Macroeconomic impacts of stranded fossil fuel assets

The Institute of Economics will hold a meeting of its Seminar Series on Tuesday, April 9, 2019: Jean-Francois Mercure, from University of Exeter and Cambridge Econometrics, will present the paper Macroeconomic impacts of stranded fossil fuel assets.

Venue: Aula 2 - Palazzo Toscanelli

Abstract:

Emissions reductions in line with the Paris Agreement (PA) imply large changes in the way fossil fuels are used. Fossil fuels account for around 80% of energy consumption; if PA targets are met, their demand would peak and decline substantially before 2050, and reach near-zero use some time between 2050 and 2100. Meanwhile, in anticipation of some climate policy being implemented, and simply due to energy effciency policy and technological progress, the demand for fossil fuels may also decline with respect to expectations even without the adoption of climate policies designed to achieve the PA. If the demand for fossil fuels turns out substantially lower than expectations of return on investment, a carbon bubble may have formed, and a sudden burst could affect economic activity substantially. In this research, we examine whether a carbon bubble exists, and assess the macroeconomic impacts of potential future stranded fossil fuel assets (SFFA), in other words, fossil fuel assets that lose their value. We use an integrated energy-economy-climate assessment model, formed of a combination of a representation of technological diffusion for electricity generation, transportation and household heating with a highly disaggregated macroeconometric model of the global economy, and a fully dynamical carbon cycle- climate system model of intermediate complexity. We find that a carbon bubble indeed is forming in the current technological trajectory, and that macroeconomic losses in the Paris Agreement scenario are important and very different for different countries. Globally, we find a total discounted loss to the financial sector could be of the order of $4tn (in 2016 dollars; $12tn when not discounted), larger than the sub-prime mortgage loss that triggered the 2008 financial crisis.