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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2. Unburnable Carbon
Australia’s Carbon Budget
April 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 Institute
This presentation summarises a report looking at the implications of the carbon bubble on Australia's fossil fuel assets. The
report was produced in partnership with Carbon Tracker, a non-profit organisation working to align the capital markets with
the climate change policy agenda. They seek to apply their thinking on carbon budgets and stranded assets across
geographies and assets classes to inform investor thinking and the regulation of capital markets.
Image: Michael Hall, Creative Fellow of
The Climate Institute
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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.
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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.
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5. What is the carbon bubble?
The ‘carbon bubble’ relates to the build-up of risk in carbon-intensive assets and
investments that are exposed to rapid devaluation if social, political, regulatory and
technological developments enable achievement of this warming goal.
Just as sub-prime investments were based on assumptions of permanently rising house
prices, carbon bubble or ‘sub-clime’, investments assume relentless demand for fossil
fuels.
Growing constraints on coal use in China and accelerating investments in Asian clean
energy represent threats to this assumption. Step changes in these developments and/or
effective carbon prices in Australia or in export markets could render many of these
investments relatively worthless and stranded.
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6. What is the carbon bubble?
Australia is facing a carbon bubble. Australian coal against the global coal budget
A conservative estimate of all the
potential Australian coal resources is
150 GtCO2, as much as 75 per cent of
the global carbon budget for coal.
Australian coal represents 11 per cent of
global coal markets in a competitive
marketplace. Expansion beyond that
market share is highly unlikely.
Investments in Australian coal that may
seem sound at the moment could easily
turn into stranded assets that cannot be
sold in a world acting on climate
change.
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7. On the radar
The International Energy Agency, investment houses and miners are aware of the problem
of potentially unburnable carbon, and interest is accelerating.
“According to scientists … humanity now has a strictly limited ’carbon budget’ that may be emitted in
future. To emit more than this would seriously jeopardise our chances of keeping below the 2 C
threshold … It seems to us that the idea of a global carbon budget makes simple, logical sense and
gives 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 assets
being 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
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8. On the radar
The International Energy Agency, investment houses and miners are aware of the problem
of 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 direct
elegant way that central planning has never come financial losses of the subprime crisis in the US
close to. However, it is totally ill-equipped to deal were a mere $2.7 trillion, and we know what
with a small handful of issues. Unfortunately, they that did.”
are the issues that are absolutely central to our John Fullerton
long-term wellbeing and even survival. ” Founder and President of Capital Institute
23 July 2012
“…if we mean to burn all the coal and any
appreciable 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 a
'fracking' for shale gas on the boundary, then we're lower carbon economy … our relative
cooked, we're 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
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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.
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10. What are the implications?
The vast majority of Australia’s coal, oil and gas resources (and therefore potential
emissions) are exported. Yet 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 easily turn into stranded assets that cannot be sold in a world acting on climate
change.
Investors and governments can pretend that the world will not act on climate. But the
reality is that carbon prices and/or clean energy incentives are being put in place in
all major export destinations and progress is being made on global climate
negotiations.
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. Countries
like China and South Africa are also introducing carbon pricing measures.
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11. Global shipments of thermal coal
could 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
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12. Climate policy measures
in Australia’s coal export markets
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13. Recommendations
The carbon bubble will have negative economic consequences for the entire global
economy. Below are recommendations the Unburnable Carbon report makes for how
investors, 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.
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14. Recommendations
Accountants 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.
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15. Additional Resources
For more information on the carbon bubble and why carbon matters, download The
Climate Institute’s Carbon 101 explainer:
Visit
http://www.climateinstitute.org.au/carbon-101.html
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16. For more information
Visit
www.climateinstitute.org.au/unburnable-carbon.html
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