rss
8

What’s driving climate action? It’s the market, stupid

Print Friendly

My recent article – Victory at hand for the climate movement – touched a nerve, triggering more reaction than I’ve had for a long while. Opinions were strong wherever it ran around the world and my inbox was flooded with feedback. Many appreciated the optimism and saw new insights into the overall picture they’d so far missed. Others thought I was just wrong – that the momentum behind fossil fuels was so great we weren’t even close to turning the carbon ship around.

What struck me most, though, was how differently people interpreted the same signals, suggesting widely varying views on how the shift to a carbon-free energy system would occur. Here, though, I want to draw out one particular angle, a core assumption behind my views: how this will play out in the market.

One of the strongest grounds on which people disagreed with my conclusions was the scale of investment and growth in the fossil fuels industry. Huge new projects are underway or planned in coal, oil and gas and given such projects can have a production life of decades, surely they argued, the idea of ending fossil fuel use in a few decades is just not possible. After all, if we are turning a corner, wouldn’t such investments be in decline, rather than growing?

My answer is, not necessarily. I think many of these projects will fail and investors will simply lose their money – the argument behind the carbon bubble.

The nature of bubbles is denial of obvious risks: everyone else is jumping in, so any concerns you have must be wrong, and you’d better not miss out. Then at some point a critical risk threshold is breached and the bubble bursts.

In the case of carbon, most investors are still piling in assuming nothing will change; ignoring the clear, rational evidence of the significant risk in carbon assets, especially coal. Let’s take a look at these risks.

Looking forward over the lifetime of such assets, there’s really only two likely outcomes. The first is that we keep investing in coal and the planet warms by 4-6°C and as a result the economy melts down. That is well explained in this World Bank report, which explains why such warming must not be allowed to occur.

The second possible outcome is that the world acts strongly to reduce emissions, in which case even with the modest goal of giving us just a 50 per cent chance of not crossing the agreed 2°C threshold, two-thirds of proven reserves of coal, oil and gas can never be burnt, with the loss of income for the coal industry estimated at around $1 trillion per year by 2030.

The point is, there is little likelihood of the world economy growing smoothly to 2030 – the underlying assumption behind forecasts of future coal, oil and gas investments.

So the bubble will burst, we just don’t know when. When it does, money will flow away from fossil fuels and instead be invested in the alternatives, thus driving a self-reinforcing decline in the former and growth in the latter. It won’t happen overnight, but once it starts the process will drive itself.

It is important to understand this is now much more likely than the generally assumed process of a global political agreement being the key driver of stronger policy. There will certainly be stronger policy in various countries, but it will not be consistent nor globally aligned, except that it will generally undermine prospects for fossil fuels.

The best example we have of this is German policy on solar feed-in tariffs having driven large-scale Chinese production and dramatic global price reductions. This made rooftop solar competitive with retail prices in many countries – including, interestingly, places without strong policy, like the United States. This, in turn, is now causing upheaval in the utility sectors in countries like Germany, the US and Australia.

The price drops also contributed to the bankruptcy of a major Chinese solar company, Suntech, and its takeover by the local government. Keep an eye out for measures in China to boost domestic solar consumption in order to protect the tens of thousands of jobs involved and further reinforce China’s low-carbon transition.

This is all a great example of what we can expect in policy-triggered, but market-driven change – chaotic, unpredictable and dramatic impacts on businesses and consumers. While this makes it a tough space for investors, the prize of success is so great that the march to a low-carbon economy will continue. It is the essence of how markets work and the current shake out is a sign of a maturing industry.

The impact of all this is that many people are so busy looking at politics for signs of change, they’re missing the signs in the market. Of course policy is essential, as we’ve seen in its impact on solar. But the point of policy is to drive markets to deliver solutions and the signs are this process, while messy, is well underway. Meanwhile, that carbon bubble just keeps getting larger.

RenewEconomy Free Daily Newsletter

Share this:

  • keith williams

    … and at some stage politics will need to pay attention as we as a country are pinning our economic hopes on an ever growing fossil fuel based economy. The only political group paying attention to the looming catastrophe (The Greens) is labelled as a bunch of extremists because they are taking the facts seriously.

    Figure that one out.

    And yes, Tony Abbott’s plan is to sack Tim Flannery.

  • Dave Johnson

    The question here is not whether the fossil fuel industry will eventually go out of business – if nothing else, fossil fuels are a finite resource that cannot last forever – but rather the question is whether the end of fossil fuels will happen soon enough to avoid busting the carbon budget.

    Plus, even if most of the carbon stays in the ground, there are paleo-climatologists saying that 400 ppm of CO2 is enough to melt all the ice caps and glaciers, and we are at that level now, give or take a trifle. So, one of the worst effects of climate change is likely already locked in, and others may be as well.

    Plus, even if we avoid climate change, we are doing lots of other damage to the environment that may well be quite catastrophic in any case. Switching to alternative energy sources is merely one step in cleaning up our act before we completely wreck our own habitat, and so far we have not done that much – never mind doing other much harder things.

    In short, both articles involve sloppy handling of both facts and logic, and, in any case, most of the “facts” cited are really just speculation about future events that may never happen, much less in the precise manner needed to support your argument.

    Meanwhile, the fossil fuel industry is still freely spending hundreds of millions every year on PR campaigns and the election of friendly politicians, and so far the strategy is working rather well.

    Certainly CO2 concentrations are rising faster than ever before.

    So, you will pardon me if I do not share your optimism.

  • adam

    I really enjoyed your first article.

    Your link between the imperative to reduce emissions and this being an inevitability, even considering an absence of coordinated global political action, is unforunately too weak.

    Why would carbon intensive investments fail? Many reasons but for the purposes of this chat, likely due to:
    1. Operational costs (including fuel) is too expensive to keep up profit margins; or
    2. Markets for products dry up or consumers source them cheaply elsewhere

    Quote:
    The point is, there is little likelihood of the world economy growing smoothly to 2030 – the underlying assumption behind forecasts of future coal, oil and gas investments.
    /Quote.

    I question this?

    All predictions I’ve read are that the world economy will grow significantly especially BRIC, Indo, Mexico etc countries and their energy consumption will increase substantially. They’ll all be looking for the cheapest energy (and energy intensive products).

    Will global warming effects topple this economic growth and lead to a carbon bubble?

    The likely effects of AGW on the world economically and geopolitically is not something I’ve come across in popular press except in the vaguest terms. If you have anything pointing this I’d be glad to see it.

    At a minimum, we could say that the reverse would probably occur, in that any cultural “anti-carbon” market forces and regulatory programs would be scrapped in increasing economic difficulty and the ‘tragedy of the commons’ effect will be enhanced, driving up the value of these products and supporting the investments made.

    Perhaps the pre and post GFC experience is indicative here.

  • http://Allthingssustainable.wordpress.com Jo Lewis

    The climate is changing.
    The cost of insuring against climate loss and damage is rising.
    Crop yields are becoming less predictable and resulting in unstable prices on world markets as drought, heat waves and floods get more severe and more frequent.
    The world population is increasing.
    Can we really just keep on keeping on?
    I don’t think so. The real question is when will the crash come…….

  • Chris Fraser

    Paul’s above piece also appears to exonerate Australia from having a climate policy (the trigger) which gets driven by demand (the market). Not only is Australia not to be chastised by negators for policy which was perceived to be ahead of the developing world – Paul shows it doesn’t matter anyway, we are only recognising a good investment before much of the world. So all those contrarians that are still critical of Australia’s efforts to reduce pollution may now hang their heads in thoroughly embarrassing shame.

  • Ken Fabian

    If the market is going to solve the problem it is only going to do so by accident. It’s extremely fortunate that renewables have been showing a remarkable capacity to get cheaper, but I suspect fossil fuels will remain profitable at much lower prices than are current. At some point actual regulated limits to fossil fuel production will have to be applied.

    • Chris Fraser

      Considering we have so much accessible ‘unburnable’ fossil fuels we may have to regulate against producing them. As is the nature of these things, the investment in finding new fossil resources could very likely die off and the infrastructure in the current supply systems will be wound down, potentially resulting in very cheap fuels long before they are able to be locked away.

  • http://450ppm.com.au Terry Mc

    Its the market stupid. Thats exactly right. If you think that the market will act in time or will act in the interests off others(your children) you are stupid. We are on track for 4C at least. The market will not save us but campaigns like Repower Port Augusta might. Stuff the market and the government we need to act now. Its up to the people,so stand up and be counted. Act now! I dont know why we have people trying to suppress action but dont believe them. Reading emails and hoping the market will fix wont happen. Dont under estimate the power of greed and the stupidity of government. Act now!