Politics of Poverty

Who should sell the last of the fossil fuels: Stranded assets, equity and climate change

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A girl walk along a street while Oshie gas flare belonging to Agip oil company burns in Akaraolu community Rivers State, Niger Delta area of Nigeria June 2015. (Photo: George Osodi / Panos for Oxfam America)

There is a need for the world to think more clearly about equity issues when it comes to how assets will be stranded as we move to decarbonize the economy.

James Morrissey is a Researcher on Extractive Industries and Governance at Oxfam America.

New research from Oxfam argues that the process of stranding assets to address climate change has important equity dimensions that have thus far been overlooked. While it is widely recognized that the world’s poorest people should not shoulder an unfair burden as we transition to a zero-carbon world, equity concerns to date have been limited to who consumes fossil fuels rather than who sells them. James Morrissey has done some calculations to explore just how important these equity concerns could be.

Extractive industries provide potentially significant opportunities for development. For example, in 2012, according to World Bank figures, the total resource rents generated by developing countries were just under five times as large as the total aid flows in the same year.  When these revenues come from fossil fuels, however, they come with a cost: burning them drives climate change.

Oxfam is committed to limiting the increase in global average temperatures to 1.5oC. Elsewhere estimates indicate that in order to limit the world to a 2oC rise in temperature vast quantities of fossil fuels will have to remain in the ground – a process known as stranding assets. A focus on limiting warming to 1.5oC means leaving an even greater proportion of fossil fuels, unburned.

So far analyses of how much carbon needs to be left in the ground have focused on assessing which fossil fuels will be extracted first from the world’s reserves, and then stopping extraction at the point at which burning more fossil fuels will result in a temperature rise of more than 2oC. Importantly this analysis of how fossil fuels will be extracted has been modelled on where it makes the most economic sense to extract these fossil fuels (to use the technical jargon the model has been based on ‘cost optimization’).

However there might be more to this problem than simple economic efficiency and cost optimization. This is because who has their assets stranded has important implications. For developing countries in particular, leaving these fossil fuels in the ground has real consequences. It means forgoing the revenues that could be generated from the sale of those fossil fuels, and that could be used to pay for important services such as schools and hospitals.

The issue of stranded assets therefore raises very tricky issues of equity: Should the burden of stranded assets land on countries whose assets are least economically efficient to extract? should all of the world’s countries have to share the burden of stranded assets equally? or should some countries shoulder more of the burden, and some less?

While the issue of equity has received a great deal of attention in climate negotiations, this has been limited to a focus on reducing emissions. The dominant framing for dealing with this has been to acknowledge that, some countries are both more responsible for climate change and have a greater capacity to reduce their emissions. As such, those countries should bear the greatest burden for reducing emissions. This idea is captured in the notion of ‘common but differentiated responsibilities’, by which all countries have a responsibility to reduce their emissions, but those responsibilities are differentiated so that the greatest share of the burden falls on advanced industrial economies.

Despite the centrality of the notion of common but differentiated responsibility within climate negotiations, there has, to date, been almost no mention of equity concerns around stranding assets, where the assumption has been that assets will be stranded based on how economically efficient it is to extract them. Essentially the world has focused on equity in terms of who gets to use fossil fuels, but not in terms of who gets to sell them.

In order to address this, Oxfam turned to political philosopher, Professor Simon Caney, at Oxford University, and asked him to explore whether there were ethical grounds for considering equity questions in the stranding of assets. In particular we asked whether the notion of ‘common but differentiated responsibilities’, should apply to stranded assets as much as it should to emission reductions. In short Professor Caney’s report finds that there is a compelling argument for expanding the notion of common but differentiated responsibilities to the issue of stranded assets. He further argues that countries should receive preferential treatment based on:

  1. Their low level of human development
  2. Their lack of historical benefit from fossil fuel extraction
  3. Whether they have alternative development options available to them

Based on these grounds, the paper argues countries should either bear less of the burden of having their assets stranded, or they should receive priority for compensation in return for not exploiting their fossil fuel reserves (a policy that might make sense given the infrastructure costs that have already been sunk in major fossil fuel exploiting territories such as North America and Middle East).

A quick response to this argument might be to acknowledge that while the case for considering equity in how assets get stranded is compelling, this issue is moot because we simply cannot afford to burn any more fossil fuels – especially if we hope to stay below 1.5oC of warming. As a result there is simply no space for equity concerns – however disappointing or unjust that might be.

Some quick (and dirty) calculations, done by me however suggest that we could burn virtually all of the fossil fuel reserves in the developing world, and we would still have a 50% chance of keeping global temperature rise below 1.5oC (you can check out the calculations supporting this here – but it is worth noting, up-front, that they don’t include China*). The total value of these reserves is impossible to accurately guess, however, at today’s prices they are thought to be worth around $21 trillion – or about $627 billion per year** (approximately equivalent to the total US expenditure on education in 2015), for 35 years (up until 2050). These resources therefore clearly represent a significant opportunity for improving the lives of some of the world’s poorest people, and they can be exploited without necessarily inducing dangerous levels of climate change.

Obviously the issues surrounding equity and stranded assets are contentious and the political implications of these questions are enormous. It is unlikely, for example, that all developed countries (including China in this case) would simply stop extracting their fossil fuels and begin purchasing them from developing countries, or that developed countries would simply start compensating developing countries for foregoing those revenues. Likewise there remain problems with the calculations, such as what these numbers would look like if we included all the considerations laid out in Simon Caney’s paper, and whether or not the world considers a 50% chance of exceeding 1.5oC acceptable (the world has already passed the possibility of standing an 80% chance of keeping global temperature below 1.5oC). Finally there are challenges in terms of translating resource wealth into broad and inclusive improvements in human well-being and whether we think developing countries, with their current forms of governance, are capable of achieving this.  As such it is not my intention to simply suggest that all the developing world’s fossil fuel reserves should be exploited.

That said, it seems clear that there is a need for the world to think more clearly about equity issues when it comes to how assets will be stranded as we move to decarbonize the economy. Equity is an issue that is central to addressing climate change. It seems reasonable therefore that we should expand that notion of equity to include who gets to sell fossil fuels and not just who gets to consume them. Based on the numbers that I have calculated here, the scale of resources involved is not trivial. Overlooking equity issues could cost developing counties an enormous amount of revenue in terms of forgone improvements in human wellbeing. Based on these arguments it seems that equity in stranded assets is an issue that is simply too important to overlook.

*If we include China in the calculations then we go beyond a 50% chance of keeping temperature rise below 1.5oC, however, even if we include China’s reserves we still have an 80% of staying below 2oC. See the calculations for more details.

**Note that this is the gross value of the reserves, this is not what we could expect countries to receive in revenues (i.e. this is not the rents). See the calculations for more details.

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