This Changes Everything: Capitalism vs. The Climate

by Naomi Klein

If the companies have miscalculated and we do get serious about leaving carbon in the ground, these huge projects will become what is known as “stranded assets”—investments that lose their projected value as a result of, for example, dramatic changes in environmental policy. When a company has a great deal of expensive stranded assets on its books, the stock market takes notice, and responds by bidding down the share price of the company that made these bad bets. This problem goes well beyond a few specific projects and is integrated into the way that the market assigns value to companies that are in the business of extracting finite resources from the earth. In order for the value of these companies to remain stable or grow, oil and gas companies must always be able to prove to their shareholders that they have fresh carbon reserves to exploit after they exhaust those currently in production. This process is as crucial for extractive companies as it is for a company that sells cars or clothing to show their shareholders that they have preorders for their future products. At minimum, an energy company is expected to have as much oil and gas in its proven reserves as it does in current production, which would give it a “reserve-replacement ratio” of 100 percent. As the popular site Investopedia explains, “A company’s reserve replacement ratio must be at least 100% for the company to stay in business long-term; otherwise, it will eventually run out of oil.”53