Why the Abbott government's carbon reduction target will hurt investment in Australia

The Australian government announced the emissions targets it will take to the Paris climate talks in December: a 26% reduction on 2005 levels, by 2030.

It is well short of what any reasonable measure says we should be doing if you a) think it’s not worth taking a risk that climate change won’t affect us, and b) think Australia’s economy deserves a good chance to thrive and prosper in a world that also doesn’t want to take that risk.

National emissions targets are tricky to compare: there are baseline years, per-unit of GDP, and per-capita considerations. That’s before you even get into the arguments of whether special allowances should be made for economies that are particularly reliant on fossil fuels, or who’ve already made great strides in efficiency and renewables. However as this table shows, even fossil fuel producers like the USA and Norway are making stronger commitments than Australia on both per capita, per-GDP unit, and on most baselines.

You might be wondering: so what? (Especially if you are the sort of person who comments on The Australian’s stories.) Why should we care that Australia isn’t pulling its weight — in fact, shouldn’t that be the objective in this whole prisoners’ dilemma, tragedy-of-the-commons climate change scenario? And even if we were to be exemplary emissions-cutters, aren’t our emissions so small that it wouldn’t have much effect on the actual climate?

It’s true that Australia only emits a small percentage of overall greenhouse gas emissions, but our commitment matters — strong (or even middling) commitments from developed economies will incentivise poorer countries to adopt ambitious emissions targets, and the contributions of these emerging countries will be critical. In other words, making a “fair” contribution matters, and not just in a feel-good way. Australia is exposed to all the known effects of climate change, so it’s in our interests to avoid chaotic, dangerous increases in average temperatures.

International climate negotiations don’t just happen at the well-known meetings in Paris, Copenhagen, or Kyoto; numerous meetings have been held just this year in the lead-up to Paris.

Incidentally, Australia came in for more searching scrutiny than any other country — with questions being asked by major economies and key trading partners such as China, Japan, the US, UK, Japan, Brazil, and New Zealand among others.

The Climate Institute calculates that a fair contribution to the 2°C goal would require Australia to reduce emissions by around 65% below 2005 levels by 2030; however the government’s target is consistent with a 3-4°C rise in global temperatures.

A 3-4°C world is unlikely to be a pleasant or stable environment for many investors or businesses — in fact, at above 3°C, the projections about the effects become more and more uncertain, in part due to the possibility of “tipping points” in which warming triggers the release of more greenhouse gases. Experts can and do argue about how high these risks are and what scenarios may unfold. Everyone, however, should be able to agree that an extremely rapid warming towards temperature levels not experienced for at least 800,000 years is probably not a good thing.

Another important concept in evaluating climate targets is the “carbon budget”.
Put simply, the world can emit about another 1,000 gigatonnes of CO2 before we pass up a good chance (75% probability) of keeping climate change to within a “safe” 2°C level. Just like with emissions targets, there are several ways to look at this, but the bottom line is that most of the world needs to be “net zero emissions” by 2050 — meaning any greenhouse gas emissions need to be effectively captured and stored, or fully offset by sequestration (via forestation, for example).

The below chart shows how Australia’s newly-announced 2030 targets would mean an extremely dramatic transition to a zero-carbon economy in just 20 years.

Abrupt transitions are messy — and just imagine the recriminations over this. No-one can say they didn’t see it coming.

Investors, unsurprisingly, do not like this at all. Just this year has seen a number of reports on how climate change itself, and avoiding climate change, will create vast hazards and risks for certain types of asset owners, particularly those with long-term mandates such as pension funds, SWFs, and insurers.

The Australia-New Zealand Investor Group on Climate Change, whose members manage about $1 trillion in total, warned that “Australia needs an emissions reduction target which puts us on a pathway to our current commitment to limit global warming to 2°C and establishes Australia as a preferred destination for low-carbon investment. Shallow targets which delay effective action will exacerbate investment risks and increase costs.“

To get a sense of how worried some of these big investors are, look at recent reports from asset consultants Mercer (or read this mercifully short New Yorker story on it) and another from The Economist Intelligence Unit (commissioned by UK’s Aviva).

Just in case it wasn’t already clear, Australia’s prime minister, Tony Abbott, was at pains to clarify today that he is counting on a good future for thermal coal. Yet the general direction of travel is clear, and national policy framework that relies on growth in export of coal — particularly thermal coal — hardly looks like a safe bet. From the recent coal price trajectory and the abundant lack of enthusiasm in new production, that also seems to be the market view.

* Kate Mackenzie is the Investment and Governance Manager at The Climate Institute.

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