policies or a breakthrough in lowcarbon technology is unlikely to be a source of systemic risk to the larger financial sector. In fact, the risk of stranded assets can be a springboard for better resource planning, diversification and a transition towards more sustainable development. On the other hand, delayed and disorderly mitigation strategies to tackle the transition to net-zero will lead to stranded assets and legal claims. Major technological breakthroughs in the renewable energy sector, which are both cost effective and sustainable, will make way for an increase in stranded assets. Similarly, abrupt policy changes by governments to severely limit cumulative carbon emissions can plunge the profitability of fossil-fuel companies, making it unfeasible for them to operate their assets, which will also result in write-downs. An increase in stranded assets due to legal claims could happen if a legal action is taken against the owners of carbon-emitting assets who are responsible for significant amounts of damage due to climate change. This is because the dangers and risks of global warming were known to the fossil-fuel industry since early 1960s, yet they continued to invest in large-scale fossil-fuel exploitation. A DOUBLE-EDGED SWORD Adopting clear and effective long-term climate and energy policies is crucial to reducing uncertainty for financial institutions. A credible climate change policy framework that provides the necessary long-term certainty to financial institutions will discourage investments in firms holding stranded assets and other high-carbon businesses. At the same time, it will boost investments in cleaner technology and energy saving. Implementing and following a clear-cut policy also helps in reducing uncertainty, which can prevent wasteful capital expenditures by fossil fuel firms, cutting losses for investors and creditors, while reducing market volatility and ensuring market liquidity with regard to high-carbon assets, thus avoiding unnecessary distrust among financial institutions. Finally, macro-prudential policies by central banks and other regulatory bodies can ensure that national financial sectors do not have an excessive exposure to transition risks, helping to prevent the emergence of negative feedback loops that could destabilise the financial system. This could involve reducing the impact of potential shocks to the asset management sector as a whole, for example, even if the risks for many individual investors do not seem excessive. Such prudent measures can be a double-edged sword in making a techno-economic paradigm shift towards the next green wave. FIFTY FOUR DEGREES | 23 Marwan Izzeldin is a Professor of Financial Econometrics in the Department of Economics, and the LUMS Associate Dean International. The article Stranded assets a double edge sword or a double whammy for countries dependent on Fossil Fuel? Was co-authored by Professor Marwan Izzeldin and Dr Momna Saeed, a Research Fellow for the Gulf One Lab for Computational and Economic Research (GOLCER). m.izzeldin@lancaster.ac.uk
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