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Clean tech and climate policy could cut fossil fuel profits by two thirds
Countries must plan orderly exit from oil, gas and coal LONDON/NEW YORK, June 4 – Falling demand and...Read More
Decline and Fall: The Size & Vulnerability of the Fossil Fuel System
This infographic is for the report Decline and Fall: The Size & Vulnerability of the Fossil Fuel System.Download Resource
Kingsmill Bond, Carbon Tracker Energy Strategist and report author, said: "We are witnessing the decline and fall of the fossil fuel economy. Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the COVID-19 pandemic has accelerated this. We may now have seen peak fossil fuel demand as a whole. This is a huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement. Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.
The energy transition is disrupting the entire fossil fuel system, with profound consequences for financial markets and geopolitics.
In this report, we calculate the size and vulnerability of the different parts of the system. We take a wider definition of the whole fossil fuel system, looking at stocks and flows, supply and demand, fossil fuels, infrastructure and financial markets.
Source: Bloomberg, IEA, Tong et al., Carbon Tracker
The forces of disruption in the fossil fuel system
The fossil fuel system is being disrupted by the forces of cheaper renewable technologies and more aggressive government policies. In one sector after another, these are driving peak demand, which leads to lower prices, less profit, and stranded assets. The COVID-19 crisis is now accelerating this.
Our analysis finds falling demand, lower prices and rising investment risk is likely to slash the value of oil, gas and coal reserves by nearly two thirds, increasing the risk and likelihood of stranded assets. The four main consequences of lower prices, as highlighted in the chart below, are:
- Lower rents. As the chart shows, the largest quantum of change is the fall in the amounts of rent. This means less money for the governments of petrostates.
- Lower profits. Profits fall not just for the high cost companies, but right across the system.
- Totally stranded assets. When prices fall below variable costs, you have totally stranded assets.
- Lower capex. As companies struggle to survive and figure out that growth is over, so they reduce their capex.
The decline of the fossil fuel economy poses a significant threat to global financial stability. The report warns investors there is far more risk in the fossil fuel system than is conventionally priced into financial markets. Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs.
For policymakers, the implication is the urgent need to put in place an orderly wind-down of assets rather than trying to rebuild the unsustainable.
Carbon Tracker has been writing for many years about which areas are most at risk from the energy transition. We have focussed on different areas of supply and demand for existing and new assets, over separate timescales, and the conclusions of that analysis are incorporated into this report.
We provide a framework within which to think about the energy transition so that the impact on each of the pieces can be better understood.