BDLive, 7 October, 2016.
FINANCIAL markets across the world are waking up to the threat of a new financial bubble, one premised on the possibility that trillions of dollars worth of fossil fuel assets will be lost as the world takes action on climate change.
Yet, as other economies prepare to avoid this carbon bubble, SA seems to be digging itself in deeper and deeper.
At the UN climate negotiations in Paris last year, the world agreed to keep global warming to well below 2°C above pre-industrial levels.
This is great news for averting the worst impacts of climate change, but bad-to-terrible news for the fossil fuel industry as three-quarters of their proven coal, oil and gas reserves have to remain in the ground if we are to adhere to that target.
To put a financial number on the amount of reserves that would be unburnable, Kepler Cheuvreux estimates that adhering to the 2°C target would result in $28-trillion in lost revenue in the next two decades, with the oil industry accounting for $19.3-trillion, gas $4-trillion and coal $4.9-trillion. In the longer term, Citibank estimates more than $100-trillion in lost revenue by 2050.
Those losses and stranded assets could be triggered by a perfect storm of factors challenging the viability of the fossil fuel industry business model.
A rapid increase of climate regulation coupled with major advances in energy efficiency and clean technology are undercutting the profitability of fossil fuels.
Simultaneously, broader social pressure from the likes of the rapidly growing fossil fuel divestment movement has shone the spotlight on the necessity of keeping carbon underground.
In doing so, they draw attention to the risks the fossil fuel industry faces, pushing investments out of the industry and constraining its ability to attract funders and shareholders.
These mutually reinforcing factors create a cumulative effect that makes the chances of the carbon bubble bursting quite significant. And those risks are playing out faster than most expect — so fast they have already put at risk trillions of dollars’ worth of fossil fuel assets.
Looking forward, the financial specialists at Carbon Tracker, who pioneered the concept of the carbon bubble, recently demonstrated that renewable energy is already undercutting gas and coal. And that’s even more the case in sun-drenched and wind-rich SA, where a new study from the Centre for Scientific and Industrial Research demonstrated that the lowest cost option for providing energy to the country is to pursue a high renewable energy future.
As this new reality plays out, the sector that is likely to be hit hardest is the heavy polluting coal sector.
This is perhaps best evidenced by a recent analysis from the Institute for Energy Economics and Financial Analysis, which shows that in Texas — historically one of the largest power markets in the world — none of their coal-power units is financially viable as “all but one of the plants is expected to produce pre-tax losses for their owners in coming years”.
This rapidly shifting reality leaves the South African economy in a terribly vulnerable position as we are deeply wedded to the coal industry and, if anything, are digging ourselves deeper into coal reliance.
Our Public Investment Corporation holds more coal investment than any pension fund on Earth by a long way, putting it and its pensioners at huge financial risk.
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