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.

Houses and Holes
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  1. Methinks this post needs some editing onclick=”return TrackClick(”,’file%3A%2F%2F%2FC%3A%2FUsers%2FDavid%2FDesktop%2FWEO2013_Climate_Excerpt_ES_WEB.pdf’)”s.

  2. Well thank Christ we have a coal-friendly investment environment down here in Oz. We’re not silly enough to fall for this global warming fraud.

    • There is an incredibly strong consensus in support of the IPCC from reputable national and interantional scientific organisations

      and almost no dispute in peer reviewed scientific papers:

      In the face of this science a risk management approach is warranted, leaving coal in the ground, even at a cost to GDP growth (which can’t be perpetual anyway in a finite world).

      If ever the sceience was disproven, the coal still in the ground would have been a form of national savings and could be dug up and burnt.

      • dumb_non_economist

        Explorer, you should know Lorax better than that, sarcasm, unless of course your being sarcastic! 😆

      • “In the face of this science a risk management approach is warranted, leaving coal in the ground, even at a cost to GDP growth”

        Very scientific of you Explorer!

        Let’s break down the logic of your argument:
        1. Burning coal has associated risks
        2. Do not burn coal even at a cost to GDP growth

        Right…. so you could apply that to … investing in education.
        1. Investing n education has associated risks (there are no guarantees that you will get a return on investment)
        2. Do not invest in education …. even at a cost to GDP growth.

        I like your ‘scientific’ approach.


      • Melbourneguy, thats a very weak take-down there.

        Educating children does not run a planet-alteration/destruction risk (at least only very very indirectly). Nor is it a resource that could be used at some point in the future if it were proven to be safe to do so. Your analogy is moronic.

      • davel – you’re argumentative skills are moronic.

        It is a simple example that shows how absurd reasoning such as “there is a risk in doing something ….. therefore avoid it at all costs”.

        It requires very little brain power to point out that an analogy is not exactly the same as the original argument.

        Try harder.

  3. Diogenes the CynicMEMBER

    It is not just climate change. What about the cheaper price of new wind and solar electricity generation? The wind farm in Merridan WA has higher capacity factors than the coal power stations in Collie. What about health? Look at Morwell – sickening health effects from our reliance on this dirty fuel and no solution to what will be an horrible problem for the future. Consider the high lung cancer rates in the Port Augusta region. It is a nasty fuel and we need to wean ourselves off it. China, the US and others are starting to move away from coal, why we are lagging?

  4. Funny that the Norwegians who’s fund relies on Oil, tried to ban coal.
    Has anyone though what the world would like like if we totally got off Hydrocarbons and Coal? Would Russia Fossil Fuel Energy King just go quietly away with no fallout, or any of the other Petro States ?
    Imagine the middle east with no ability to earn foreign currency.
    How about the political implications in the coal states in the U.S they have already taught the Democrats a lesson once on this issue.
    Not to mention our own sorry hides, Our country has never shown any ability to develop a robust industrial economy. Without Coal & Gas, we would quickly circle the drain.

  5. I think this is a bit overblown and alarmist. Yes coal has negative health & environmental externalities that should be accounted for in an efficient manner (such as Pigovian tax or a market based ETS).

    After adjusting for these externalities does coal most likely still have a role to play in our future energy portfolio? Almost certainly yes. If you want to be ‘progressive’ and ban it altogether you are doing so at the expense of efficient economic outcomes. So less to spend on health, education etc. etc. Is that morally right? Absolutely not.

    As to whether the extent of impact to the coal industry from increasing shift to renewables and other low emissions form of power is being accurately predicted, it is probably not.

    Markets tend to overshoot and in this case the over-optimism for renewables and over-pessimism about coal is probably likely to create some arbitrage opportunities in the future.

    There are those who yap about battery power etc. being the panacea. This is always predicated on cost declines (and typically over-ambitious ones). The fact is they are not economic now. If they were the market would take them up. If they still weren’t because of market failures, policy-makers would be more actively intervening.

    But they’re not……. Go ahead … invest in some battery companies.

    • Diogenes the CynicMEMBER

      On batteries being economic – today they are for off grid situations today especially for those who have to pay enormous connection upgrades to “join” the grid.

      Today batteries are also economic as a partial backup and grid stabiliser for smaller decentralised grids. Some inverters for residential PV are starting to have small 2kWhr batteries included.

      They are also economic when looking at supply management, instead of making expensive upgrades to the network, a battery solution at a substation can be cheaper and faster to install for the grid operator.

      Some wind turbines are looking at coming with batteries as a way to increase investment returns and enhance the grid.

      I don’t buy your batteries are rubbish line melbourneguy.

      • Thanks you’ve just proved my point. They’re currently only economic in limited applications.

        My point is that they’re hardly the revolutionary technology that will be the nail in coal’s coffin as it is often suggested.

  6. Coal’s here to stay for decades to come.

    I’d like to see any advocating the Stranded Assets lunacy compelled to exist sans all fossil fuel drien existence – no flights; no cars; nothing.

    • We might have to all get used to a non fossil fuel existence.No flights; no cars; nothing. A scenario which isn’t science fiction. For anyone interested it’s not about coal but OIL. See – and go to ” Reaching oil limits-new paradigms needed”.

  7. I heard Caldecott on ABC radio this morning. He sounded like an anti-fossil fuels campaigner, although he dressed his pitch in academic trappings (he does “research” and gives “lectures”). The Stranded Assets Program seems to receive funding from the WWF.

  8. “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…..” – IEA.
    Without wishing to delve too deeply into their assumptions, this statement suggests that CO2-rise mitigation can be achieved, while maintaining economic growth, by a combination of substitution of coal by non-fossil energy sources for power generation at the margin, and CSS for the remaining coal-fired capacity.
    The world looks to the coal-fired power generators to absorb the high cost of CO2-rise mitigation, because they have the lowest marginal cost of production, are large, stationary and technically sophisticated and, with increasing use of electric vehicles/subways in cities, they are the only non-nuclear alternative to petroleum fuels for transport.
    The coal mining industry has no obligation to contribute to the development of CSS and other CO2-rise mitigation technologies, although it is clearly in their interest to do so. According to Rio Tinto’s energy division chief, Harry Kenyon-Slaney, “Rio Tinto has to date spent in excess of 100 million dollars on activities directed towards the development of carbon capture and storage technology.”
    CO2-rise mitigation is an issue for politicians, and their responsibility alone. Slow progress has been because of failures in political leadership. The shareholders of the coal mining companies might feel their investment risk has increased with the possibility of their holding “stranded assets”, but while coal mining companies sometimes go bankrupt, the coal mine usually continues under new management.