Investors and stranded asset risk: evidence from shareholder responses to carbon capture and sequestration (CCS) events

ABSTRACT

To avoid catastrophic climate change risk, the case for fossil fuel reserves not being burned has become stronger. This is particularly the case for coal, as the highest emitter of CO2 per unit of energy, with large portions of coal reserves likely to become stranded assets, posing significant risk to investors. Technology in the past has come to the rescue, so investor valuations may depend on perceptions for the success of technology in reducing stranded asset risk. We examine whether coal company shareholders perceive coal as a technologically stranded asset by studying shareholder reactions to news about CCS (carbon capture and sequestration) technology breakthroughs and setbacks. We find significant positive reactions to CCS breakthroughs, but no reaction for setbacks. This suggests investors have embedded expectations of stranded asset risk into their valuations, but also recognize the significance of successful CCS technology development and deployment for the economic prospects of the coal industry.

KEYWORDS:

• Climate change
• coal
• stranded assets
• carbon capture and sequestration technology
• pricing climate risk

JEL:

• G14
• Q51
• Q54
• Q58

Acknowledgement

The authors thank two anonymous referees for valuable comments and suggestions that greatly improved the quality of the paper. This study benefited from comments by participants at the 1st Global Conference on Stranded Assets and the Environment, October 2015, The Queen's College, University of Oxford and the 3rd Geneva Summit on Sustainable Finance, Geneva, Switzerland, University of Geneva, March 2016.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

We are grateful for a summer research grant from the Tom and Jane Petrie Faculty Development Fund at the University of Colorado Denver, and summer faculty research grants from the Business School at the University of Colorado Denver.