Valuing Subsoil Fossil Fuel Assets in the CWON

range of low-carbon transition policy scenarios than most models used in the stranded assets literature.2 Fourth, it informs the political economy of international climate cooperation by exploring how the distribution of stranded assets across regions changes in alternative climate and trade policy scenarios.

Not all known and proven reserves qualify as economic assets. In the SNA, only the deposits that are commercially exploitable, given current technology and relative prices, are considered assets (EC et al. 2009). SEEA identifies three classes of known deposits, among which only “class A,” commercially recoverable resources that come from on-production projects, projects approved for development, and projects justified for development, is recommended for inclusion in the balance sheets (United Nations 2019, 93). The CWON follows these recommendations in its valuation of fossil fuel reserves. In contrast, the stranded assets literature, especially the “gray” literature, often considers a much wider scope of reserves as being potentially “stranded assets,” using the concept of asset as a metaphor rather than a balance sheet concept (Carbon Tracker Initiative 2011). Within the CWON/SNA approach, all known or proven recoverable reserves cannot be “stranded assets,” because a large portion of them are not assets in the first place. It is uncertain whether they would be extracted and converted into economic wealth even in the reference scenario. Leaving resources in the ground is not new to extractive industries. For example, IEA (2013) shows that 60 percent of known coal reserves are left underground even in the business-as-usual scenario.

Expected returns determine asset value. The SNA and SEEA provide a recommended methodology for valuing commercially recoverable subsoil assets: the discounted sum of expected rents over the lifetime of an asset. In this approach, the asset value is determined by several factors, which can change resource rents in the future: the size of commercially recoverable reserves, the extraction path, prices, extraction costs, and interest rates. Since such forward estimates are not generally available for national accounts, the guidance from the SNA and SEEA is to assume that current or recent values for the factors that determine resource rents will remain constant into the future.3

The CWON core accounts apply the SNA and SEEA recommendations for the valuation of minerals and fossil fuels. Asset values are calculated with a five-year lagged average unit rent over the lifetime of the reserve of the resource or 100 years, whichever is less, and discounted with a constant 4 percent rate. For 2018, the last year for which annual resource rents were calculated, the five-year moving average covers the period of historically low fossil fuel prices following a significant drop in 2014. Therefore, constant future rents extrapolated from this five-year period are significantly lower than typically expected by resource owners. This implies that the traditional accounting methodology applied in the