Climate Change, Stranded Assets, and the Next Credit Crunch
Last month I wrote about the huge risks climate change poses to the world economy. International financial institutions have made big bets on residential property just as extreme weather is making insurance in some regions harder—or impossible—to get. Without insurance, those properties are essentially worthless.
Without swift government action, we could be heading for another credit crunch.
But there’s another dimension to the problem—one that’s less visible, but potentially just as destabilising.
What Are Stranded Assets in the Low-Carbon Transition?
Stranded assets are business assets that can no longer be used because of the shift to a low-carbon economy. This includes obvious infrastructure like pipelines, oil refineries, and power plants, but also reserves of oil, gas, and coal that will never be burned.
When a country transitions to renewables, all of these assets become worthless. And they’re not sitting in some vault marked “Danger – Obsolete Soon.” They’re owned by companies—many of which are listed on stock markets.
The total value of potential stranded assets is estimated at $1.4 trillion.
Most of the market risk falls on private investors in OECD countries, including significant exposure through pension funds. A rapid collapse in the value of these assets could destabilise economies and blow a hole in government finances.
Countries Most at Risk from Stranded Asset Losses
In terms of physical assets, the US and Russia top the list, each with around $300bn in potential stranded assets. China and Canada each face around $100bn in exposure, while Qatar, Saudi Arabia, and Iran face roughly $50bn apiece.
But it’s not just about oil rigs and refineries—it’s also about profits. Fossil fuels generate enormous earnings, and the companies that benefit from them are deeply exposed too. Many of these firms aren’t drilling themselves; they’re financial institutions based in global hubs like London and New York.
The UK may have low risk in terms of physical stranded assets, but the loss of fossil fuel profits could cost it $100bn. For the US, losses would double. Globally, the potential hit to financial institutions is $600bn—more than was lost in the 2008 financial crisis.
The Hidden Human Cost of the Green Energy Shift
For rich nations, these numbers are eye-watering but survivable. Gulf States, for example, are already throwing billions at sports, tourism, and diversification projects.
But there’s a human cost that can’t be smoothed over with sovereign wealth funds.
I grew up in a former mining village in the East Durham coalfield. When the pits closed in the 1980s, whole communities lost not just their main industry but their purpose. The economic damage was devastating, but the psychological blow was worse—and we’re still living with it today.
The shift to renewables doesn’t just strand assets; it strands people and communities. Jobs disappear, and so does the reason some places exist at all.
Managing these social impacts is crucial for winning public support. The way blue-collar America swung to Trump in coal and steel regions shows how political the fallout can be. In the UK, Reform are trying similar tactics.
Just Transition: Policy, Challenges, and Opportunities
On paper, the solution is simple: a Just Transition that protects workers and communities during the shift to clean energy. In practice, it’s much harder.
The UK has a Just Transition strategy, and Scotland has earmarked funds for the North East—its most vulnerable region. A green economy brings enormous investment and job opportunities, and history shows technological change can drive growth.
But timing is everything.
How Governments Balance Climate Goals and Economic Stability
When Labour took power, they halted new oil and gas licences in the North Sea. Recently, rumours have swirled that they may allow one or two projects to go ahead. That frustrates those who want a rapid, decisive break from fossil fuels.
Yet the government faces a tricky balance:
- Move too slowly, and the risk of a climate-driven credit crunch rises.
- Move too fast, and you risk collapsing stock values, undermining pensions, and losing public support.
At least the UK recognises the challenge. In the US—the country with the largest stranded asset exposure—the presidency is still signing off on new fossil fuel projects that will become stranded within a decade or two.
Russia’s Looming Stranded Asset Crisis
One country faces a particularly grim outlook: Russia. With both massive physical and financial exposure, and an economy already under strain, it’s hard to see how it will fund the transition.
If you want to understand why oligarchs in the US and Russia suddenly find themselves on the same side, just look at the balance sheets of their companies. The numbers explain the politics.
PS.
I wrote this blog over the weekend, and yesterday the Guardian reported on this – a foreign investor trying to sue the UK Government over climate change legislation. Which goes to show that while we might not have spotted the problem some very rich people have….
https://www.nature.com/articles/s41558-022-01356-y
Your point about stranded people and communities is making me think about why Starmer’s government is in such a terrible predicament, with the Reform menace still way in the polling lead.
December 2019 shows that a metropolitan-only Labour Party (which it had been almost reduced to by then as the right-wing press exposed Corbyn’s true third-worldist views) cannot possibly win a UK General Election: it is dependent on lots of non-metropolitan “Red Wall” areas too.
The problem is however that the Red Wall is basically the former mining regions of England and Wales, which had very little going for them except that (in the past) there was coal there to mined: there is no longer any good reason for businesses to set up shop there (given that they’re also on the periphery of Europe) so they’ve largely become places to warehouse the unproductive population (pensioners, single mothers, the disabled, asylum seekers).
The Labour Party has traditionally been about protecting workers from exploitation (by bosses or by landlords) but the Red Wall’s population is increasingly made up of non-workers, and thus Labour (especially given that the national finances don’t permit buying them off with higher pensions and/or benefits) is floundering in its search for an alternative to the nativism offered by Reform.
An obvious solution would be to redistribute the population of the UK to be closer to the distribution of jobs but this is hindered by factors that mostly came into being under Labour’s most revered PM Clement Attlee: the Metropolitan Green Belt, council housing and above all the Town and Country Planning Act, which were likely devised in part to keep northerners in the north.
Liberalizing planning laws would likely mean that even more of the UK’s population would crowd into London and South East England, and while this would likely benefit Britain (it would help rid us of the toxic anti-intellectual culture, fuelled by parents fearful of their kids moving away: East Asian countries lack this in part because of their YIMBYer capital cities) it wouldn’t be easy for Labour to repudiate Attlee’s main non-NHS legacy.
That is exactly the problem. Labour are a party of workers. Reform are a party of non-workers
2010-2014 saw a massive shift in income from workers to non-workers. Predictably the economy slowed down.
Labour want to shift that back, and grow the economy faster. Non-workers will always be angry about that. Labour’s problem is whether the workers feel richer by the new GE to reward them, or whether the angry non-workers will put Reform in to bat
Sounds like the real problem is that the non-workers dominate far more electoral constituencies than the workers do!
Or that the non-workers vote as a block. The workers vote is split
Sounds like an urgent case for introducing Proportional Representation!
It is. But social media has infantilised us. People demand a new Government every few months, they want instant gratification. We don’t have a mature enough political culture to make PR work – it requires compromise and coalitions. People don’t want to hear that, and they will have massive tantrums if you try and explain it to them