost overnight, and in a sector, car making, synonymous with ‘brand Germany’.
If one sector could so easily turn unnoticed into a technological dead end, how many others already are doing so, without companies, regulators or officials realising it?
The global economy is currently around 80% dependent on power from fossil fuels. Coincidentally, the proportion of recoverable reserves that need to be left in the ground, unburned is estimated to be around the same, 80%. The World Bank put the value of global economic activity in 2014 at about $78tn.
Looking ahead, how much of that continued activity is premised on using fossil fuels that can’t be burned, and for which there is no easy energy substitute – such as aviation and types of industrial agriculture? It’s a good, if tricky, research question.
But globally, potentially stranded assets are likely to run into multiple trillions of dollars. Car makers may go electric, but even that’s no get out of jail free card, as the power still needs to come from somewhere. And, as we can see, there’s still far too much carbon in the energy system. So, given that what we already have is unsustainable, no new carbon intensive infrastructure should be being built.
To look at things with fresh eyes, and to really see what has become normal when it never should have done, will take more than policy. It will take a shift of culture. A huge range of artists, musicians and writers will be as active as policy people and campaigners on climate change over the coming months. The group Cape Farewell is organising an entire, parallel event to the climate talks called ArtCOP21, spanning 25 countries.
Carney coined what he called ‘the tragedy of the horizon’ because the real costs of climate change fall in the future beyond the policy and investment horizons of key financial actors.
By the time it matters to them, he argues, it will be too late. To counter the human self-absorption that creates this state of affairs, a brilliantly inventive new initiative called The Parliament of Things invited people to imagine how non-human entities with a stake in the world might grapple with the problems humanity presents them.
In the winning response, by Fien Veldman, the Horizon, personified, nervously addresses the newly gathered parliament of animals, plants and things.
It thanks those present for never leaving it empty, but where humans are concerned it complains of being simply overwhelmed. The parliament considers this, and passes the first rule of its new constitution: ‘Dear humans, we would like a little more space.’ Find those stranded assets and we could answer its call.
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An AirportWatch member commented:
| “An expensive transition if major companies go bust from investing in high carbon infrastructure” David King on LHR R3 2009 |
| “An expensive transition if major companies go bust from investing in high carbon infrastructure” David King on LHR R3 2009 |
| “An expensive transition if major companies go bust from investing in high carbon infrastructure” David King on LHR R3 2009 |
“An expensive transition if major companies go bust from investing in high carbon infrastructure” Sir David King on LHR on Radio 3 in 2009
Stranded Carbon Assets and Negative Emissions Technologies
Working Paper
February 2015
Authors: Ben Caldecott, Guy Lomax & Mark Workman
Smith School of Enterprise and the Environment, University of Oxford.
This paper says:
“But the fact remains, that even if NETs (Negative Emissions Technologies) were deployed successfully at sufficient scale to increase carbon budgets for sectors like agriculture and aviation, it would not protect business as usual. The extent to which sectors might benefit from NETs deployment depends on the cost of NETs and who bears these costs – variables
exposed to significant uncertainty. If the sectors that benefit pay a proportion of development and deployment costs, which given the polluter pays principle might reasonably be expected to happen, business models would still be affected. So even sectors that might be ‘bullish’ or optimistic about NETs and their implications for future business, might be wise to temper this optimism. Either way, carbon budgets if implemented in some form, with or without NETs, will impact their activities and in ways that are difficult to predict.”
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NETs are a family of technologies that encompass diverse options, including: Afforestation, Agricultural Soil Carbon Sequestration, Biochar, Bioenergy with Carbon Capture and Storage (BECCS), Direct Air Capture (DAC), Ocean Liming, Enhanced Weathering, and Ocean Fertilisation.