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McKibben vs the coal industry: It’s a question of time

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The climate change movement led by Bill McKibben has decided that the planet will not be saved with either the pen or the sword, but it might just be saved if it is given more time. Delay – of fossil fuel investments and projects – has become the maxim for climate change activists.

The problem is that the fossil fuel industry has come to the very same conclusion, and delay – of carbon pricing and renewable energy incentives – has become top of its agenda too. Environmentalists realise that they are running out of time to save the planet, and the fossil fuel industry knows it is running out of time to dig up its wealth.

“It’s a fight, and it’s a very interesting one,” McKibben said on Tuesday, as he took his campaign of fossil fuel divestment and obstruction of new projects to the financial community, addressing some 100 industry professionals in Melbourne and Sydney. His principal goals are to encourage asset managers to sell their investments in thermal coal companies, and to dissuade financiers from supporting the expansion of coal mining activities, particularly in Queensland’s Galilee Basin.

“We understand that if we can delay things like the proposed expansion of coal mines in this country for two, three or four years, then it’s never going to get built,” he told the briefing, hosted at the offices of global investment bank Goldman Sachs, a venue which indicates where this debate is shifting. “The world is quickly waking up to the reality of climate change, and we’re reaching the point where people shouldn’t be doing this kind of thing any more.”

McKibben’s argument is that we just have to do the “maths”. The world has agreed to limit average global warming to 2°C, and to do that means that the world has to work within a strict carbon budget. For the best chance of avoiding dangerous climate change, McKibben estimates that budget at around 500 gigatonnes – a budget that the world will exhaust within 15 years at its current rate.

That message is not as extreme as some people want to paint it. It is endorsed by the International Energy Agency and the International Monetary Fund, as well as the UN. The IEA, for instance, suggests that two-thirds of the world’s fossil fuels must be left in the ground if climate change is to be addressed. In Australia, AGL Energy – the country’s second biggest utility and owner of the most heavily emitting power station – has also come out in support of an “ambitious” carbon budget.

The problem for McKibben and other climate change advocates – and the rest of us for that matter – is that the fossil fuel industry has also done the maths and knows that it needs to act now to dig those assets out of the ground, or leave their wealth buried forever.

Delay – of climate change policies and incentives for alternative technologies such as renewables – has been and continues to be the centrepiece of their strategy of dissing the science, the rival technologies, and then pleading special interest in the name of jobs and economic growth.

McKibben – and others who have written on the subject, including S&P, Citi, HSBC, asset consultants Mercer, the Investor Group on Climate Change – say the problem with financial markets is that they are making a huge bet on the world not taking action on climate. And it might not turn out to be the right bet.

One of McKibben’s initial goals is one of divestment – encouraging asset managers to dump their investments in listed companies whose business interests would likely trash the planet’s climate. The big target is thermal coal.

As it turns out, that might not be such a big deal (apart from the specialist coal miners involved). Citigroup recently produced a report that suggested they amounted to around 1 per cent of the value of the Australian Stock Exchange – about the same scale as the average daily movement on the index.

That suggests that if fund managers did sell their listed thermal coal assets it would cause barely a blip on the radar, and probably wouldn’t cause much divergence from the “tracking” that governs their comparative index returns.

Ian Woods, head of ESG research at AMP Capital Investors, says the bigger issue for investors is what the economy needs to look like if the world is to cap emissions at 2°C – because this has flow on effects through all sorts of industries. “That is the much bigger and more difficult question for us to address,” Woods said. “Whether we invest in thermal coal or not is interesting, but it’s not really where the big question is.”

Woods said sustainable and ethical funds could easily direct money away from such investments, and had done so and performed well, but it was not as easy for the “indexed” funds that represent the vast majority of money invested, and whose performances are ranked on a quarterly basis.

“There is a huge challenge in the way that traditional financial analysis thinks about this particular issue,” Woods said. One funds manager at the meeting bore this out, wondering what if the world didn’t act, and the planet warmed to 3°C or 4°C. What would that mean for his investments? And would his fund “miss out” if it acted prematurely on its fossil fuel exposure?

Fortunately, there is just enough happening that is causing big companies and investors and financiers to reassess some fossil fuel investments. BHP and Rio have been cutting back plans for coal expansion because of declining demand and outlook for coal, caused mostly by a reassessment of China’s appetite for imports. Others are seeking to ignore the market tea-leaves and the trends in supply and demand and are committing to massive investments in infrastructure and mines to “lock in” their wealth.

It is these projects that are in McKibben’s sights, and the controversial Keystone pipeline in the US and the vast coal projects in the Galilee basin in Queensland top the agenda. “We’ll do our damndest to pop that carbon bubble over the next few years, and if you look at the tar sands industry in north America, you can see that we are quickly acquiring the capability to do that,” he said.

“The mining industry is … working pell mell to get that stuff out of the ground as fast as they can.” He said it was clear that the reason why the US did not have a carbon price, and Australia was potentially about to lose its “noble attempt” at having one, was the power of the fossil industry to prevent what every economist said should be done.

“We have won the argument but lost the fight. Now we are back in the fight. Their business plan is to burn that fossil fuel. The flaw is not in the business plan, it is the business plan. If they do (burn), the science is clear on what will happen. Our job is to rewrite that script.”

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  • Nigel Lake

    Giles, An interesting article as ever. To my mind the key point for financial market participants and long term investors is a simple one: are the risks symmetrical or not? Many projects have an expected life of twenty to forty years, meaning that investors need to consider what the upside and downside scenarios are over decadal periods. It is certainly possible to see a number of scenarios where much of the value in some resources companies dissipates over this time period. This has been the subject of some interesting analysis by the Institute of Actuaries in the UK and Aled Jones from Anglia Ruskin University. We should all watch this emerging thinking and analysis closely.

  • Keith

    The problem for the financial markets is that they are not good at considering qualitative aspects. The key qualitative issues, especially considering coal, are what the customers are going to do. Both the investment community and Government have assumed that China and India will provide a massive market for the next 50 years. Using extrapolations of business as usual, you can see why 7 billion tons of coal use by China makes sense from that prism. However, when China has made it clear that they plan to cap coal use at 4 billion tons, you know that the business as usual scenario isn’t going to happen. India is also interesting as you are seeing a different, more distributed, approach to electrifying the economy. Again it is qualitatively very clear that coal will no longer be the mainstay for Indian development.

    Both China and India understand the climate emergency and their citizens are revolting about the health effects and environmental disaster of burning coal.

    The developed world markets don’t understand that failure to address the climate emergency will mean that there won’t be an economy as we know it. Indeed climate related events are already putting a strain on governments both here (eg Qld floods) and internationally (eg US droughts, Sandy etc).

    My hunch is that the business community and Aussie & US Governments will only understand as the demand for our coal starts to evaporate. It is touch and go, but with Chinese plans for capped coal as early as 2015, there is a reasonable chance that the coal will end up staying in the ground.

    Bill McKibben is a hero for carefully and unemotionally explaining just how serious the issue is.

  • Petra Liverani

    Of course, there is the alternative investment opportunity in renewables which, at least for the renewables that are commercially available at the moment, are a better bet.