A vast industrial area opens before Hans-Peter Noll. Standing on the roof of a now-defunct coal mine in Essen, in western Germany, Noll takes inventory of his legacy: his grandfather, then his father, worked these mines. But Noll shut them down.
Noll, who is president of a foundation representing Zeche Zollverein and what used to be one of Europe’s largest coal mines, had time for this transition away from coal. The Ruhrgebiet slowly ceased its digging operations over a period of more than 40 years.
But today, the world doesn’t have that kind of time to act on climate change. With no action, emissions from existing coal power plants could on their own tip the world above the limit of 1.5 degrees Celsius (2.7 Fahrenheit) warming, according to the International Energy Agency.
Phasing out coal as an energy source would mean shutting down around 9,000 coal power plants worldwide. Adding to that, the recommended phaseout of oil would leave thousands of pumping jacks idle and offshore drilling rigs stranded at sea.
Stranded assets haunt companies’ balance sheets Fittingly, that’s exactly what these investments are called: stranded assets. That’s how business people refer to these vast, idling industrial infrastructures. It’s abandoned property that will have to be written off in a company’s balance sheets before the end of its planned lifetime.
And it’s costing companies — and the public — a fortune.
Germany has been twisting and turning over its phaseout of coal and lignite power plants over the past five years. Originally, it planned to stop using coal in its energy mix in 2038. Then the current government accelerated that goal by eight years to 2030. Recently, some politicians have called that decision into question.
Climate wrangling: Germany’s coalition on the brink?To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video
The earlier phaseout plan could lose operating companies €11.6 billion ($12.5 billion), according to a 2022 study by Dresden University.
That’s unrealized profits for companies that invested in the energy infrastructure, betting on a longer life span, plus potential lost income for investors who bought stock in the utility companies.
Fossil fuels at center of global financial system But Germany’s example is only a drop in the bucket. Globally, up to 50% of the currently used and planned fossil fuel-dependent power plants would have to be phased out earlier than their planned lifetime to limit climate change to below 2 degrees warming. Taking only coal into account, this represents assets worth between $150 billion and $1.4 trillion.
Making exact assessments of the size of the problem is difficult because it remains unclear which path policymakers will take. And what should be included in estimates — the value of minerals left in the ground? Unrealized company profits? Or even combustion engines that will no longer be of use?
Globally, countries will have to face financial consequences from shutting down coal power plants “The problem with fossil fuel is that it’s worth between $16 trillion to $300 trillion, depending on how you calculate. So it’s massive,” said Joyeeta Gupta, an economics professor at the University of Amsterdam. But this industry is also the base for a huge pile of financial wealth.
Pension funds deeply exposed to fossil fuel industry A case in point are the money managers set up to handle retirement for billions of people globally: Pension funds are tasked to hold their clients’ money and turn a profit from the investments. That means investing the proceeds into stocks on the market.
But with large chunks of the market tied to the fossil fuel industry, a lot of the money is invested in coal, oil and gas. And this money could lose value under ambitious climate policies.
A European pension fund could be exposed as much as 40% to companies that could be at risk of stranded assets, according to Irene Monasterolo. The professor of climate finance at Utrecht University is part of a large and growing group of academics and experts drawing out the risks to the wider financial system posed by these carbon assets.
Mark Carney, the former Bank of England governor, is largely credited with kicking off a public debate on the financial stability concerns due to climate change. Speaking in front of London’s insurance executives in 2015, he called for more transparency on climate risks — information that should then feed back into climate policies in reference to risks in financial markets.
Growing carbon bubble threatens action on climate change Thus far, these risks haven’t been resolved. Speaking with DW, Monasterolo warned that the amount and intricate interconnectedness of carbon assets could lead to a disastrous outcome.
“The point is not whether there is a financial bubble, but whether it will burst or not,” she said.
Regulators seem to have caught up with the warning calls. In late November, the European Central Bank threatened to fine about 20 European banks for mishandling climate risks, Bloomberg reported. But returns on investment could stack pensioners against tough climate action.
Zollverein Coal Mine, as seen from aboveTo view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video
Most large central banks globally now require their banks to stress test their business models for climate scenarios.
But what is essentially at odds, highlights Monasterolo, is the “long-term dimension of climate change versus the short-term decision making in policy and in finance.”
The long period of transition in Germany’s west turned polluting smokestacks into tourist attractions. The former mine in Essen was turned into a museum and event location — a new asset for the region, and a change that put the public good over short-term profits.
Edited by: Kristie Pladson
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