Stranded Assets: Economic risks of fossil fuels and entry points for international cooperation

In the Paris Agreement on climate change, the international community set a goal to limit global warming to 1.5 or maximum 2 degrees Celsius. This goal necessitates limits on fossil fuel use: estimations suggest that around one third of crude oil, half of natural gas and over 80 per cent of global coal reserves will have to stay in the ground. However, not extracting these resources is likely to cause significant stranding of assets, generating major risks for investors and governments. This could heavily affect social and economic development prospects of countries that depend on fossil fuel production. However, the adverse effects of climate change would be even more devastating for the global economy if no action were to be taken. Therefore, to address the issue of stranded assets, a development path more compatible with the environment and that mitigates impacts is required.

In this context, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) has commissioned adelphi to assess the ways in which asset stranding could affect the economies and governance structures of fossil fuel-producing countries. Based on this, adelphi is exploring options for bilateral and multilateral action in order to minimise the risks that come along with a climate-compatible transition. The project aims to highlight the nexus of climate and resource policies and foster coherent approaches in different fields of development cooperation.

adelphi supported GIZ in preparing a scientific report on the current status of economic and political research on stranded assets as well as on developing recommendations for Germany’s involvement in development cooperation activities. Particular attention was paid to case study countries Mexico, Nigeria, Indonesia and Mongolia. The results and recommendations were discussed with experts by means of interviews and a conference at the sidelines of COP23 in Bonn.