Carbon's unburnable truth

The coal industry has made a feeble attempt to pop the concept of the carbon bubble and its investment consequences. 

The Australian Coal Association commissioned Alan Oxley to examine The Climate Institute and Carbon Tracker’s recent research into Australia’s Unburnable Carbon. Oxley attacked the carbon bubble concept in the AFR yesterday. 

If you accept the science of climate change, the carbon bubble concept is based on a simple unburnable truth. There is a limited budget for the heat trapping greenhouse gases we can put in the atmosphere to avoid global warming goals. 

Our research, and that of the International Energy Agency amongst others, examines the budget in terms of the goal that Australia, China and the US amongst over 190 other countries have agreed upon, of avoiding global warming of two degrees.

This research is not the realm of radicals or “extremists” as the Minerals Council of Australia would have it. Two years ago the now CEO of Anglo American Mark Cutifani said “… the global carbon budget makes simple logical sense.”

Investors like Warren Buffett and Jeremy Grantham have embraced the concept and begun applying it. Just last week investors representing $22.5 trillion held an historic summit in Hong Kong focused on their role in avoiding the economic costs of dangerous climate change and launched a new global low carbon investment register.

Central to Oxley’s arguments is that national governments are unable or incapable of organising to avoid two degree warming and that investors should stick to their knitting and avoid public interest goals not supported by policy.

In Oxley’s report he makes the old short-termist argument that the job of business is to maximise profits within current policy.

This ignores the very real interest that investors such as superannuation and insurance funds should have, and are beginning to take, in the consequence of their investments. These funds are both legally obliged to manage funds for long term outcomes and invest in a range of asset classes that will take, and arguably are already taking, climate hits. They are awaking to the fact that their old ways of investing actually add to the risks they are now attempting to manage.

Limiting average global warming to two degrees above pre-industrial levels is an extremely challenging task especially as there is already almost one degree warming with 1.4 degrees locked in by lag effects. 

There are however a number of social, political and technological scenarios where effective action to avoid two degrees warming will be taken. We don’t pretend to predict the exact course, but the International Monetary Fund and the World Bank – hardly a bunch of left-wing greenie extremists – are warning of the economic consequences if we don’t.   

Global leaders at the G8 concluded its meeting two days ago with a communique restating their commitment to this goal noting “climate change is one of the foremost challenges for our future economic growth and wellbeing.” 

The history of financial bubbles, such as the dot.com and sub-prime mortgage bubbles, is based on the assumption of never ending demand. History has shown those assumptions to be high risk indeed. All bubbles are theories until they crash. This bubble rests on very solid foundations of basic carbon physics and budgets.

Contrary to Oxley’s claim yesterday, nowhere does the IEA say there is “little risk” of stranded assets for the coal industry. The IEA report does say that, for its two degree scenario, “more than two thirds of current proven fossil-fuel reserves are not commercialised unless carbon capture and storage is widely deployed.”  The prospects of that are not good at the moment – the prospects of a bubble are therefore real, exposing as bizarre the report’s claims that a mining company’s reserves of fossil fuels are disconnected to its valuation by the market.

It should be noted that The Climate Institute can hardly by labelled as ignoring the importance of carbon capture and storage. We have repeatedly called on industry and government to speed up the technology’s deployment, and have been public on why Australia and the world should pursue it. The ACA on the other hand appears in retreat, turning its billion dollar Coal21 fund, previously focused on low emissions technology into a vast slush fund now also able to “promote the use of coal.”

Finally, our analysis challenges current valuation methods but does not, as Oxley’s report falsely asserts, call for full divestment. Our call is for far greater consideration and disclosure of carbon and climate risks from investors, as well as greater investment in low carbon solutions. In that we are joining and being joined by a swelling rank of NGOs investors and regulators. 

Denying the concept of the carbon budget is like denying climate science. That is carbon’s unburnable truth.

This article was originally published in The Australian Financial Review (online). Republished with permission of the author.

John Connor is CEO of The Climate Institute.