Hewson warns of climate-induced financial crisis

Dr John Hewson, Professor and Chair in the Tax and Transfer Policy Institute at the ANU Crawford School of Public Policy, and chair of the Asset Owners Disclosure Project, has warned that a new global financial crisis could be triggered by the financial and economic implications of climate change.

Speaking at the recent Climate Leadership Conference in Sydney, Dr Hewson identified three ways that climate could induce a financial crisis – extreme climate events, government policies and technology.

“Most likely, some coincidence of all three would be what would precipitate a global financial crisis. It doesn't take a lot”, he said.

Extreme climate events, he said, can impact share prices, property values, and business values.

“The original climate science predictions back in the '80s or earlier suggested that with global warming we would see more extreme weather events occurring with greater frequency and intensity. That is certainly happening. I saw a Munich re-assessment of the major insurance events of the past 12 months – 93% of the major insurance events of last year were climate related.”

The second climate-related factor that could trigger a financial crisis was government policies.

“Policy can change the nature of an investment. I remember when this government led the world, under Malcolm Turnbull, surprisingly, when he was Environment Minister and banned incandescent lightbulbs.

“I don't think they thought through the consequences of that or how to implement that policy but it certainly changed the value of the big light bulb manufacturers who had very heavy and exhaustive investments in incandescent bulbs, and created opportunities for the sort of company I started which capitalised on the fact that there was going to be that transition.”

Dr Hewson said rapid developments in technology were changing the relative value of certain assets, particularly coal and coal-fired power plants.

He said the difficulty of funding new coal mines was exemplified by the Adani project, which he described as “already a stranded asset”.

“You wont get that sort of 15-20 year finance against the sort of risks that are being run, particularly if you accept the assessments of something like 70% of the known coal reserves in the world can't be mined and burned if we are going to meet the emission reduction targets for 2050.”

“Technology is moving to replace coal. You even hear the government say today that renewables are cheaper than coal. You get an super critical coal fired power station price per KW hour and compare it to say the solar thermal plant that we are building in South Australia and we beat it.”

Dr Hewson is chair of Solastor Australia Pty Ltd, formed as the project company of Port Augusta Graphite Energy which will used patented Graphite Storage Technology to store and produce solar energy on demand.

Dr Hewson warned of impacts on the renewable energy sector when the Renewable Energy Target ceases in 2020.

“From that point on, the subsidies start to disappear. The value of the certificates which are presently around 8 cents a KwH will suddenly drop towards zero. So a lot of wind and solar projects that have been built to take advantage of just that will no longer be commercially viable – just on that consideration alone. But if you add to that the Finkel requirement of dispatchability ..... those wind and solar farms don't actually satisfy that. They are still being approved without a requirement for storage, with the exception, I think of South Australia.

I think what will happen is when the price of those certificates collapses and the incapacity to supply dispatchable power is recognised the value of a lot of existing solar and wind farms will actually be a lot less than they think it is. That is a source of potential financial instability.

Dr Hewson reinforced his view that the world's financial markets are failing to understand and price risk.

“Individual asset owners are running risks if they are not adjusting their portfolios and failing in their fiduciary responsibilities as a directors of those institutions if they are not managing it and more broadly, systemically.”

Further, he said, banks that have invested in coal mines are highly exposed.

“None of them are really being brought to account because everyone hopes that the coal price comes back and the LNG market improves. They do not understand risk, they do not price it correctly, it is not being declared and that is the essence of systemic risk.”

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