Moving to a Low-Carbon Economy: The Impact of Policy Pathways on Fossil Fuel Asset ValuesIVThe Impacts of Policy Pathways on Fossil Fuel Asset ValuesEnergy plays a central role in the global economy, and for more than a century one of the cheapest and most prevalent sources of energy has been fossil fuels coal, oil, natural gas, and the power that has been generated from these fossil fuels. Unfortunately, fossil fuel use has also been a major source of carbon emissions; in 2010, fossil fuels burned for energy contributed close to two-thirds of anthropogenic greenhouse gas emissions.1 Addressing climate change will invariably reduce or change fossil fuel use, and in all likelihood reduce the value of fossil fuel resources.Some observers worry that a switch away from fossil fuels will not only have a significant cost to the global economy, but could also absorb the investment capacity of the financial system and even undermine the finan- cial system if investors were burdened with worthless fossil fuel investments. We examine the impact of a low-carbon transition on the investment capacity of the global financial system in a companion paper, “Moving to a Low-Carbon Economy: The Financial Impact of the Low-Carbon Transition.” That paper shows that the increase in financial capacity due to reduced invest- ment needs and operating costs for fossil fuel assets more than offsets the increased investment required for lower carbon investments, even when “stranded assets” (investor losses in existing fossil fuel assets) are taken into account.In this paper, we examine the question of stranded assets: What impact would a low-carbon transition have on the value of investor portfolios when: Some fossil fuel assets become valueless as they are no longer needed and are left unex- ploited as demand falls? Other assets that continue to produce lose value as a result of price declines resulting from lower demand?Most importantly, we examine how the decline in value would be spread between governments and investors and among various countries, and how both the level of stranded assets and their distribution depends on policy. For this analysis, we have built regional and global economic models for each of the fossil fuel industries coal, oil, natural gas, and power as a tool to assess stranding risks for various assets and their owners and investors. These models estimate risk 1 Intergovernmental Panel on Climate Change, 2014. Contribution of Working Group III to the Fifth Assessment Report: Technical Summary. Available at: http:/mitiga-tion2014.org/report/final-draftby comparing two extreme scenarios one where no action is taken on climate change and one where the IEAs low carbon goals are achieved to quantify risks and assess how they may be allocated between various groups and investors.2 Actual risks are lower, as markets have built in expectations for climate action, but these two scenarios provide benchmarks for comparison.Our analysis finds the following:Governments, their citizens, and taxpayers, rather than private investors and corporations, face the majority of stranding risk. This risk is concentrated in resource-owning and producing countries, partic- ularly major oil producers. Governments own 50-70% of global oil, gas, and coal resources and collect taxes and royalties on the portion they do not own. Thus, it is unsurprising that governments would bear close to 80% of the $25 trillion of value difference for producers under our two scenarios. Only some of the value at risk would actually be lost in the transition most of the value would be trans- ferred from one economic actor to another, or one country to another. For example, a falling oil price may hurt producers but benefit consumers. Some of the lost value represents lost revenue collected by fossil fuel-producing governments from their own citizens. When these transfers are excluded, the total value at risk falls from $25 trillion to $15 trillion. Almost half of the potential stranding for governments represents lost profits and taxes that countries would raise from sales to their own citizens at world market prices. In practice, many energy producers subsidize local fossil fuel products compared to world prices, thus returning some value back to their consumers at the expense of taxpayers or service recipients. Even when adjusting for these transfers or potential subsidies, govern- ments still face twice the risk that investors do. (To put this number in perspective, $15 trillion is equivalent to approximately 6% of the 2 To evaluate and quantify stranded asset risk, we use two scenarios to represent the extreme outcomes. One is based on business as usual, where no additional climate relevant policy action is taken. The other is based on the IEAs low carbon scenarios, including the 2DS scenarios from the 2012 Energy Technology Perspec- tives (ETP) modelling, the 450 pp