Plausible energy demand patterns and transition risks

There are practical limits to reducing energy demand when global economic growth is robust, particularly in lower income regions. Therefore, to meet ambitious climate targets, the energy supply would have to change extremely fast from a mix dominated by fossil fuels to one mainly powered by renewable sources. To the extent that these targets are being ambitiously pursued, the pace of fossil fuel displacement can abruptly accelerate as nonlinear dynamics of adoption and relative price changes take over. Some of this change is already underway and could be accelerated by additional policy and various shocks. But numerous studies show that fossil energy capital stock is built for a ‘business as usual’ scenario, where fossil energy continues to supply large shares of the energy demand and that fossil fuel company valuation does not reflect potentially large declines in future earnings. In other words, ambitious steps toward a low carbon future are not expected. The financial sector and regulators increasingly wake up to the possibility that an ambitious climate policy future may be realized, but while there is a growing number of estimates of potential fossil energy 'stranded assets', less is known about their links with the financial sector and associated ’transition risks'. This talk presents estimates of the size and the geographical and functional distribution of impacts on global financial wealth from abrupt changes in expectations about oil and gas assets' future revenues. These are generated by linking an integrated assessment model with a database of oil and gas assets, and a database of the global equity ownership network, and tracing changes in net present value caused by switching from baseline to policy scenarios through the network.

Thursday, March 11, 2021 - 4:00pm