Energy transition is disrupting fossil fuel systems, with profound consequences for financial markets and geopolitics as the COVID-19 crisis accelerates change.

A Carbon Tracker report, Decline and Fall: The Size and Vulnerability of the Fossil Fuel System, finds falling demand, lower prices and rising investment risk is likely to reduce the value of oil, gas and coal reserves by nearly two thirds, increasing the risk and likelihood of stranded assets.

The largest quantum of change is the fall in the amounts of rent, slashing income for the governments of petrostates. Profits will also fall, not just for the high cost companies, but right across the system and assets will become stranded as prices fall below variable costs.

The decline of the fossil fuel economy poses a significant threat to global financial stability. The report warns investors there is far more risk in the fossil fuel system than is conventionally priced into financial markets. Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs.

Kingsmill Bond, Carbon Tracker energy strategist and report author, said: "We are witnessing the decline and fall of the fossil fuel economy. Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the COVID-19 pandemic has accelerated this. We may now have seen peak fossil fuel demand as a whole. This is a huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement.”

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