Avoiding investment in fossil fuel assets

Reducing greenhouse gas emissions requires a transformation of capital assets in the economy, especially those for energy supply. This paper explores the hypothesis that economically efficient decarbonization occurs when the demand for fossil fuels declines at the same rate as their capital assets depreciate. In theory this means that new investments in fossil fuel assets are avoided, but without incurring stranded assets. We examine the practicality of this hypothesis using a biophysical economic model of the US energy supply system, with an example focused on impacts of electric vehicles on the petroleum supply chain. We specifically address two questions: (1) What rate of market penetration for electric vehicles is necessary to avoid investments in the petroleum-related assets? (2) How do the costs of upstream capital assets change with the transformation to electric vehicles? High annual depreciation rates for oil refineries (δ = 9.47%) and assets for crude oil extraction (δ = 8.23%) have important impacts on results. To avoid new investment in oil refining assets through widespread electrification of light-duty vehicles, the vehicle stock would need to be transformed in just 4 or 5 years. Under most scenarios, some petroleum pipelines will likely become stranded assets due to their low rate of depreciation (δ = 2.48%). In some scenarios, additional investments in wind and solar power generation surpass oil and gas extraction for about 5 years during the transformation to electric vehicles. Once built, however, wind and solar capital assets last longer, as shown by their low rate of depreciation (δ = 3.26%).

The online version of this article (doi:10.1111/jiec.13401) contains supplementary material, which is available to authorized users.