Coal’s $1.8 trillion bad joke


The AFR is carrying a story that is closer to the truth about the future of coal than some more bullish recent reporting:

Fossil fuel divestment campaigns are gathering momentum and are likely to increasingly lead to reputational damage for coal miners, as well as increased financing costs, according to Ben Caldecott, director of the Stranded Assets Program at Oxford University.

Mr Caldecott, who is in Australia for two weeks for a series of lectures and meetings with investors and politicians about his research, said that moves by large funds to exclude coal stocks from their portfolios were spreading remarkably rapidly.

While the sale of fossil fuel stocks typically has little impact, the bigger effect would be through “stigmatisation” of the companies, hampering their operations within society.

“That makes it much harder for them to get capital, to hire people, and do all sorts of things in society,” he said. “That is a very significant potential problem.”

His comments come after the Norwegian Parliament last week rejected a proposal to ban the $US840 billion Government Pension Fund Global from investing in fossil fuels. However, the threat has not gone away, with the opposition Labour Party that brought the move signalling it may re-submit the proposal after April.

The fund is one of BHP’s top three shareholders and also has holdings in Glencore Xstrata, Woodside Petroleum and Whitehaven Coal. 

Markets and governments will both shift away from coal in the future. Fast forward another decade or two as global warming pressures become increasingly intense and polities the world over will increasingly demand action on coal.


This is a better effort than recent AFR reporting which cited the International Energy Agency (IEA):

King coal is here to stay, says the world’s top energy forecaster. Australian coal producers “definitely” have a rosy future once they get over current ­pricing and cost woes, Fatih Birol, chief economist of the International Energy Agency, said.

“People have been wrong many times saying that the time of the coal is passed, is over,” Dr Birol toldThe ­Australian Financial Review in an exclusive telephone interview from Paris. “[But] we have seen that the coal is still growing strongly – unless there are some regulations [to slow its growth].”

Dr Birol, architect of the IEA’s World Energy Outlook, said such regulations were not yet in force in developing Asia – the fastest-growing market for coal, natural gas and other forms of energy.

He said about 70 per cent of new power plants under order from utilities in China, India and south-east Asia were coal-fired, many of them “sub-critical” – or not of the most efficient modern design. Sub-critical power ­stations use up to 15 per cent more coal than the most modern ones, locking in higher carbon dioxide emissions.

Coal-fired power plants had a powerful competitive advantage over natural gas in the region, generating power at less than half the cost of gas, Dr Birol said. Gas-fired power still costs 2.2 times as much as coal-fired power.

Dr Birol’s comments are bad news for environmentalists campaigning to curtail the use of coal, the largest ­generator of carbon dioxide emissions. But they will be a relief to Australia’s besieged coalmining industry. Coal companies have laid off thousands of workers in the past two years amid ­falling coal prices, surging costs and a vociferous anti-coal campaign.

Actually, Dr Birol’s comments are bad news for everybody – including the coal industry – unless, according to that same IEA, carbon capture becomes a reality, which Mr Birol’s comments assume. From the latest World Energy Outlook 2013 [my italics]:


Coal remains a cheaper option than gas for generating electricity in many regions, but policy interventions to improve efficiency, curtail local air pollution and mitigate climate change will be critical in determining its longer-term prospects.

And in its 2013 special report, Redrawing the Energy Climate Map:

The financial implications of stronger climate policies are not uniform across the energy industry and corporate strategy will need to adjust accordingly. Under a 2 °C trajectory, net revenues for existing nuclear and renewables-based power plants would be boosted by $1.8 trillion (in year-2011 dollars) through to 2035, while the revenues from existing coal fired plants would decline by a similar level. Of new fossil-fuelled plants, 8% are retired before their investment is fully recovered. Almost 30% of new fossil-fuelled plants are fitted (or retro-fitted) with CCS, which acts as an asset protection strategy and enables more fossil fuel to be commercialised. A delay in CCS deployment would increase the cost of power sector decarbonisation by $1 trillion and result in lost revenues for fossil fuel producers, particularly coal operators. Even under a 2 °C trajectory, no oil or gas field currently in production would need to shut down prematurely. Some fields yet to start production are not developed before 2035, meaning that around 5% to 6% of proven oil and gas reserves do not start to recover their exploration costs in this timeframe.

Delaying stronger climate action to 2020 would come at a cost: $1.5 trillion in lowcarbon investments are avoided before 2020, but $5 trillion in additional investments would be required thereafter to get back on track. Delaying further action, even to the end of the current decade, would therefore result in substantial additional costs in the energy sector and increase the risk that the use of energy assets is halted before the end of their economic life. The strong growth in energy demand expected in developing countries means that they stand to gain the most from investing early in low-carbon and more efficient infrastructure, as it reduces the risk of premature retirements or retrofits of carbon-intensive assets later on.


A trillion here and trillion there and pretty soon your talking serious money.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.