Sustainability Transition

Aug 6, 2019 by

The lecture was delivered by Prof. Armon Rezai who took us through the topic of climate policy and carbon-based assets from a finance perspective.

In his opening remarks, they mentioned that in the June of 2015, the United Kingdom pledged to reduce carbon emissions to a net 0% by 2050, which was followed by France taking the same decision. This set the tone for his presentation that global efforts to minimize carbon emissions are underway.

In the next part of his presentation, they pointed out financial implications of climate policy such as risk of fossil fuel deposits getting stranded, risk of financial assets, and risk to countries that depend largely on fossil fuels and therefore, the race to burn the last ton of carbon.

“Stranded assets” were described as those assets that undergo unanticipated drops in profitability and valuation (and become liabilities). One example are fossil fuel-based industries. They pointed out that fossil fuel-based industries face threats from climate change and technological innovation. However, a caveat was issued that the relevance and magnitude of such a threat is subject to ongoing research and their outcomes. Citing the examples of oil producing countries such as Norway, Kuwait, Iran, Saudi Arabia or others, Rezai added that these countries depend on oil for income to develop their states, and that any drop in oil prices would cause their economies to plummet. They quoted the oil price fall of 2008 as an example of the unpredictability of oil prices.

Further, Rezai explained a five points ‘One slide Theory’ and went onto explain the carbon bubble; the anticipated point of time when the demand for fossil will peak and then nose dive, as the governments of most countries are putting in efforts to curb the use of fossil fuels and switch over to renewable alternatives.

In terms of financial market representation, the carbon tracker initiative (2011) suggests that 20 to 30 percent of the market capitalization of the stock exchanges of London, São Paulo, Moscow, Australia and Toronto is in fossil fuels. This is a risky undertaking given that climate policy are being toughened, Rezai informed.

The lecture concluded by posing three questions:

  1. What is the risk of fossil fuel assets?
  2. What are the risk of other financial markets?
  3. Which is risk of fossil fuel driven economy of the country?

The main gist of Rezai’s lecture was that the transition from fossil fuel to alternative renewable energy would be tandem with technological breakthroughs. Simultaneously, they cautioned that the use of fossil fuel will continue on as per usual basis for the foreseeable future, and the use will not be put to an end, not soon enough to put a break on imminent climate change.


Footnotes:

  1. Emission of greenhouse gas is the world’s largest negative externality (Stern, 2007);
  2. Internalizing externalities creates a surplus (efficiency gains), which is up for grabs;
  3. Most of the benefits accrue to future generations;
  4. Economic benefits might be capitalized and visible in today’s prices;
  5. While in general, climate policy is beneficial, owners of certain assets classes will undoubtedly lose. 

Written by: Sabina Nimako & Ugyen Dorji

Based on the lecture “Sustainability transition” held by Armon Rezai during AEMS 2019.