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The prospect of energy assets becoming “stranded” by the transition to a low-carbon economy poses a long-term risk to the sovereign ratings for major exporters of fossil fuels, says Fitch Ratings.

In a new report, the rating agency said that major fossil fuel exporting countries face the threat of a loss of GDP and government revenues “over the coming decades” as the global economy transitions to a lower reliance on fossil fuels.

At this point, the size and speed of the decline in demand for fossil fuels remains uncertain, Fitch said, adding that the impact of transitioning to a low-carbon economy will not be uniform.

“Coal will face a faster and fuller loss of market than oil and particularly gas,” Fitch said, adding that “high-cost producers will be squeezed out first.”

As demand shrinks, an excess global supply of fossil fuels “will weigh on prices, potentially compounding the loss from lower volumes,” Fitch said.

“Political instability and rising financing costs could amplify challenges,” the rating agency noted.

For some countries, the shift may eventually result in ratings downgrades, Fitch warned.

“For the most-exposed sovereigns and those that do not adequately prepare for it, climate change stranded-asset risk is likely to lead to rating downgrades as the effects become clearer, closer and more material.”

Countries with stronger balance sheets and the potential to diversify their economies are better positioned to weather the effects of the transition to low-carbon, Fitch said.

“Under a plausible scenario, the transition would be a similar shock to oil revenue as occurred in 2013-2016 and again in 2018-2020. During this period two oil exporters defaulted and a further three were downgraded by at least four notches.”

The shift to a lower-carbon global economy will be more gradual, giving countries more time to adjust. Unlike temporary price drops, “the move would be permanent,” Fitch said.