In every corner of the world we are witnessing a true revolution, a real transformation of our economies.
Like most in human history such changes are rarely linear in nature but the speed and scale of the one we are living through is staggering.
Basic truths about our survival, and our managing risks relate to how well we manage diversification, innovation and constant adaptation – these are the keys to business and national prosperity.
There are plenty of examples, but probably the most important are not ones we commonly think of: climate policy, fossil fuels and clean energy.
I accept the overwhelming consensus of scientists that climate change is real, human beings are causing it, and the threat is existential and quite unlike any that we have faced before. But let’s say you don’t and on that basis, let’s ask a simpler question about the diversification of Australia’s economy and energy sources.
The truth is that Australia’s lack of diversification is economically reckless. Most of our electricity generation is reliant on coal; an overwhelming majority of our transport and a very large percentage of our export industries are reliant on fossil fuels. When you look at this, you would be blind to not see a myriad of looming business risks.
There are four I can think of:
first is simply price volatility – the oil price (even with any rebound), the global coal price softening even further as demand collapses and supply increases and coal shareholder wealth destruction. Many pure play coal companies have shed more than 90 per cent of their value in the past 10 years.
Second is that you can destroy the value of fossil fuel assets without a single carbon regulation. We are seeing Chinese coal consumption falling – years earlier than anyone expected – and why? Because their cities are literally choking on air pollution. The same issues exist in India and many other countries, and water stress is a huge extra complicating factor.
Third is the growing momentum within governments to cut fossil fuel subsidies. Some of this comes from environmental pressure, but most of it is standard cost-cutting as countries try to repair stretched budgets (and lower fuel prices make it more politically palatable to cut subsidies). People in many Treasuries around the world would be glad to see the back of them.
And then there is the oldest reason of all: competition from a better product. The quiet energy revolution has been gathering pace, with the average cost of solar and wind power (and battery technologies) plum
meting as technologies develop and deploy. I mention “average” costs, because the marginalcosts of solar and wind are, of course, zero, and I don’t think any of us have grasped quite how revolutionary that will prove to be for energy markets in the longer run.
So you can be as angry as you like with environmentalists and “environmentalism” but from an economic point of view, it still wouldn’t make sense to be so heavily addicted to this polluting business s Australia is.
These risks are what the economists call “stranded asset” risks. It’s an evocative term for when an asset – a coal mine, a power station, a smelter – still has years of life in it, but just can’t compete becaue the economic or regulatory tide has turned.
Press link for more: http://www.smh.com.au/comment/strong-leadership-needed-on-carbon-reduction-policies-20150802-gipla5.html