The government is swimming against the tide on Westpac’s Adani decision

David Peetz, Griffith University and Georgina Murray, Griffith University

The Australian government’s strident criticism of Westpac for not financing the Adani Carmichael coal mine is out of step with the economics. As the cost of renewable energy falls and its adoption increases, fossil fuels are becoming a riskier investment. The Conversation

It’s not just Westpac. This shift is reflected right across the finance industry. The big four Australian banks have all declined to finance this mine, as have many large international financial institutions.

The Commonwealth Bank quit as the project’s financial adviser in August 2015. NAB ruled out financing the mine in September 2015. ANZ effectively ruled out financing in October 2015 and again, more firmly, in December 2016.

Big overseas financiers Standard Chartered, Barclays, Royal Bank of Scotland, Citi, HSBC, Morgan Stanley, Société Générale, Crédit Agricole, JP Morgan Chase, Deutche Bank and BNP Baripas have also already abandoned or made clear their lack of support for the mine.

Adani’s coal was to be used to generate electricity in India, recently seen as the future for the product given China’s shift away from coal. But Indian demand for coal is slipping. Its new National Electricity Plan has renewables rising from the current 15% to 56% of installed power capacity by 2027.

The Indian government itself now thinks it may not need any new coal power plants for at least a decade.

As mines require a huge initial investment that pays itself off over many years, this increases the risk that the Carmichael mine will become a “stranded asset”.

Shifting economics of coal

Sure, financial institutions are under pressure from customers and activists to avoid investments that damage the climate. But for these institutions, such pressures only make a difference at the margin. For them it is the poor economics of coal that is fundamental.

The long-term prospects of coal are weakened by the rapid changes in technology and the deterioration of the climate outlook.

Solar energy prices have fallen more rapidly than most expected, and battery technology and use is rapidly improving.

A recent study found that solar energy is on a trajectory to supply at least 3 terawatts (TW) of power globally by 2030, and potentially up to 10TW if certain barriers to installation can be overcome. For comparison, the world’s total electricity capacity from all sources as of 2014 was just 6TW.

Financiers’ minds may be focused still further by the fact that, if anything, scientists appear to have underestimated the effects of climate change on sea levels, polar ice caps, and methane emissions from thawing permafrost and lakes.

From short- to long-term thinking

The fact that the financial industry is reluctant to fund the Carmichael mine is just one example of the phenomenon described in a report by the Asset Owners Disclosure Project (AODP) as “a fundamental power shift … from short-termers to long-termers”.

There are several reasons for this, besides the changing economics of renewable technology, the worsening climate outlook, and the shifting policies in countries like China and India.

New tools are being developed to enable investors to quantify the impact of climate on their investments. In financial circles, the more things can be counted, the more they count.

Superannuation funds and overseas pension funds need to invest over long periods of time, and so are now forced to invest with climate change in mind. They can’t afford to have a stranded asset on their books.

Reinsurers – essentially large firms that provide insurance for insurance companies – face the same issue. They need to minimise exposure to extreme weather events, which are increasingly influenced by climate change.

Fund managers are creating financial products to enable investment in climate change adaptation. And some investors are taking more control over their investments, rather than leaving them in the hands of fund managers, so they can give appropriate priority to climate issues.

This is not to say that financiers around the world are uniformly reacting to climate issues. The AODP report shows that, on average, European and Australian asset owners and fund managers have done well in acting on climate risk, whereas American, Middle Eastern and (until now) Chinese ones have done poorly.

It’s also not true that finance has uniformly abandoned short-termism. “Climate-interested investors” currently account for just a third of the ownership of the world’s very large corporations.

But no one is going to make even short-term profits out of the Adani coal mine, with its huge upfront capital investment, unless they get a substantial subsidy from the taxpayer. And the long-term prospects look grim.

Those who argue that Westpac’s decision was “illogical” are swimming against both the financial and technological tides.

David Peetz, Professor of Employment Relations, Griffith University and Georgina Murray, Associate Professor in Humanities, Griffith University

This article was originally published on The Conversation. Read the original article.

The future of Australian coal: an unbankable deposit

File 20170502 17263 10ykrtv

AAP/Paul Miller

David Holmes, Monash University

The news last week that Australia’s oldest bank, Westpac, has withdrawn from any prospect of financing Adani’s Carmichael coal mine may well be the death knell for the controversial project. The Conversation

Westpac is the last of the big four Australian banks to have ruled out investing in Adani. ANZ declared its move away from mining in December 2016. The Commonwealth Bank and NAB dissociated themselves from Adani in August and September 2015.

The move means that, even if the Northern Australia Infrastructure Fund proceeds with a A$1 billion subsidy for the mine in the form of a dedicated, “private” railroad for Adani to export the coal, the mine is unlikely to proceed. The timing of Westpac’s decision may be a response to the multiple campaigns being launched against Adani, including consumer activism targeting the bank itself.

Westpac may have perceived these campaigns could have an impact on its customer base, and the savings accounts that underwrite its lending revenue stream. It responded with an update to its position statement on climate change. The statement specifies terminating financing mines with coal quality of less than 6,300 calories per kilo – which rules out Adani’s lower-quality coal from funding.

This is significant beyond just ruling out Adani. Westpac is the first of the big four banks to put restrictions on new thermal coal mines. This signals the largest financial players in Australia are accelerating the transition away from coal, and – as the position statement outlines – toward increasing lending to renewables and energy efficiency projects by two-thirds.

Climate solutions finance group Market Forces’ executive director Julien Vincent said Westpac has “raised the bar” on climate change for the other banks. Whereas banks used to watch each other for who was going to pass on interest rate cuts, it seems now they are also mindful of who is doing the most for climate change.

But even without its new position statement, Westpac could not expose itself to the obvious risks of funding a project that will so rapidly devolve from a global climate pariah to a fossilised stranded asset.

According to a report from 2011 on climate-change issues for the Land Court of Queensland’s hearing of objections to the grant of Adani’s mining lease:

The cumulative emissions related to this mine … are amongst the highest in the world for any individual project, and – to the knowledge of the authors – the highest in the Southern Hemisphere.

Given our current atmospheric CO₂ is 407.5ppm, this gives us 43ppm left to keep warming under 1.5℃, according to IPCC trajectories. Even at Adani’s own conservative estimates that it will emit 4.7 billion tonnes of greenhouse gases, which is almost 11% of the remaining global carbon budget.

1.5℃ of committed warming presents an adaptation nightmare for coastal communities around the world. This level is almost approaching the Emian period of 120,000 years ago, when sea levels were six-to-nine metres higher than they are today.

So, while Westpac still has a way to go before it gets off the Market Forces watch-list of fossil-fuel-friendly banks, it has managed to avoid an investment and PR disaster.

Westpac would have studied India’s electricity plan, released in December, which abandoned building any new coal-fired power stations in the next decade in favour of 350 gigawatts of new solar and wind power. Over the weekend, Shadow Environment Minister Mark Butler pointed out that the Modi government has said it intends to phase out thermal coal imports entirely by 2020.

But this did not stop Barnaby Joyce, on Q&A on Monday night, wheeling out the much-discredited argument that Australia has a “moral obligation” to help India keep its lights on. This is actually morally bankrupt when you consider that India is planning to look after itself with renewables.

The turning tide has not stopped The Australian newspaper from doing all it can to support the mine. This has included giving plenty of airtime to Resources Minister Matt Canavan, who last week labelled Westpac “wimps” for abandoning the mine. The Australian reported over the weekend that Canavan met with Guatam Adani in Brisbane, and was “confident the project would get the finance it needed from other lenders”.

But The Australian has been doing the heavy lifting for Adani’s PR campaign for some time now. Post-Cyclone-Debbie articles in April talked up the mine’s declared “huge economic benefits”. One front page headline declared:

Shorten isolated over Adani mine opposition (Unions, mayors, ALP premier unite to back coal project) (April 12)

And there was a blatant editorial promotion of the mine on April 18, entitled:

Adani project offers fresh hope

The April 12 edition even included a front page comment by Simon Benson, that:

Bill Shorten’s repositioning on the Adani coalmine in north Queensland appears to be yet another political retreat into the inner-city streets of leftist fanaticism.

What such a campaign tells us is it seems to be crunch-time for the mine – and the future of the entire Galilee Basin, whose coal deposits will be made to look a little more viable if that railway gets built.

But opposition to the railway subsidy has surfaced in the most unlikely of quarters. Sydney shockjock Alan Jones has weighed in, denouncing the subsidy as a case of taxpayers funding a private venture that is not in the national interest.

Paradoxically, Jones ended his outrage by comparing funding Adani with subsidising windfarms, for which Australians – both present and future – are direct beneficiaries in so many ways. But both The Australian and Jones have ignored the the big story on investment into renewables.

Whereas a giant coal-mining company has taken seven long years to realise no-one is listening – except for major political parties, perhaps eager for political donations they are accustomed to from the mining industry – investors can’t get enough of renewables. Investment opportunities for community projects have been selling out within minutes.

Grassroots solar projects are in high demand for investors. Fifty such projects have been established across Australia and are backed by $24 million. But the ABC reports Australia lags behind Scotland, Denmark and Germany, which all have extensive energy co-operatives that are promoting wind more than solar.

With an average of 7% return on investment, the appetite for such projects in Australia is obviously strong. And it will only take local communities and small businesses to be better organised to take advantage of the renewables investment revolution. At the very least, the remarkable appetite for renewables investment will drive the large banks and lending institutions to service this growing market.

With thanks to Tahnee Burgess for research assistance on this article.

David Holmes, Senior Lecturer, Communications and Media Studies, Monash University

This article was originally published on The Conversation. Read the original article.