Last year the International Energy Agency launched a report that revealed we are on track to use up our global “carbon budget” by 2017. The carbon budget is the amount of fossil fuels that can be burnt while retaining a reasonable chance of limiting global warming to two degrees.

Now a new report, Unburnable Carbon: Australia’s carbon bubble, puts that into an Australian context and looks at what this means to the investment risk associated with our major coal mining companies.

The report has been well summarised by The Age and ReNew Economy so I won’t go into details here. However, the main point is that a large proportion of Australia’s coal reserves could be rendered worthless by global efforts to reduce carbon emissions.

It’s common for company valuations to be based on an expectation of steadily increasing profits. That’s a reasonable assumption under a Business As Usual scenario, and many companies (and governments) are investing heavily to bring new coal capacity online. New mines, railways and port facilities are being built to support increased coal exports. But major customers like China are working to cap their demand for coal, concerted global action to limit greenhouse gas emissions is looking a little more likely, and renewables are now challenging the dominance of fossil fuels. As a result, the value of mining companies could plunge within the next few years.

The carbon bubble isn’t just an issue for Australian companies.The Carbon Tracker Initiative estimates the value of the world’s biggest energy companies could fall by 40-60%.

It’s an estimate that’s based on a lot of ifs, buts and maybes, but there are still implications for most Australians. Many people directly own shares in the major miners. Many more will own units in managed funds which in turn own shares in the miners. And then there is everyone with money in superannuation. In most cases, most superannuation members leave the investment choice up to the fund manager, and again, mining shares will usually be a part of their portfolios.

So a carbon bubble isn’t just a risk for the mining companies. It’s a risk for most Australians.

Knowing that this risk is out there doesn’t necessarily make it easy to do anything about it. To borrow an old quote, when Australia’s miners sneeze, the rest of the economy catches cold. On the home front, a downturn in the economic activity associated with local use of fossil energy should be more than offset by increased investment in wind turbines, solar farms and energy efficiency. But while we are very good at exporting coal, we just aren’t in the running when it comes to exporting renewable energy systems.

A potential carbon bubble is just another risk factor to be taken into account by investors; something else to keep an eye on. And for the many passive investors who have their life savings mostly held in superannuation funds, it might be time to take more interest in just where their hard-earned savings are invested.

This article does not constitute financial advice.