In this paper, I argue that addressing damages associated with asset stranding will become increasingly important in US climate law and litigation in the coming years, despite the political constraints of a Republican-held Congress and second Trump administration. Stranded assets describe assets, principally physical assets held by utilities, corporations, governments or individuals, that have suffered from premature or unforeseen devaluations or conversions to liabilities (Caldecott, Haworth & McSharry, 2013). An asset that rapidly loses value as a result of action on climate change (e.g. a shut down coal-fired power plant) or inaction (e.g. an asset newly being at risk of floods or wildfires) is considered a stranded asset. For context, in the oil and gas sector, current and continued investment in fossil fuel assets presents a risk of future lost profits that exceeds USD $1 trillion (Semieniuk et al., 2022).
Attention is increasingly turning to the US courts to settle climate-related issues (Carlarne, 2021), as progress on US climate legislation in the near future is unlikely. In the last few years, the issue of stranded assets began to be addressed in domestic and foreign litigation. A review by Caldecott et al. (2021) of asset stranding points to a growing body of litigation related to the causes and culpability of stranded assets. They find that liability risk can result from contributions to climate change, but also from mismanaging or misreporting climate-related risks. Direct damages to an asset or its owner that may result from mismanagement or misreporting may include fines or penalties, changes in valuation, class action damages, changes in credit rating, asset confiscation, restriction of insurance, and reputation damage. It’s worth noting that in addition to being the arbitrator of damages, courts themselves can also be the cause of asset stranding, for example through a court order for an energy asset to cease operation for other non-climate change reasons (habitat protection, water or air quality, etc.).
Two key domestic stranded asset cases emerged from their review: (1) Conservation Law Foundation v. Shell, which was filed in July 2021 as two citizen suits asserting the failure of the defendant to prepare fuel terminals and bulk storage in New Haven, Connecticut for climate change and (2) Trustee of the PG&E Fire Victim Trust v. Chew, which was filed in February 2021 and alleges that the 2017 North Bay Fires and 2018 Camp Fire were the direct result of the defendant’s breach of their fiduciary duties to act in the best interest of PG&E. Foreign stranded asset cases include ClientEarth v. Enea (Poland), McVeigh v. REST (Australia), and Abrahams v. Commonwealth Bank of Australia (Australia). These cases highlight the growing traction of stranded asset cases in US courts.
Furthermore, issues of stranded assets are seemingly more tractable in US courts compared to other types of cases related to climate-related damages, particularly cases related to failure to manage or disclose climate risk. This tractability and growing attention may be explained by the greater ease of establishing standing when damages are quantifiable and attributable, both using methods previously established in court.
Stranded assets also relate to US federal agencies, notably the Federal Energy Regulatory Commission (FERC), which regulates transmission of electricity, natural gas and oil across state lines, and the Federal Emergency Management Agency (FEMA), which provides disaster relief and prevention support. Legal precedent around awardment of stranded asset damages rests in FERC Order 88811, which granted full recovery of the US$135bn of monopoly generation assets that were stranded by the US wholesale electricity market deregulation of the 1990s (McArthur, 1998). The FERC order was a clear departure from their equitable sharing policy developed for natural gas deregulation. This discrepancy started a series of cases over how stranded monopoly assets should be treated and how recovery mechanisms can be structured (e.g. full, partial or zero recovery). Issues of nuclear power plant stranded assets in the 1970s, notably the move to allow utilities to shoulder costs on ratepayers, also provide precedent for modern day stranded asset issues (Tye & Graves, 1996). Moreover, in the realm of assets held by energy utilities, FERC is the federal agency that could perhaps be held responsible for a failure to regulate or otherwise reduce risk around energy stranded assets. This is an area rich for legal scholarship and for their own internal investigation.
In contrast to an area where there is precedent, a very emerging realm of stranded assets is the creation of such assets through updates to federal flood maps. FEMA is charged through the National Flood Insurance Program (NFIP) with maintaining national flood maps and updating them every five years. These maps are used by federal, state, and local governments to identify flood risk and guide floodplain management regulations and by insurance companies to set flood insurance rates. This year, FEMA completed their update and sent Letters of Final Determination to local jurisdictions whose flood map was changed. In over a dozen instances, flood zones have expanded or otherwise changed (FEMA 2021). Of particular interest is that these updates have worked to incorporate issues identified by the Department of Homeland Security’s Inspector General, which found 58% of those previous maps were inaccurate or out-of-date (OIG 2017). An emerging, open question remains: can FEMA be held responsible for damages to assets arising from the mandated use of inaccurate maps, which now have been identified in the update? Did instances occur of, for example, issues of maladaptation (e.g. misplacement of levees leading to damages elsewhere) or say unnecessary drop in value or charges of insurance premiums?
The issues that stranded asset management poses to FERC and FEMA become clear through these two examples. Still, stranded assets, and the responsibility of federal agencies in managing and otherwise preventing them, is a largely unexplored area in legal scholarship. It is likely that stranded assets will grow to play a prominent role in US climate litigation, and in turn, issues related to federal agencies will also emerge. In this way, FERC and FEMA may be useful places for legal scholarship to focus early efforts towards understanding the role of the federal governments and the courts in issues of stranded assets.