A group of the world’s central banks has predicted a complete phase-out of coal in the Asian region before 2050 and that this could be replaced by more wind and solar, under scenarios based on what is needed to meet the goals of the Paris Agreement.
Central Banks and Supervisors Network for Greening the Financial System (NGFS) is a group of central bank representatives, including the Reserve Bank of Australia, and was established to provide guidance on how governments can adequately manage the financial risks posed by climate change.
It’s both a warning and an opportunity for Australian based investors, predicting that Australia’s exports would need to undertake a major pivot away from coal and gas exports, and to instead emerge as a leading supplier of zero emissions energy into a growing Asian region.
Central banks have identified two core sources of risk related to climate change; the direct physical risks created by a warming planet, and the transitional risk which relates to how well transition to a low emissions economy and/or a warmer world is management by governments.
The NGFS modelled three different scenarios for the Asian energy market based on how the Paris Agreement goals may be achieve. These include an orderly transition, a disorderly transition and a “hot house world” scenario based on current government commitments and which sees the world miss the Paris goal to limit warming to no more than 2 degrees.
The findings have been highlighted in a briefing paper prepared by the Investor Group on Climate Change and the Asia Investor Group on Climate Change and seen by RenewEconomy.
“These scenarios prepared by the world’s central banks, including the Reserve Bank of Australia, clearly demonstrate climate change is a systemic economic threat that will significantly undercut our prosperity and job security,” CEO of the Investor Group on Climate Change Emma Herd said.
“Financial regulators are now responding to this economic risk, as are institutional investors who are increasingly wary of carbon-intensive assets and looking for opportunities that will accelerate the net-zero emissions transition,” Herd added.
“A transition is inevitable. Early action reduces the cost of the transition to net-zero emissions by 2050 substantially and helps avoid severe and irreversible impacts from climate change itself. The central banks forecast that coal use in the Asian region will be phased out sometime between 2040 and 2050 under scenarios that meet the Paris Agreement’s goals.”
Under all scenarios, investment in renewable energy projects are expected to surge, and under Paris Agreement compatible scenarios provides the equivalent of 150 per cent of Asia’s current consumption of coal.
Additionally, the use of gas in the Asian region is set to peak sometime between 2020 and 2025, and steadily declines out to 2050.
It leaves Australia vulnerable to a massive shift away from coal and gas use throughout the Asian region unless the Australian economy can also transition away from coal and gas as major export industries.
But it also provides a massive opportunity, as Australia is home to some of the region’s best wind and solar resources, and the NGFS estimates that an additional $US 330 billion ($A 470 billion) of additional investment is required annually through to 2050 to drive the necessary transition to a low emissions Asian economy.
“In Australia, this will require a stable long-term policy framework and a commitment to net-zero emissions by 2050. The alternative is sitting on our hands which will continue to expose Australia to decarbonisation efforts across the world while not gaining access to new opportunities that will stem from modernising the economy,” Herd added.
“These scenarios will underpin efforts by the Reserve Bank of Australia and financial supervisors to provide a consistent basis for companies to disclose their climate risk exposure. Companies should no longer be able to cherry pick climate scenarios that suit their preferred business strategy and instead make clear climate risk assessments that allow investors to determine their true value.”
The Investor Group on Climate Change, which represents some of Australia’s largest investment managers, said that the scenarios modelled by the central banks should be used as a guide for how investments should be directed over the next few decades.
“For investors seeking to understand their own portfolio or asset level exposures and mitigate emerging financial risks related to climate change, this work is a vital reference and a useful tool in strengthening investor capacity to assess future scenarios,” the IGCC said in the briefing paper.
