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Coal investors told to diversify before carbon bubble bursts

Sydney, April 29 — Coal investors could suffer heavy losses in the future as carbon assets are frozen by regulators to achieve global warming targets, a new research report has found.

The report, "Unburnable Carbon: Australia's carbon bubble," launched jointly Monday by the Carbon Tracker Initiative and the Climate Institute, claims that Australian coal companies are irresponsibly investing large amounts in developing coal reserves that will ultimately have to go unburnt if the nation is to achieve its carbon reduction commitments.

"Much of our reserves of potential resources rest on a speculative bubble of climate denial, indifference or dreaming," said John Connor, CEO of the Climate Institute, an independent Australian research organization.

"In Australia, coal-related companies spent more than 6 billion AU dollars last year expanding those reserves and infrastructure. It's clear from this report they are being gambled on a world that may not and should not exist," said Connor.

The report follows Carbon Tracker's recent global analysis which stated that for there to be an 80 percent chance of achieving internationally agreed targets of limiting global warming to two degrees Celsius, only 20 percent to 40 percent of existing coal, gas and oil reserves can be burnt.

Taking Australia as a case study, the new report found that the 51 gigatons of carbon pollution in Australian coal companies' reserves represents about 25 percent of a global carbon budget for coal. Australian coal exports only represent 11 percent of the global market.

"There is a clear unbalance between the current level of Australia's coal production and their share of a global coal budget. To us, this says that Australian coal companies are planning for a five to six degree future. We feel this is a really risky assumption which is fundamental to the future financial value of these companies," said principle author Luke Sussams.

"We found that BHP Billiton and Rio Tinto could lose 4 percent to 5 percent of their market value due to the stranding of coal assets in a two-degrees scenario, and this is a risk which they' re toying with," said Sussams.

Australia should not rely on China's seemingly insatiable demand for coal, Sussams added, with market forces indicating that Australian coal is at risk.

"China said in their latest five-year plan that they're going to cap coal consumption at 4 billion tons, which is pretty much their current level of consumption.

"We've seen China's ability to redirect capital, to contract certain sectors and grow others. So I think there's no reason to believe that they would not be able to achieve this target. To me, it seems that you ignore this clear political signal at your peril, " Sussams said.

Although the researchers cannot pinpoint when the so-called carbon bubble will burst, they recommend that companies and investors diversify their portfolios into more competitive, secure and climate-proof long term alternatives — especially as renewable energy technology becomes more cost effective.

"You can't decry anybody for investing in a fossil fuel company or setting one up in the hope that this bubble doesn't explode. That's the way free markets work. But the real issue for the long-term asset owners is what is the chances of it exploding in five years, ten years, fifteen years," said principle author Julian Poulter.

"I think it's going to be very difficult for undiversified companies to escape the bubble, and I think there's a very strong argument that the superannuation funds and other asset owners should drive engagement with the diversified miners like BHP and Rio and so forth, because they have some options.

"You can't expect Woodside Petroleum to become a mobile phone company, but there's a good case for engaging heavily with something like BHP to start winding down its long-term exposures to coal," Poulter said. (PNA/Xinhua)


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