Can environmental assets be stranded? | tutor2u Economics

The Governor of the Bank of England, Mark Carney, courted the wrath of the fossil fuel industry in a speech at the end of last month. He argued that investors in the sector face ‘potentially huge losses’. Actions by governments to try to head off climate change could make most reserves of coal, oil and gas ‘literally unburnable’.

Tougher rules and regulations on the use of carbon based energy, along with higher taxes, could leave the assets of fossil fuel companies ‘stranded’. ‘Stranded’ is the new buzz word in climate change circles. Assets may be left stranded in the ground because it is no longer practical to extract them at any meaningful rate.

A fascinating and closely argued paper by Ted Nordhaus and Michael Shellenberger of the California-based Breakthrough Institute puts a different perspective on how energy assets become stranded. They give plenty of historical examples. In the middle of the 19th century, Americans used 13 million gallons of whale oil each year, mainly to light their lamps. Within two years of the first oil strike in 1858, the petroleum industry achieved that level. Whalers quit their jobs to work in the oil fields. The asset of whale oil was left ‘stranded’ in the whales in the ocean. From the first stirrings of industry in England several hundred years ago to well into the 19th century, wood was the primary source of energy for our factories and blast furnaces. Coal stranded the wood fuel industry. In 1900, just 2 to 3 percent of England was covered by forests. Today, 10 to 12 percent is.

Nordhaus and Shellenberger argue that large scale asset stranding in the global energy context will remain, as it has always been, primarily driven by technological change. Whether from wood to coal in the nineteenth century or, as is currently underway in the United States, from coal to gas in the twenty-first, the primary driver of wholesale transitions to new sources of energy has been the fact that the new source of energy was cleaner, cheaper and more useful.

This is the classic concept of a disruptive technology put forward by the great Harvard economist Joseph Schumpeter. Such technologies are so superior they simply sweep aside competition. Within a few years of the coming of the railways, the prestige London to Edinburgh stagecoach service disappeared. Humanity’s quest for more heat, light, and power has been the main driver of invention and innovation. Only this month, Bill Gates announced a project to work with the Chinese government to develop a next-generation nuclear reactor that not only cannot melt down but also recycles waste as fuel.

The demand for energy, especially in the developing world and countries like India and China with their massive, aspirant populations, will continue to grow. Carbon pricing, emissions caps, the whole paraphernalia of regulation which Western countries might bring in, will not alter this demand. Fossil fuels may indeed become stranded. This will happen not because of bureaucrats, but because of innovation and breakthroughs in nuclear and alternative energy technologies.

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