Editing IPCC:AR6/WGIII/Chapter-3 (section)

==== 3.5.2.2 Carbon Lock-in and Stranded Assets ====

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There already exists a substantial and growing carbon lock-in today, as measured by committed emissions associated with existing long-lived infrastructure ( [[IPCC:Wg3:Chapter:Chapter-2#2.7|Section 2.7]] and Figure 2.31). If existing fossil fuel infrastructure would continue to be operated as historically, it would entail CO 2 emissions exceeding the carbon budget for 1.5°C ( [[IPCC:Wg3:Chapter:Chapter-2#2.7.2|Section 2.7.2]] and Figure 2.32). However, owner-operators and societies may choose to retire existing infrastructure earlier than in the past, and committed emissions are thus contingent on the competitiveness of non-emitting alternative technologies and climate policy ambition. Therefore, in mitigation pathways, some infrastructure may become stranded assets. Stranded assets have been defined as ‘assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities’ ( [[#Caldecott--2017|Caldecott 2017]] ).

A systematic map of the literature on carbon lock-in has synthesized quantification of stranded assets in the mitigation pathways literature, and showed that (i) coal power plants are the most exposed to risk of becoming stranded, (ii) delayed mitigation action increases stranded assets, and (iii) sectoral distribution and the amount of stranded assets differ between countries ( [[#Fisch-Romito--2021|Fisch-Romito et al. 2021]] ). There is high agreement that existing fossil fuel infrastructure would need to be retired earlier than historically, used less, or retrofitted with CCS, to stay within the remaining carbon budgets of limiting warming to 1.5°C or 2°C ( [[#Johnson--2016|Johnson et al. 2016]] ; [[#Kefford--2018|Kefford et al. 2018]] ; [[#Pfeiffer--2018|Pfeiffer et al. 2018]] ; [[#Cui--2019|Cui et al. 2019]] ; [[#Fofrich--2020|Fofrich et al. 2020]] ; [[#Rogelj--2018|Rogelj et al. 2018]] a). Studies estimate that cumulative early retired power plant capacities by 2060 can be up to 600 GW for gas and 1700 GW for coal ( [[#Iyer--2015a|Iyer et al. 2015a]] ; [[#Kefford--2018|Kefford et al. 2018]] ), that only 42% of the total capital stock of both operating and planned coal-fired powers plants can be utilised to be compatible with the 2°C target ( [[#Pfeiffer--2018|Pfeiffer et al. 2018]] ), and that coal-fired power plants in scenarios consistent with keeping global warming below 2°C or 1.5°C retire one to three decades earlier than historically has been the case ( [[#Cui--2019|Cui et al. 2019]] ; [[#Fofrich--2020|Fofrich et al. 2020]] ). After coal, electricity production based on gas is also projected to be phased out, with some capacity remaining as back-up ( [[#van%20Soest--2017a|van Soest et al. 2017a]] ). [[#Kefford--2018|Kefford et al. (2018)]] find USD541 billion worth of stranded fossil fuel power plants could be created by 2060, with China and India the most exposed.

Some publications have suggested that stranded long-lived assets may be even more important outside of the power sector. While stranded power sector assets by 2050 could reach up to USD1.8 trillion in scenarios consistent with a 2°C target, [[#Saygin--2019|Saygin et al. (2019)]] found a range of USD5–11 trillion in the buildings sector. [[#Muldoon-Smith--2019|Muldoon-Smith and Greenhalgh (2019)]] have even estimated a potential value at risk for global real estate assets up to USD21 trillion. More broadly, the set of economic activities that are potentially affected by a low-carbon transition is wide and includes also energy-intensive industries, transport and housing, as reflected in the concept of climate policy relevant sectors introduced in [[#Battiston--2017|Battiston et al. (2017)]] . The sectoral distribution and amount of stranded assets differ across countries ( [[#Fisch-Romito--2021|Fisch-Romito et al. 2021]] ). Capital for fossil fuel production and distribution represents a larger share of potentially stranded assets in fossil fuel-producing countries such as the United States and Russia. Electricity generation would be a larger share of total stranded assets in emerging countries because this capital is relatively new compared to its operational lifetime. Conversely, buildings could represent a larger part of stranded capital in more developed countries and regions such as the USA, EU or even Russia because of high market value and low turnover rate.

Many quantitative estimates of stranded assets along mitigation pathways have focused on fossil fuel power plants in pathways characterised by mitigation ambition until 2030 corresponding to the NDCs followed by strengthened action afterwards to limit warming to 2°C (&gt;67%) or lower ( [[#Bertram--2015a|Bertram et al. 2015a]] ; [[#Iyer--2015b|Iyer et al. 2015b]] ; [[#Lane--2016|Lane et al. 2016]] ; [[#Farfan--2017|Farfan and Breyer 2017]] ; [[#van%20Soest--2017a|van Soest et al. 2017a]] ; [[#Kriegler--2018a|Kriegler et al. 2018a]] ; [[#Luderer--2018|Luderer et al. 2018]] ; [[#Cui--2019|Cui et al. 2019]] ; [[#Saygin--2019|Saygin et al. 2019]] ; [[#SEI--2020|SEI et al. 2020]] ). Pathways following NDCs announced prior to COP26 until 2030 do not show a significant reduction of coal, oil and gas use (Figure 3.30f–h and Table 3.6) compared to immediate action pathways. Stranded coal power assets are evaluated to be higher by a factor of two to three if action is strengthened after 2030 rather than now ( [[#Iyer--2015b|Iyer et al. 2015b]] ; [[#Cui--2019|Cui et al. 2019]] ). There is high agreement that the later climate policies are implemented, the higher the expected stranded assets and the societal, economic and political strain of strengthening action. Associated price increases for carbon-intensive goods and transitional macro-economic costs have been found to scale with the emissions gap in 2030 ( [[#Kriegler--2013a|Kriegler et al. 2013a]] ). At the aggregate level of the whole global economy, [[#Rozenberg--2015|Rozenberg et al. (2015)]] showed that each year of delaying the start of mitigation decreases the required CO 2 intensity of new production by 20–50 gCO 2 per USD. Carbon lock-in can have a long-lasting effect on future emissions trajectories after 2030. [[#Luderer--2018|Luderer et al. (2018)]] compared cost-effective pathways with immediate action to limit warming to 1.5°C–2°C with pathways following the NDCs until 2030 and adopting the pricing policy of the cost-effective pathways thereafter, and found that the majority of additional CO 2 emissions from carbon lock-in occur after 2030, reaching a cumulative amount of 290 (160–330) GtCO 2 by 2100 ( [[IPCC:Wg3:Chapter:Chapter-2#2.7.2|Section 2.7.2]] ). Early action and avoidance of investments in new carbon-intensive assets can minimise these risks.

The risk of stranded assets has implications for workers depending on those assets, asset owners, assets portfolio managers, financial institutions and the stability of the financial system. [[IPCC:Wg3:Chapter:Chapter-6|Chapter 6]] assesses the risks and implications of stranded assets for energy systems ( [[IPCC:Wg3:Chapter:Chapter-6#6.7.3|Section 6.7.3]] and Box 6.11) and fossil fuels ( [[IPCC:Wg3:Chapter:Chapter-6#6.7.4|Section 6.7.4]] ). The implications of stranded assets for inequality and Just Transition are assessed in [[IPCC:Wg3:Chapter:Chapter-17|Chapter 17]] ( [[IPCC:Wg3:Chapter:Chapter-17#17.3.2.3|Section 17.3.2.3]] ). [[IPCC:Wg3:Chapter:Chapter-15|Chapter 15]] assesses the literature on those implications for the financial system as well as on coping options (Sections 15.5.2 and 15.6.1).

On the other hand, mitigation, by limiting climate change, reduces the risk of destroyed or stranded assets from the physical impacts of climate change on natural and human systems, from more frequent, intense or extended extreme events and from sea level rise (O’Neill et al. 2020a). The literature on mitigation pathways rarely includes an evaluation of stranded assets from climate change impacts. [[#Unruh--2019|Unruh (2019)]] suggest that these are the real stranded assets of carbon lock-in and could prove much more costly.

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