04/15/2013 02:21 pm ET Updated Jun 15, 2013

Our Preparation Is Long Overdue

Remarks by Ambassador Marlene Moses, Permanent Representative to the United Nations for the Republic of Nauru at the UN General Assembly Debate on Global Economic Governance

Thank you, Mr President,


Distinguished delegates,

As many of our esteemed speakers have observed today, global economic governance suffers from a democratic deficit, and must become more inclusive. This is important, because global economic governance is central to the welfare of every man, woman and child on this planet. It is a significant, if not the main determinant of all our development prospects.

This was vividly illustrated during the recent financial crisis, in which the bursting of a massive property bubble in a handful of countries crippled the financial system. The crisis reverberated throughout the global economy, disrupting trade flows, reducing access to capital and plunging many countries into recession.

As is usually the case, the most vulnerable among us were the most negatively impacted. Even my small and remote country was caught in the subsequent economic downturn, with a rapid rise in the cost of basic goods.

We now understand that the gross misallocation of resources fueled by rampant speculation, poor risk management, and most importantly, a deficient regulatory environment can pose enormous systemic risks to the global economy. For this reason, I am surprised that we have yet to discuss the next bubble threatening to shock the global economic system -- the carbon bubble.

Mr President,

The stark conclusion of the International Energy Agency is that no more than one-third of proven fossil fuel reserves can be burned prior to 2050 if the world is to have a reasonable chance of limiting the rise in global average temperature to less than 2 degrees Celsius - a goal agreed to by 195 countries.

Let me state that another way: at least two-thirds of proven reserves of coal, oil and natural gas must stay in the ground.

So how big is this carbon bubble?

Eight of the largest 20 publicly traded companies are fossil fuel companies. According to the Carbon Tracker Initiative, the top 100 coal and top 100 oil and gas companies have a combined value of almost $8 trillion, while 20 to 30 percent of the market capitalisation of several major stock exchanges is connected to fossil fuels. All proven fossil fuel reserves - those held by publicly traded and national companies -- could be valued at over $27 trillion. For comparison, the debt overhang from the recent housing bubble has been estimated to be around $4 trillion.

Large financial players are beginning to take notice. Just last month in their "Peak Planet" report, HSBC found that "between two-thirds and four-fifths of current reserves cannot be commercialised in a 2 degree world" without large-scale deployment of carbon capture and storage.

Meanwhile, governments, international financial institutions, and investors are still treating this unburnable carbon as marketable assets, and continue to pour hundreds of billions of dollars every year into the exploration and development of new reserves and into the construction of costly, long-lived energy infrastructure whose economic viability rests on the continued availability and unchecked combustion of those reserves.

Mr President,

The growing recognition of governments that ambitious regulatory action is needed to address climate change poses a high risk of stranded assets for any new fossil fuel investments. However, even without this climate imperative, fossil fuels would still be a very bad investment.

As conventional reserves are depleted, fossil fuel companies are expanding into environments where extraction is more difficult, and therefore more expensive. The risk of accidents in many of these locales is also higher, adding to the potential legal liability of these companies. Governments are recognising that the fossil fuel subsidies, on which too many companies rely, have become an unsustainable burden on national budgets.

And to a greater extent than imaginable even a few years ago, public movements are rejecting the carbon-intensive development model.

In most applications, the levelised cost of energy generated by fossil fuels is increasing. At the same time, it is dropping rapidly for renewable alternatives. Wind and solar energy in particular have reached grid parity in many places already, and this trend is expected to accelerate over the coming decade.

Mr President,

I'm not an economist, but I have learned two things from the 2007 financial crisis. First, if there is a bubble, then stop inflating it. Second, let the air out before it bursts.

Reducing the systemic risk posed by the growing carbon bubble is the immediate challenge of global economic governance. While the task is enormous and will require deepening our understanding of its full implications, some steps should be taken immediately.

First, G20 countries should deliver on their commitment to phase out inefficient fossil fuel subsidies as soon as possible.

Second, market regulators should require companies to disclose their carbon exposure and risk of stranded assets. Companies should also discount the value of their fossil fuel reserves to reflect the reality that most will not be commercialised.

Third, international development banks and bilateral donors should reassess their funding priorities with respect to energy infrastructure to avoid locking developing countries into carbon-intensive development pathways and minimise their risk of stranded assets.

Fourth, we must better understand the implications of the carbon bubble for those countries that are highly dependent on the fossil fuel sector, and consider options for mitigating any negative impacts.

We have seen this before. We have seen it with mortgages. We have seen it with technology stocks. We have seen it with currencies -- all in the last few decades.

We have seen how hot money seeking quick returns can lead to a gross misallocation of resources, and we have seen the devastation that is left when the house of cards collapses. We are seeing it again now, but this time we should act.

Mr President,

The honorable Sheik Ahmed Zaki Yamani, former Saudi Minister of Oil of Saudi Arabia observed ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.''

That day is now upon us, and our preparation is long overdue.

Thank you.