Will soaring prices for coal, oil and gas speed their replacement by renewables or foster a surge of investment in fossil fuels?

The new political economy of climate change is facing a head-on collision with the old-fashioned market economics driven by supply and demand in global energy markets. Australia finds itself uncomfortably at the point of impact.

The radical green fringe which in the 1970s postulated human-induced climate change has gone mainstream with 64 nations now having some form of carbon-pricing scheme raising revenue. Australia and the United States are among a tiny handful of developed nations that do not.

The Australian government’s adoption of a net-zero emissions target for 2050 doesn’t reflect a damascene conversion by the prime minister who four years ago brandished a lump of coal in federal parliament to mock the opposition’s embrace of renewables. Rather, it reflects an appreciation of the formidable forces building internationally which are also reflected in the Australian electorate.

Treasurer Josh Frydenberg expressed the motivation clearly in a speech ^[1] to the Australian Industry Group in September. ‘Climate risk has become one of the key issues raised in my discussions with CEOs, investors and counterparts, here and overseas,’ he said.

‘Considerations around climate risks are now being hard-wired into how global financial institutions allocate capital—at both a firm and country level—and how they engage with clients and companies.

‘We cannot run the risk that markets falsely assume we are not transitioning in line with the rest of the world.’

Frydenberg said Australia had long depended on imported capital to fund the economy. Banks secured around 20% of their wholesale funding from global markets; foreign investment in Australia stood at $4 trillion while foreign investors held about half the government’s bonds.

‘Reduced access to these capital markets would increase borrowing costs, impacting everything from interest rates on home loans and small business loans, to the financial viability of large‑scale infrastructure projects. Australia has a lot at stake.’

Frydenberg noted that major investing institutions like BlackRock, Fidelity and Vanguard were committing to zero emissions. A US database ^[2] reports that almost 1,500 investing institutions around the world, with a combined worth of US$40 trillion, have committed to divesting from fossil-fuel businesses.

So the political economy of climate change is both acting to reduce demand for fossil fuels by imposing taxes on carbon that stimulate a shift to renewables and also squeezing supply by choking the flow of funds going to fossil-fuel-intensive industries.

And yet the world still depends on fossil fuels for around 80% of its energy. Right now, fossil fuel prices are soaring. Coal—the most reviled of all fossil fuels—hit a record of US$269.50 per tonne on 6 October, with Australia’s coal out of Newcastle setting the global benchmark price. Australia is the world’s largest coal exporter.

Oil prices have soared from last year’s extraordinary low of US$12.80 to US$83.60 a barrel, the highest in seven years. Spot prices for liquefied natural gas have also been at record levels, with the commodity now fetching more than US$50 per million ‘British thermal units’, a phenomenal increase from as little as US$2 a year ago.

Demand for energy has surged as the global economy emerges from the pandemic-induced recession. Investment in renewables has grown rapidly over recent years but has weakened in most fossil fuels, partly because of the pressure of investment and financial institutions that are increasingly shunning the sector. The result is shortages and soaring prices.

A market economist would say that taxes on carbon emissions to reduce demand for fossil fuels are the best way to achieve a shift in energy consumption patterns. Subsidising renewables is less efficient, and waiting for technological solutions is equivalent to prayer.

But trying to quash supply by starving new projects of capital or by regulatory fiat will only result in the prices that provide an incentive for new projects which will be funded by someone, if not the major institutions, when the profits are high enough.

The political economist will respond that all weapons must be deployed if the imperative of shutting down the fossil-fuel industry is to be achieved.

This clash between the political economy of climate change and the market economics of the energy industry was on display last week when the secretary-general of the United Nations, Antonio Guterres, commented that the top hydrocarbon-producing state in the US, Texas, needed to look beyond oil and gas ^[3] to renewables. ‘If Texas wants to remain prosperous in 2050 or 2070, Texas will have to diversify its economy and Texas will have to be less dependent on oil and gas,’ he said.

The Texas governor, Greg Abbott, responded that the UN should ‘pound sand’—a US idiom equivalent to ‘jump in a lake’—tweeting ^[4], ‘The world is reeling from spiraling fuel costs caused by premature over-reliance on renewable energy. High fuel costs punish middle class families & stoke the supply chain crisis. Texas oil & gas is needed right now.’

A savage article ^[5] in the New York Times about Australia’s lack of commitment to curbing emissions noted that the New South Wales government had approved three new coalmines in the past month and had 20 new coalmining projects under review. India’s Adani Group is forging ahead with the construction of the world’s largest coalmine west of Rockhampton in Queensland.

‘At a time when climate change and those who fight it demand that coal be treated like tobacco, as a danger everywhere it is burned, Australia is increasingly seen as the guy at the end of the bar selling cheap cigarettes and promising to bring more tomorrow,’ the paper said.

While spending on coal exploration is still far below the $1 billion a year peak reached during the resources boom, the $450 million invested in 2020–21 in Queensland and New South Wales is more than double the level of the previous year.

Woodside Petroleum is expected to give the go-ahead in December to a new $16 billion LNG plant to service its Scarborough field off Western Australia. It would be the first investment approval for an Australian LNG plant in a decade following the resources-boom investments that made Australia the world’s biggest LNG supplier.

Fossil fuels account for around 20% of Australia’s export earnings. The Department of Industry’s , compiled in June before the latest surge in prices, predicted that earnings from coal, LNG and oil would soar almost 40% over 2021–22 to surpass $100 billion.

Although much of the profit from Australia’s fossil-fuel production goes to overseas shareholders, enough remains in Australia through wages, superannuation earnings, taxes and royalties for the industry to be an important contributor to the Australian economy that no government can ignore.

So despite the plan to reduce Australia’s net emissions to zero by 2050, which relies on advances in technology rather than any government suppression of either supply of or demand for fossil fuels, it is possible that the world’s investing institutions will make the sort of adverse judgements about Australia that Frydenberg fears.

It could be argued that Australia would be in a better position to continue supplying fossil fuels if it were doing something meaningful to curb demand, although it’s likely that any such proposition would fall on deaf ears among the political economists shaping climate policy in both the public and private sectors around the world.