Importance of recalibrating the carbon bubble

by Terence Jeyaretnam

Our economy as well as global economies are unhappily only too familiar with bubbles and stranded assets/costs. The most recent example that led to the global financial crisis is subprime mortgages – where the inflated value was belatedly recognised, leading to recalibration at significant global costs. The resulting stranded assets were the repossessed houses, and the implications of stranded costs are what we are continuing to see unfold across failing economies whose banks were more directly invested in the bubble than Australia.

Unfortunately, bubbles are hard to spot until markets collectively lose confidence on a particular commodity or asset class. Extraordinary Popular Delusions and the Madness of Crowds, an 1841 book was one of the first to describe best how crowds behave irrationally, describing the Dutch tulip mania as one of the prime examples of how speculative markets are sometimes downright unintelligent., when tulip bulbs were fetching as much as ten times the average annual income, at the height of that bubble.

Unburnable Carbon 2013: Waster Capital and Stranded Assets, a recent report by UK think tank Carbon Tracker, and the Grantham Research Institute on Climate Change is one of the most eloquent to capture the significance of the ‘carbon bubble’, and the magnitude of the implications for economies that are coupled to fossil fuel reserves. According to the report, between 60-80% of coal, oil and gas reserves of publicly listed companies are ‘unburnable’, if the world is to have a chance of not exceeding global warming of 2°C to meet existing internationally agreed targets to avoid the threshold for dangerous climate change. The contradiction is that investment markets cannot believe that global action on climate change will be taken, and at the same time believe that markets are fairly valued now. The warning by Carbon Tracker is supported by organisations including HSBC and Citi bank, with Citi even warning investors in Australia's vast coal industry that little could be done to avoid the future loss of value if governments acted on their climate change targets. Interestingly, while China has recently announced that their coal usage will peak shortly given their climate change targets, Australian markets seem to have completely ignored this – another sign of a bubble with a belief that good times can’t surely end.

While carbon pricing is one of the correctional regulatory mechanisms the world is starting to see, others that could lead to these fossil fuel reserves classed as stranded assets include the steady fall in costs of renewables, continued increase in renewable energy yields and sophistication of technologies, increasing labour costs in extraction of fossil fuels and falling fertility rates across the world. The perfect storm is brewing for the carbon bubble to be recalibrated. The question for us as a nation and as individuals is how we avoid the pain of the fall-out. Australia has a long way to move – from tackling fossil fuel subsidies to transitioning parts of the economy. As individuals, we must ensure that our jobs, investments and economic alignment have regard to the impact of a recalibration.

Terence Jeyaretnam is a Director of Net Balance (terence@netbalance.com), 
one of the world’s leading sustainability advisory firms.
Terence is based in Melbourne.

Twitter: TerenceJey

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