Description

Extending the approach of Barraclough et al. (2013), Professor Smith estimates the probability of effective action on climate change, the non-stranded asset values of fossil fuel firms, and the firm’s residual value after effective action, allowing him to infer the value of stranded assets as the difference between the non-stranded and residual values.

Professor Smith has found that there is a significant probability of effective action on climate change at 51 percent. We also find that the situation is not as dire for oil and gas companies as policy makers proclaim—the residual value is very close to the current market value, at 91 percent. This suggests that the market has foreseen a significant probability of effective action on climate change but is also aware that the proven reserves of fossil fuel firms represent only a small fraction of the remaining carbon budget to keep warming below a 2°C target and hence these proven reserves are very likely to be able to be extracted.