Ben Caldecott

Introduction to special issue: stranded assets and the environment

Since 2011 the topic of ‘stranded assets’ created by environment-related risk factors, including physical climate change impacts and societal responses to climate change, has risen up the agenda dramatically. The concept has been endorsed by a range of significant international figures, including: UN Secretary-General Ban Ki-moon (McGrath 2014); US President Barack Obama (Friedman 2014); Jim Kim, President of the World Bank (World Bank 2013a; World Bank 2013b); Mark Carney, Governor of the Bank of England and Chair of the G20 Financial Stability Board (Carney 2015); Angel Gurría, Secretary-General of the OECD (Gurría 2013); Christiana Figueres, former Executive Secretary of the UNFCCC (Figueres 2013); Lord Stern of Brentford (London School of Economics 2013); and Ben van Beurden, CEO of Shell plc (Mufson 2014). The emergence of the topic should be of significant interest to scholars and practitioners alike, as it has influenced many pressing topics facing investors, companies, policy-makers, regulators, and civil society in relation to global environmental change, for example:

Game theory and corporate governance: conditions for effective stewardship of companies exposed to climate change risks†

ABSTRACT Engagement between investors and corporate boards has been suggested as a pathway to mitigate stranded asset and climate change risks. Debate is ongoing as to whether divestment or active ownership strategies are more appropriate to deliver long-term value and environmental sustainability. The paper tests the effectiveness of owner engagement strategies by studying the conditions for cooperation between investors and their companies. Characteristics of investors and companies are modelled in game theoretic frameworks, informed by semi-structured interviews with professionals from the energy and finance industries, and academia, NGO, and regulatory sectors. Conditions for mutual cooperation between investors and companies are characterized as prisoners’ dilemmas. A number of parameters are examined for their impact on the development of sustained cooperative equilibria, including: the benefits and costs of cooperation; the degree of strategic foresight; individual discount factors; and mutual history. Challenges in the formation of investor coalitions are characterized and solutions are proposed.

Stranded Assets and Thermal Coal in Japan: An Analysis of Environment-Related Risk Exposure

The principal aim of this report is to turn the latest research on environment-related risk factors facing thermal coal assets into actionable investment hypotheses for investors. By examining the fundamental drivers of environment-related risk, creating appropriate measures to differentiate the exposure of different assets to these risks, and linking this analysis to company ownership, debt issuance, and capital expenditure plans, our research can help to inform specific investor actions related to risk management, screening, voting, engagement, and disinvestment. To our knowledge, this report contains the most comprehensive and up-to-date analysis of the environment-related risks facing thermal coal companies that is publicly available.

Coal-fired Power Stations

Thermal coal-fired power stations currently provide approximately 40% of the worlds electricity and 30% of the worlds generating capacity. Approximately 83% of all coal demand is thermal coal, and 61% of primary coal energy is consumed in power stations. Notwithstanding alternatives in coal gasification, coal-to-liquids, and chemical looping technologies, the future of coal in the 21st century depends largely on the future of coal combustion for power generation. This chapter provides a technical overview of coal-fired power stations and their exposure to a wide array of environment-related risks, including greenhouse gas emissions and stranded assets; water consumption and competition with agriculture, industry, and domestic uses; climate stresses induced by anthropogenic climate change (of which they are the primary cause); competition with renewables and generating flexibility; costs and trade-offs of mitigation options; retrofitability with carbon capture and storage; and the availability of finance. The future of coal in the 21st century depends largely on the response of policy makers, industry and the concerned public to these risks.

Empirical calibration of climate policy using corporate solvency: a case study of the UK’s carbon price support

ABSTRACT Emission reductions improve the chances that dangerous anthropogenic climate change will be averted, but could also cause some firms financial distress. Corporate failures, especially if they are unnecessary, add to the social cost of abatement. Social value can be permanently destroyed by the dissolution of organizational capital, deadweight losses paid to liquidators, and unemployment. This article proposes using measures of corporate solvency as an objective tool for policy makers to calibrate the optimal stringency of climate change policies, so that they can deliver the least loss of corporate solvency for a given level of emission reductions. They could also be used to determine the generosity of any compensation to address losses to corporate solvency. We demonstrate this approach using a case study of the UK’s Carbon Price Support (a carbon tax). Key policy insights Solvency metrics could be used to empirically calibrate the optimal stringency of climate policies. An idealized solvency trajectory for firms affected by climate change policy would cause corporate solvency to initially decline – approaching but not exceeding ‘distressed’ levels – and then gradually improve to a new ‘steady state’ once the low-carbon transition had been achieved. In terms of the UK’s Carbon Price Support, corporate solvency of energy-intensive industries was found to be stable subsequent to its introduction. Therefore, the available evidence does not support its later weakening.

Current and Future Challenges Facing the European Union's Energy System

The EU energy system is in the middle of a period of profound change. Financing the transition to a low-carbon EU economy is expected to require

Avoiding Stranded Assets

2.2 trillion by 2035, requiring substantial private capital. However, investors are hesitant to commit capital due to many challenges facing the energy system. This review provides a high-level discussion regarding the challenges and the potential solutions to address them. We identify four main challenges: 1) structural challenges and reduced capacity adequacy, 2) an incorrect market framework to value flexibility, 3) the inability to finance the energy transition, and 4) the role of transitional fuels. Against these challenges, four potential solutions are: 1) capacity remuneration mechanisms, 2) demand-side response and consumer empowerment, 3) reforms in emissions trading and renewable subsidies, and 4) improved physical interconnections and governance. The EU’s ability to address these challenges will directly impact its position as a global leader in green energy investment.

Stranded assets and the fossil fuel divestment campaign: What does divestment mean for the valuation of fossil fuel assets?

At the turn of this century, coal mining firms in Australia believed they had a bright future ahead. China’s economy was headed into overdrive, and its leaders looked overseas for energy to fuel the unprecedented growth. Australian coal miners jumped at the opportunity. By 2013, Australia had become the largest supplier of coal to China, accounting for more than 30 percent of China’s imports. Australian companies drew up plans to pursue 89 new mining projects that would more than double their country’s coal output, largely for overseas markets like China’s.