Why our continued use of fossil fuels is creating a financial time bomb

The numbers are shocking.

We know how much carbon dioxide we can put into the atmosphere before we exceed our climate goals. We can figure out how much more fossil fuel we can burn before we start emitting carbon dioxide. When you compare those numbers with our known fossil fuel reserves, things get jaw-dropping.

To reach our climate goals, we need to leave a third of the oil, half of the natural gas, and nearly all the coal in the ground unused.

We are still building infrastructure that is predicated on burning more than that: mines, oil and gas wells, refinery, and the distribution networks that get all those products to market. If we are to reach our climate goals, some things will have to be shut down and left to sit and wait for a return on their investment.

If we decide to get serious about addressing climate change, there will be problems. We have workers who are trained to use all of the unused hardware, companies that treat the fuel reserves and hardware as an asset on their balance sheets, and various contracts that dictate that the reserves can be exploited.

If we were to get serious about climate change, all of these things would see their value plummet. At that point, they would be referred to as "stranded assets" and have the potential to unleash economic chaos on the world.

Fantastic assets and how to strand them

Armon Rezai of the Vienna University of Economics and Business turned to actual strandings to explain stranded assets. If you have a boat that runs aground, you can no longer derive financial benefits from it, because it is no longer useful. The same thing happens for any goods it was carrying, as well as the crew that was familiar with it.

It is possible for a one-off disaster to occur with fossil fuel production and use, but it does not represent the sort of wholesale threat to fossil fuel production that is at issue in the near future.

Many of the ways that assets can become stranded are related to fossil fuels. A brand falling out of fashion leaving its owners with excess production capacity is what Joyeeta Gupta of IHE Delft said. The infrastructure used to make, sell, and service a product can be irreparably damaged by technological changes.

All of the people we talked to said that strandings are part of capitalism. They apply to fossil fuels, as people are looking for cleaner alternatives and renewable technologies are cheaper than fossil fuels.

Policy interventions by governments are an added risk. Various governments have put a price on carbon emissions, launched carbon trading systems, and taken other actions to either discourage the use of fossil fuels or encourage the use of cleaner alternatives. At the same time, many of them have pursued policies that promoted fossil fuel use.

It is tempting to try to identify which stranding mechanisms will be decisive. All of them are acting in parallel. They will have to act quickly if we want to reach our climate goals.