CH AP TER 10: LO W-C AR B ON TR ANSITION AND INTER NATIONAL C OOPER ATION
simulated with the updated and enhanced ENVISAGE v10 and its new extraction module. The narratives are broadly consistent with the Network for Greening the Financial System scenarios for transition risk (NGFS 2020). In the climate policy scenarios, the value of stranded assets (net present value of resource rents produced endogenously in the model) is calculated as the difference in the asset values against the reference scenario rather than against the CWON. Many investors and asset owners expect that future fossil fuel prices will be higher than those prevailing over 2014–18, which are used in the CWON for rent extrapolation. The more recent price shock caused by the COVID-19 lockdowns is not expected to keep fossil fuel prices low for too long. Therefore, asset owners often consider most of their economically proven but not yet commercially recoverable reserves as assets—more than could be put on the national balance sheet by conservative SNA standards. The asset owners expect that a large share of these proven reserves will be brought into production in the future and will generate rents. The reference scenario that assumes adherence to climate mitigation commitments officially pledged by countries through their NDC submissions better reflects such expectations than the CWON with its constant extraction and rent profile. It is common that national statistical offices assign lower values to national fossil fuel reserves in government balance sheets compared with the more wishful thinking of extractive companies and other agencies that exercise ownership rights over fossil fuel reserves. The policy scenarios simulated here represent surprise policy shocks that diverge fossil fuel prices and volumes away from those expected in the reference scenario and, hence, change the rent profiles compared with those expected by fuel owners. Sometimes the resulting rents (for example, for coal) are even below those that a conservative accountant would put into the national balance sheet from the CWON accounts.
Countries and Country Groups For simulation purposes, the countries were aggregated into two stylized climate policy “clubs”: (1) climate policy leaders (CPLs), the members of which are assumed to be the likely primary movers of climate mitigation policies, and (2) fossil fuel–dependent countries (FFDCs), which choose to cooperate with CPLs on climate mitigation or free ride on their policy effort, risking BCATs. The results are reported for eight subgroups (table 10.1). The full list of countries in each category can be found in the background technical paper (Peszko et al. 2021). Fossil fuel wealth is highly concentrated. As much as 80 percent of the global fossil fuel wealth, reaching US$26 trillion in 2018, is in three country groups: Middle East and North Africa (MNA); Europe and Central Asia (ECA); and the coal-intensive middle-income fuel importers, including China and India (figure 10.3). MNA itself accounts for over 50 percent of the world’s total fossil fuel wealth. Countries depend on fossil fuels in many ways. Countries are also differently prepared for the impacts of low-carbon transition (see Peszko
233
