Australia's huge coal industry is a speculative bubble ripe for financial implosion if the world's governments fulfil their agreement to act on climate change, according to a new report. The warning that much of the nation's coal reserves will become worthless as the world hits carbon emission limits comes after banking giant Citi also warned Australian investors that fossil fuel companies could do little to avoid the future loss of value.

Australia is already the globe's biggest coal exporter and "mega-mine" plans in Queensland for more extraction are identified as the world's second biggest "carbon bomb" threatening runaway global warming.

"Investments in Australian coal rest on a speculative bubble of climate denial, indifference or dreaming," said John Connor, one of the new report's authors and CEO of The Climate Institute, an independent research organisation based in Sydney. "Investors, governments and even some coal companies say they take climate change seriously, but this report shows they do not or are taking risky gambles."

James Leaton, at thinktank Carbon Tracker and also another of the report's authors, said: "Investors need to challenge the assumption that coal demand will continue to rise in China and elsewhere, otherwise billions of dollars of taxpayer, superannuation and shareholder funds will be wasted in assets linked to unburnable carbon."

Carbon Tracker's recent global report found that at least two-thirds of existing fossil fuel reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate change. The new report shows Australian coal reserves owned by listed companies alone are equivalent to 25% of the global carbon budget for the fuel to 2050.

However, far from cutting back on exploration for new coal reserves, Australian listed companies spent AU$6bn on developing new deposits. If only half of potential future reserves were exploited, Australian coal would use up 75% of the global carbon budget for the fuel.

Earlier in April, Citi banking group issued a warning to investors in fossil fuel companies. "We see limited potential for engagement to alter the outcome in this case," concluded its report. "If the unburnable carbon [scenario] does occur – even with carbon capture and storage technology – it is difficult to see how the value of fossil fuel reserves can be maintained."

Leaton said China has indicated its coal use will peak in the next five years, but that this had not been priced by markets. "I don't know why the market does not believe China. When it says it is going to do something, it usually does." Yet Australia is banking on selling coal to China: "That doesn't add up."

The report, called "Australia's carbon bubble", also warns that the nation's politicians will have little control over events: "Tokyo and London have high exposure to Australian proven coal reserves. The decisions in overseas markets that will leave Australian assets stranded are beyond any Australian political control."

It also warned that as coal prices fell in future, Australia's high costs of production leave its coal less competitive.

A separate report, also published on Monday, highlighted the opportunities available to Australia in joining other nations with big energy resources in transforming to a low-carbon economy.

"There are a lot of opportunities for Australia but the world is changing quickly and we need to be prepared," said Prof Tim Flannery, of the independent Climate Commission. "We are the 15th largest emitter in the world, larger than 180 other countries. We are more influential than most of us think."

"China is accelerating action. After years of strong growth in coal use, this has begun to level off. They have an impressive array of [climate] actions that will drive global momentum in the future," he said. "Renewable energy is surging globally with solar PV capacity increasing 42% and wind 21% in just one year. With so much global momentum this is clearly the beginning of the clean energy era."