Unburnable Carbon: Australia's carbon bubble
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Unburnable Carbon: Australia's carbon bubble

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Australian coal reserves and resources alone could exceed global coal carbon budgets and attempts to avoid dangerous climate change. Investors in our coal resources are taking high risk gambles on......

Australian coal reserves and resources alone could exceed global coal carbon budgets and attempts to avoid dangerous climate change. Investors in our coal resources are taking high risk gambles on global climate inaction, the deployment of carbon capture and storage technology or significantly increasing Australia’s share of global coal markets. Governments, investors and even many coal companies say they take climate change seriously, but this report shows that if they did, their Australian investments could be a costly speculative bubble.

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  • 1. 1
  • 2. Unburnable CarbonAustralia’s Carbon BudgetApril 2013 “Australian and overseas investments in Australian coal rest on a speculative bubble of climate denial, indifference or dreaming. Investors, governments and even some coal companies say they take climate change seriously, but this report shows they do not or are taking risky gambles. Taxpayers’ funds, retirement nest eggs and shareholder value is being gambled on investments in a world that may not, and should not, exist.” John Connor CEO, The Climate InstituteThis presentation summarises a report looking at the implications of the carbon bubble on Australias fossil fuel assets. Thereport was produced in partnership with Carbon Tracker, a non-profit organisation working to align the capital markets withthe climate change policy agenda. They seek to apply their thinking on carbon budgets and stranded assets acrossgeographies and assets classes to inform investor thinking and the regulation of capital markets. Image: Michael Hall, Creative Fellow of The Climate Institute 2
  • 3. Key Findings+ The International Energy Agency has said that in the absence of carbon capture and storage technology, more + Australian coal reserves than two thirds of coal, oil and gas owned by listed companies reserves cannot be burnt before 2050 if have emissions potential of we are to have a 50 per cent chance of 51GtCO2, equivalent to limiting global warming to 2 C. 25 per cent of the global carbon budget for coal to 2050. A conservative + Australian coal is becoming less estimate of all the potential competitive, given its high cost Australian coal resources operations in a highly competitive has 150 GtCO2, as much as market. Expansion beyond the 11 75 per cent of that global per cent market share is highly budget. unlikely. 3
  • 4. Key Findings+ An increasing number of countries that import Australian coal, such as China, are tightening their belt on coal use. This means that investments into Australian coal that may seem sound at the moment could easy turn into stranded assets that cannot be sold in a world acting on climate change. + The significance of Australian coal for investors goes beyond its own shores, with more Australian coal reserves owned by companies listed outside Australia - especially in London and Tokyo – than by those listed domestically. 4
  • 5. What is the carbon bubble?The ‘carbon bubble’ relates to the build-up of risk in carbon-intensive assets andinvestments that are exposed to rapid devaluation if social, political, regulatory andtechnological developments enable achievement of this warming goal.Just as sub-prime investments were based on assumptions of permanently rising houseprices, carbon bubble or ‘sub-clime’, investments assume relentless demand for fossilfuels.Growing constraints on coal use in China and accelerating investments in Asian cleanenergy represent threats to this assumption. Step changes in these developments and/oreffective carbon prices in Australia or in export markets could render many of theseinvestments relatively worthless and stranded. 5
  • 6. What is the carbon bubble?Australia is facing a carbon bubble. Australian coal against the global coal budgetA conservative estimate of all thepotential Australian coal resources is150 GtCO2, as much as 75 per cent ofthe global carbon budget for coal.Australian coal represents 11 per cent ofglobal coal markets in a competitivemarketplace. Expansion beyond thatmarket share is highly unlikely.Investments in Australian coal that mayseem sound at the moment could easilyturn into stranded assets that cannot besold in a world acting on climatechange. 6
  • 7. On the radarThe International Energy Agency, investment houses and miners are aware of the problemof potentially unburnable carbon, and interest is accelerating.“According to scientists … humanity now has a strictly limited ’carbon budget’ that may be emitted infuture. To emit more than this would seriously jeopardise our chances of keeping below the 2 Cthreshold … It seems to us that the idea of a global carbon budget makes simple, logical sense andgives us all a clear target to work with.” Mark Cutifani CEO of AngloAmerican 20 October 2011“Resilience will become a watchword in the boardroom – to policy responses as well as to the climate… More radical and disruptive policy reactions in the medium term could lead to high-carbon assetsbeing stranded.”"The new reality is a much more challenging future in terms of planning, financing and predictability.” Jonathan Grant Director of Sustainability and Climate Change at PwC 5 November 2012 7
  • 8. On the radarThe International Energy Agency, investment houses and miners are aware of the problemof potentially unburnable carbon, and interest is accelerating.“Capitalism does millions of things better than the “Civilization is facing our $20 trillion big choice -alternatives. It balances supply and demand in an our investments or our planet. Recall the directelegant way that central planning has never come financial losses of the subprime crisis in the USclose to. However, it is totally ill-equipped to deal were a mere $2.7 trillion, and we know whatwith a small handful of issues. Unfortunately, they that did.”are the issues that are absolutely central to our John Fullertonlong-term wellbeing and even survival. ” Founder and President of Capital Institute 23 July 2012“…if we mean to burn all the coal and anyappreciable percentage of the tar sands, or even “To remain competitive in a future carbon-third-derivative, energy-intensive oil and gas, with constrained world, Australia will need turn into afracking for shale gas on the boundary, then were lower carbon economy … our relativecooked, were done for. ” competitive advantages have given us an Jeremy Grantham economy that has traditionally and increasingly Co-founder and Chief Investment Strategist of produced products for the export market that Grantham Mayo van Otterloo (GMO) are materially carbon intensive.” 12 April 2013 Marius Kloppers CEO of BHP 15 September 2010 8
  • 9. Is Australia at risk? Australia’s risk exposure to the carbon bubble is significant. A key reason for this is the fact that more than half of coal in Australia is owned by foreign companies listed on overseas exchanges. These companies are, and/or may be, exposed to different directives, regulations and disclosure rules than Australian listed companies. Of the 51 GtCO2 equivalent of coal held on the books of listed companies in Australia, 27.76 GtCO2 are owned by companies listed overseas, compared to 23.18 GtCO2 owned by Australian listed companies. 9
  • 10. What are the implications?The vast majority of Australia’s coal, oil and gas resources (and therefore potentialemissions) are exported. Yet an increasing number of countries that import Australiancoal, such as China, are tightening their belt on coal use.This means that investments into Australian coal that may seem sound at the momentcould easily turn into stranded assets that cannot be sold in a world acting on climatechange.Investors and governments can pretend that the world will not act on climate. But thereality is that carbon prices and/or clean energy incentives are being put in place inall major export destinations and progress is being made on global climatenegotiations.The OECD published research in January 2013 showing that - whether through a tax,market mechanism, or other policy - carbon is priced in every OECD country. Countrieslike China and South Africa are also introducing carbon pricing measures.  10
  • 11. Global shipments of thermal coalcould be 18 per cent lower than forecasted by 2015 should China, the biggest importer, toughen measures to curb air pollution to safe levels Deutsche Bank AG March 2013  11
  • 12. Climate policy measuresin Australia’s coal export markets  12
  • 13. RecommendationsThe carbon bubble will have negative economic consequences for the entire globaleconomy. Below are recommendations the Unburnable Carbon report makes for howinvestors, companies, accountants and regulators can address the carbon bubble:Investors Companies• Factor the carbon budget into their • Disclose the forward-looking numbers investment strategy to reduce exposure to on their emissions. Traditionally, carbon intensive activities. reporting has only covered disclosure• Further research commissioned to integrate of historical annual emissions rather carbon constraints into valuation than the emissions potential of fossil methodologies. This analysis should be used fuel reserves (in the case of to reallocate funds into low-carbon extractive companies) or other investments. forward-looking indicators.• Some AU$22 billion is spent annually on • Factor in the many risks associated reserves development in Australia. But with climate change. capital would be better deployed in to other sectors of the economy to limit the assets becoming uneconomic or stranded.  13
  • 14. RecommendationsAccountants and auditors Regulators• It is critical to understand how broadly- • The financial markets have proven they recognised carbon budget estimations are are not currently set up to respond being factored into Australian companies’ adequately to systemic risks, with the valuations of their assets. current structures too focused on short-• More work needs to be undertaken on the term returns. valuation of fossil fuel reserves and • Other regulators have already started resources as well as the development of to issue guidance on the disclosure of guidance accompanying impairment climate-related risk (for example, the valuations. Securities and Exchange Commission in the United States) and monitor the level of market exposure (for example, the Bank of England). Australia needs to introduce similar measures to monitor and manage this risk. • The regulator can only understand the level of risk if disclosure of relevant data is made mandatory.  14
  • 15. Additional ResourcesFor more information on the carbon bubble and why carbon matters, download TheClimate Institute’s Carbon 101 explainer: Visit http://www.climateinstitute.org.au/carbon-101.html  15
  • 16. For more information Visit www.climateinstitute.org.au/unburnable-carbon.html Or connect with us on Facebook or Twitter for the latest news… www.facebook.com/theclimateinstitute www.twitter.com/climateinstitut  16