The key breakthrough in the COAG Energy Council meeting last week was the recognition of the need to integrate climate policy and energy policy.
This has the potential to establish a coherent national energy policy for Australia and to fix on firm national targets on emissions reductions to meet Australia’s commitments to the Paris climate change agreement.
The independent panel chaired by chief scientist Alan Finkel will begin this work with a plan to ensure security of energy supply as more renewable energy comes into the grid, and more coal fired power stations close.
Despite Prime Minister Malcolm Turnbull’s misgivings about the “aggressive” renewable energy targets of South Australia, Victoria and Queensland, renewable energy could be considered a central part of his innovation “ideas boom”.
As former US Vice President Al Gore has said, the US$391 billion invested in 2014 in clean energy and low carbon development makes it “the biggest new business opportunity in the history of the world”.
Why the urgency on the switch to renewable energy?
Economist Nicholas Stern has called climate change “the greatest market failure the world has ever seen”. He insists the choice we face is taking mitigation action now, or very expensive adaptation in the future. Stern says “there is still time to avoid the worst impacts of climate change, if we take strong action now”.
In the same vein in a speech to Lloyds insurers, Bank of England Governor Mark Carney, who is also Chairman of the Financial Stability Board, said while a classical problem of environmental economics is the “tragedy of the commons”, climate change is a “tragedy of the horizon”. This is because the catastrophic impact of climate change is beyond the traditional horizon of most people. It is imposed as a cost on future generations as the current generations has little direct incentive to fix this.
As the critical dilemma of our time climate change is now considered worthy of concern by the G20 finance ministers. They asked the Financial Stability Board to consider the risks climate change poses for the financial system.
In 2015 the FSB launched the task force on Climate Related Disclosure (TFDC) applying to financial and non-financial companies, chaired by former New York Mayor Michael Bloomberg. Mark Carney identifies three channels through which climate change can impact on financial stability:
Physical risks: the impact today on insurance liabilities and the value of financial assets arising from climate-related events such as floods and storms that damage property and disrupt trade.
Liability risks: the impacts that could arise if parties suffering loss or damage from the effects of climate change seek compensation from those they hold responsible. These claims could come decades into the future, but could potentially hit carbon resources companies and emitters hard, and if they have liability cover would hit their insurers the hardest.
Transition risks: the financial risks resulting from the process of adjusting towards a low carbon economy as changes in policy, technology, and physical risks prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.Nic Bothma/EPA/AAP
A US$28 trillion carbon bubble?
Aside from the risk to financial stability, there’s also a threat inherent in the way economies are dealing with carbon emissions.
A terrifying thought is that we have created a carbon bubble in financial markets as large and threatening as the toxic securities that delivered the global financial crisis.
CarbonTracker calculates the bubble of unusable carbon assets, using research by the Potsdam Institute. It suggests that to reduce the chance of exceeding 2°C warming to 20%, the global carbon budget for 2000-2050 is 886 billion tonnes of CO₂.
With the emissions that have already occurred since 2000 this leaves a carbon budget until 2050 of 565 billion tonnes of CO₂. However the total carbon potential of the earth’s known fossil fuel reserves of 2,795 billion tonnes of CO₂ exceeds the carbon budget by five times (65% from coal, 22% from oil, and 13% from gas).
Authors: Thomas Clarke, Professor, UTS Business, University of Technology Sydney