Australia is increasingly globally isolated and economically vulnerable, as Korea and China move toward national Emissions Trading Schemes and other major trading partners make policy and investment decisions that directly contradict Australia’s approach, a new report warns. 

The investor briefing note from the Institute for Energy Economics and Financial Analysis (IEEFA) focuses on the implications for Australian fossil fuel investment taking into account regulatory, market, technological and reputational risks resulting from the transformation of global energy markets.

Tim Buckley, Director of Energy Finance Studies, Australasia for IEEFA and author of the report said:

“In the same week that Australia repealed its ETS, both China and Korea took decisive action in the opposite direction, joining other major trading partners in acting on climate change, thereby placing Australia in a highly isolated and vulnerable position.”

The Korean Ministry of Environment, which oversees its ETS program, last week announced that it would maintain its 2015 implementation timetable, while China’s National Development and Reform Commission announced the creation of a committee of experts to oversee expanding the existing seven ETS pilot programs into a unified national program.

“Following on from US President Obama’s Clean Energy Plan last month, these announcements by Korea and China suggest that almost all of Australia’s major trading partners are progressing carbon reduction initiatives,” Mr Buckley said.

“The repeal of the Australian carbon price seeks to artificially stimulate more investment in fossil fuels at a time when demand and prices around the world are directing capital in other directions in the energy sector,” Mr Buckley said.

“The repeal may have some short term stimulative impact but is unlikely to reverse the broader global market trends, which are overwhelmingly against fossil fuels and in favour of renewables. The risk of continued investment in fossil fuels leaves Australia exposed to a portfolio of stranded assets, combined with a failure to capitalise on the financial opportunities of favourable market conditions for renewables.

“The viability of major coal export markets such as India and China is increasingly being called into question as stalling coal demand meets growth and cost efficiency in renewable energy production.

“67% of all new power installations in the last year in China were non-coal. The growth of China’s coal imports is in dramatic decline, down from 13.3% last year to just 0.9% in the first half of 2014. The stalled demand for growth in coal in China is despite robust electricity demand, reflecting the high marginal cost of productive of thermal fuels relative to installed solar, wind, hydro or nuclear.

“India has recently increased taxes on coal at the same time that its new Prime Minister Narendra Modi aims to boost investment and remove domestic growth impediments for solar.

“The Australian government is placing billions of dollars in investment at risk by ignoring the simple fact that major coal export markets such as India and China are taking decisive steps away from fossil fuels, in line with other major trading partners,” Mr Buckley said.

Global investment bank HSBC has similarly identified this “carbon isolation,” and noted that Australia is “even more vulnerable” as other major powers move in the opposite direction.

The IEEFA report also identifies positive trends in renewables, noting that global financial markets need to be unlocked to accelerate the deployment of renewable energy and energy efficiency.

“In contrast to the bleak forecast for fossil fuels, renewable energy is experiencing an increasing flow of financial capital from global markets. This trend is illustrated by the growth of the U.S. “YieldCo” listed renewable equities sector with three initial public offerings in June 2014 alone, the issue of US$20 billion of Green Bonds in the first half of 2014 and the creation of a New Development Bank with an initial equity capitalisation of $50 billion,” Mr Buckley said.

“Solar also continues to grow globally. The cost of solar has been decreasing dramatically over the last five years, with total module manufacturing costs down more than 80% in this period. The global industry is expected to grow by 15-20% in 2014, on top of record installs in 2013.

“Australia’s resource-dependent economy is increasingly exposed to substantial risk due to the government’s failure to heed global market trends, combined with a ‘head in the sand’ approach to international action on climate change,” Mr Buckley said.

Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research. Mr Buckley has spent the past five years investigating trends in global renewable energy.

The briefing note is available for download here: http://www.ieefa.org/julybriefingnote/

China ETS announcement reference: “China ETS Committee Would Set National Standards,” 18 July 2014, Bloomberg Bureau of National Affairs (paywalled, available upon request).