Stranded asset, or last mover advantage?

“Stranded assets” are those left unexploited or experience a decline in value due to changing in market conditions and regulations adopted to decarbonise the economy.

The energy supply and generation business is particularly familiar with the concept of stranded assets. The total embedded emissions of known fossil fuel reserves is estimated to be around 3,700 Gt CO2, according to Carbon Tracker. If all reserves were produced this would lead to global temperatures rising in excess of 3°C. To limit warming to 1.5°C, 90% of fossil fuel reserves must remain in the ground, thus becoming a “stranded asset”.

Stranding is a function of changed consumption and expectations influenced by changes in policy, pricing, technology and behaviour. One or a combination of these factors could make it relatively more expensive to produce and consume than the alternatives, e.g. via carbon pricing and taxes, regulation, etc. These factors could make it uneconomical to invest in increasing supply, or face adverse reputational effects if they do. The technologies available to asset owners influence the timing of investment decisions, e.g. infrastructure investment involves long lead times, long lifetimes, and new technology especially, involves uncertain payoffs.

And finally, the behaviour of asset owners cannot be considered in isolation, since their behaviour operates in an environment where the incentives are not always clear and consistent, e.g. while publicly traded companies are subject to the criticism of…