What is Stranded Assets?

What are Stranded Assets?

Stranded assets are resources, infrastructure, or capital equipment that suffer unanticipated or premature write-downs, devaluations, or conversion to liabilities before the end of their expected economic life. In the climate context, the term refers primarily to fossil fuel reserves that cannot be burned within carbon budget constraints, and to the physical infrastructure—power plants, pipelines, refineries—built to extract, process, and combust those fuels.

Why It Matters

The Carbon Tracker Initiative's foundational 2011 analysis established that proven fossil fuel reserves held by listed companies exceed the global carbon budget by a factor of three to five. If the world follows through on Paris Agreement commitments, the majority of these reserves—and the infrastructure built to exploit them—will never generate their expected returns. This "carbon bubble" represents trillions of dollars of potentially overvalued assets on corporate balance sheets and in investment portfolios.

The stranding mechanism operates through multiple channels. Carbon pricing makes high-cost fossil fuel extraction uneconomic. Renewable energy cost declines undercut fossil generation on merit order. Regulatory mandates (ICE vehicle bans, coal phase-outs, building electrification codes) eliminate demand segments. And shifting consumer preferences and corporate procurement policies redirect purchasing away from carbon-intensive products.

Real-world stranding is already occurring. European utilities wrote down over €100 billion in fossil fuel asset values between 2010 and 2020. U.S. coal company valuations have collapsed—the market capitalization of the U.S. coal sector fell by over 95% between 2011 and 2020. Oil and gas companies recorded over $200 billion in asset impairments during 2020 alone, though many analysts argue that book values still reflect overly optimistic assumptions about long-term demand.

For investors and lenders, stranded asset risk translates directly to financial exposure. Banks with large fossil fuel loan books, pension funds with concentrated energy holdings, and insurers writing policies for fossil infrastructure all face potential losses as the energy transition accelerates. The Network for Greening the Financial System (NGFS), a coalition of over 130 central banks, has warned that disorderly transition poses systemic risks to financial stability.

How It Works / Key Components

Carbon budget analysis quantifies the constraint. The remaining global carbon budget for a 50% chance of limiting warming to 1.5°C is roughly 400 gigatonnes of CO2 from 2024. Current proven fossil fuel reserves, if fully combusted, would release over 3,500 gigatonnes. This arithmetic means that the majority of reserves—particularly high-cost, high-carbon assets like Arctic oil, tar sands, and thermal coal—face stranding under any credible transition scenario.

Asset-level analysis identifies the most vulnerable holdings. Carbon Tracker's asset-level modeling examines individual projects and reserves against various demand and carbon price scenarios, ranking them by break-even cost and carbon intensity. Assets requiring oil prices above $60/barrel, coal plants without CCS competing against renewables below $40/MWh, and gas infrastructure dependent on 40+ year operating lifetimes are most exposed to early stranding.

Financial transmission mechanisms propagate stranding risk through the economy. Impairments reduce corporate earnings and equity values. Debt covenants may be triggered by asset revaluations. Tax revenues decline in fossil fuel-dependent jurisdictions. Employment and community economic impacts follow. These cascading effects are why central banks and financial regulators increasingly require climate scenario analysis and stress testing from financial institutions.

The time dimension is critical. Gradual, predictable stranding through orderly policy implementation allows companies and investors to adjust portfolios and transition investments. Abrupt stranding—triggered by sudden policy shifts, technology breakthroughs, or demand collapses—creates disorderly market adjustments with amplified financial and social consequences. The gap between climate ambition and current policy action increases the probability of disorderly outcomes.

Council Fire's Approach

Council Fire helps investors, lenders, and corporations assess and manage stranded asset exposure through carbon budget analysis, asset-level scenario modeling, portfolio climate stress testing, and transition planning. We work with financial institutions to integrate stranded asset risk into credit analysis, portfolio construction, and regulatory compliance, and with asset owners to develop transition strategies that protect long-term value.

Frequently Asked Questions

Which assets are most at risk of stranding?

Thermal coal faces the most immediate stranding risk—unabated coal power is already uneconomic against renewables in most markets, and over 40 countries have committed to coal phase-outs. High-cost oil (Arctic, deepwater, tar sands) is next most vulnerable, as these projects require sustained high prices to generate returns. Long-lived gas infrastructure (LNG terminals, pipelines with 30-40 year design lives) faces growing risk as electrification and green hydrogen reduce gas demand through mid-century.

How does stranded asset risk affect company valuations?

Stranded asset risk affects valuations through multiple channels: reduced expected future cash flows from reserves that may never be produced, impairment charges that reduce book value, increased cost of capital as investors demand higher risk premiums, and regulatory compliance costs. Companies that fail to incorporate credible transition scenarios into their strategic planning face accelerating discount rates as investors increasingly differentiate between fossil fuel companies with and without viable transition strategies.

What should investors do about stranded asset risk?

Investors should stress-test portfolios against multiple climate scenarios (including orderly and disorderly transition pathways), assess exposure at the asset level rather than relying on sector-level averages, engage with portfolio companies on transition planning, and reduce exposure to the most vulnerable assets. The TCFD and ISSB frameworks provide structured approaches to identifying and disclosing climate-related financial risks, including stranded asset exposure.