Stranded Assets

The idea first covered fossil fuel reserves that could not be burned if warming was to be limited, and now extends to power plants, pipelines, refineries, ships, buildings and land. An asset can be stranded by a carbon price that makes it uneconomic, a ban, cheaper alternatives, falling demand or physical damage from climate hazards. Accounting then calls for impairment, where the book value is written down. Lenders face lower collateral values and higher defaults, while investors face lower share prices. Timing is the main uncertainty, because policy and technology move unevenly. Firms test exposure using scenario analysis and set shorter lives for assets at risk. A write-down on an impaired plant lands on the owner's balance sheet and the lender's credit book together.

A utility owns a coal-fired power station with 25 years of design life remaining. New rules limit its running hours, and cheap renewable power wins most of its customers. After 10 years the plant earns too little to cover its costs. The utility writes down its value, and the bank that financed it reclassifies the loan as higher risk.