Stranded Nations? The Climate Policy Implications for Fossil Fuel-Rich Developing Countries

Abstract

Developing countries rich in fossil-fuels face a unique challenge posed by climate change. They seek to extract fossil fuels at a time when the global community must reduce carbon emissions. Effective global climate policies and low carbon technologies will likely reduce the demand for fossil fuels, creating the risk of ‘stranded nations’ — where resources under the ground become commercially unattractive to extract and a substantial share of a nation’s wealth may permanently lose its value. This constitutes a parallel to the stranded assets challenge faced by the private sector.

We identify three key challenges faced by fossil-fuel rich developing countries. First, we show that these countries are highly exposed to a decline in fossil fuel demand, with their median ratio of oil and gas reserves to GDP is 3.66, compared with a median for non-FFRCs of 0.58.

Second, they are less able to diversify away from this risk than fossil fuel companies or investors - oil companies on average hold only around 13 years of reserves on their balance sheets, whereas FFRDCs hold a median of 45 years of known reserves at current production rates. Third, these countries often find themselves under pressures to implement policies that may expose them to further risk. For example, supporting fossil fuel linked infrastructure and skills that relies on long time horizons for payoffs to the country, subsidising fossil fuel consumption that extends carbon-intensity of production, or by investing state capital in fossil fuel linked assets such as national oil companies.

In response, we identify four policy implications arising from this carbon market risk that fossil-fuel rich developing countries should consider. While several of the policy recommendations align with general good practice, we show that the prioritisation, sequencing and in some cases direction of these policies require modification when considering the risks posed by a global shift away from fossil fuels.

Keywords: stranded assets, fossil fuel producers, natural resource management, climate policy, technological innovation, rapacious depletion

JEL Classification: H23, O13, O34, Q32, Q38, Q54