What will you lose when the carbon bubble bursts?

By Warwick Smith

Last week I attended a panel discussion on whether or not the bursting of the carbon bubble would cause the next global financial crisis. The event was organised by the University of Melbourne’s Faculty of Business and Economics and the four high profile panellists were Ross Garnaut, John Hewson, Jemma Green and Tony Wood.

I’ve been to a lot of events like this but this was the first where the discussion was grounded on the assumption of meaningful action to avert climate disaster. Instead of the usual doom and gloom with respect to the future climate, the well-informed panellists were mostly discussing the financial implications of the beginning of the end of the fossil fuel era.

Ross Garnaut and Jemma Green told us that the great China driven resources boom of 2003 to 2011 is not coming back. Resource prices are higher than they were in 2003 but much lower than they were in 2011. The massive investment in new mines and mining infrastructure in recent years in Australia has missed the boat and many of those investments will not even return the capital invested in them, let alone make a profit. According to Jemma Green, Australian companies whose only interest is coal, have fallen in value by 60%, on average, since 2011.

There was supposed to be something of a debate but the most striking thing about the whole event was the level of agreement among the panellists. The first and perhaps biggest thing the panellists all agreed about was the great significance of the joint announcement made last week by the US and China with respect to their carbon emission targets. All of the panellists concluded that this was a game-changer and that it signalled a high likelihood of a significant international agreement being reached next year with respect to post 2020 global emissions targets.

The discussion really centred around the risk faced by fossil fuel investors with all of the panellists indicating that investments in carbon intensive sectors were high risk in the current political climate. Nobody seemed to really seriously entertain the idea that the write-down of fossil fuel assets would cause another global financial crisis though John Hewson did suggest there are risks to the financial systems of some economies that are overexposed to fossil fuels – like Australia’s.

John Hewson also prompted us to ask how honest our super funds are being about our carbon exposure risk. Will we lose a lot of our retirement funds when the inevitable write-downs of fossil fuel assets occur? Are the energy and mining companies themselves being honest with their shareholders about their risk exposure?

Tony Wood from the Grattan Institute made a great point with respect to the action taken by carbon exposed companies. Their natural reaction to the changing carbon policy landscape is to protect their company in the short term while they implement plans for long term adjustments to the new reality. Their short term actions are aimed at stalling policy change for long enough for their long term strategy to be implemented. On the face of it they may seem to be denialist and obstructionist but in the background they’re getting ready for a carbon constrained world. This is simply the rational actions of profit maximisation – something they are obliged to prioritise.

The panellists all agreed that there was an oversupply of coal and that coal demand would peak before supply, causing even lower prices than we see today. The enormous investment in coal mines and coal export infrastructure in Australia would largely be wasted. In particular, they warned against governments spending public money supporting the coal industry, as the Queensland government has just promised to do with the construction of the rail line to the Galilee Basin.

I sense a dramatic paradigm shift occurring. Investment in carbon intensive industries is no longer just a moral issue relating to climate change but has become a financial risk issue. Major investment managers are starting to pay attention to climate change action and policy and the impact they have on investment returns. Divestment campaigns combined with the threat of stranded carbon assets and overinvestment in supply have already seen many carbon exposed stock prices tumble. Many analysts believe this is the beginning of the slow but inevitable demise of the fossil fuel era. For those of us concerned about climate change these developments, along with last week’s China/US emissions announcement, are sorely needed reasons to be optimistic about the future.

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