Yesterday Barack Obama declared a war on coal in the US. From the FT:
The Obama administration has launched the most ambitious plan to combat climate change in US history by proposing to regulate greenhouse gas emissions from power stations.
The plan would cut carbon dioxide emissions from power stations by 30 per cent by 2030 from 2005 levels, a move that has the potential to reshape the US electricity sector but will spark a wave of legal and political challenges.
President Barack Obama said on Monday: “These new standards are going to help us leave our children a safer and more stable world.”
The Environmental Protection Agency, the regulator that drew up the plan, said it would create tens of thousands of jobs and lead to lower household electricity bills because of improvements in energy efficiency.
But business groups, with representatives of the coal industry in the forefront, warned that the plans would raise bills, cause job losses and increase the risk of blackouts.
This will be a bun fight, no doubt. Capital Economics sees it playing out thus:
To recap, yesterday the EPA announced the “clean power plan proposal”, a new set of rules designed to curb US emissions of carbon dioxide from the power sector by as much as 30% from 2005 levels by 2030. These are the first rules to focus on carbon dioxide emissions from current power plants.
In September 2013 the EPA announced rules on emissions from new coal-fired power plants, which would limit emissions to 1,100 lbs/MWh of carbon dioxide. To put that into context, the most efficient coal plants currently produce around 1,800 and natural gas plants produce about 1,000. These rules make it virtually impossible to build new coal power plants in the US without using expensive and unproven carbon capture and sequestration technology.
However, rather than just focusing on emissions from power plants, the “clean power proposal plan” takes a “system-wide approach” meaning that states can use a variety of methods, such as installing more renewable capacity or reducing demand to meet the lower emission targets. While a system-wide approach takes some of the pressure off coal power plants, demand for coal will still be reduced as an increase in renewables or a reduction in overall demand for power will eat into coal’s market share. Indeed, over 90% of US coal is used for electricity generation, (see Chart 1), so even a small reduction could have a large impact on prices.
Overall, these new regulations reinforce our view that coal prices have further to fall. We expect the price of international coal to fall from $74 per tonne today to $60 by the end of 2015.
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Adding to the sector’s woes are reports from Reuters from China of an immediate in-sympathy response:
China, the world’s biggest emitter of climate-changing greenhouse gases, will set an absolute cap on its CO2 emissions from 2016, a top government adviser said on Tuesday.
The target will be written into China’s next five-year plan, which comes into force in 2016, He Jiankun, chairman of China’s Advisory Committee on Climate Change, told a conference in Beijing.
“The government will use two ways to control CO2 emissions in the next five-year plan, by intensity and an absolute cap,” he said.
We already know that China is moving aggressively to limit its coal-dependency versus previous trajectories. At this stage a hard cap as well would be a largely symbolic move but even so it will give global climate talks a huge boost. The intensity deductions versus absolute deductions debate has been the primary stumbling block for negotiators and bodies politic.
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The International Energy Agency today outlines the extent of that challenge for the Paris 2015 summit:
Over the period to 2035, the investment required each year to supply the world’s energy needs rises steadily towards $2 000 billion, while annual spending on energy efficiency increases to $550 billion. This amounts to a cumulative global investment bill of more than $48 trillion, consisting of around $40 trillion in energy supply and the remainder in energy efficiency. The main components of energy supply investment are the $23 trillion in fossil fuel extraction, transport and oil refining; almost $10 trillion in power generation, of which low-carbon technologies – renewables ($6 trillion) and nuclear ($1 trillion) account for almost three-quarters, and a further $7 trillion in transmission and distribution.
Nearly two-thirds of this investment takes place in emerging economies, with the focus for investment moving beyond China to other parts of Asia, Africa and Latin America; butageing infrastructure and climate policies create large requirements also across the OECD.
…The investment path that we trace in this report falls well short of reaching climate stabilisation goals, as today’s policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed: a breakthrough at the Paris UN climate conference in 2015 is vital to open up a different investment landscape. We estimate that $53 trillion in cumulative investment in energy supply and in energy efficiency is required over the period to 2035 in order to get the world onto a 2 °C emissions path. Investment of $14 trillion in efficiency helps to lower energy consumption by almost 15% in 2035, compared with our main scenario. The $39.4 trillion of energy supply investment remains at a comparable level to our main scenario, but unit investment costs are higher as investment shifts away from fossil fuels (where investment is almost 20% lower on average and coal is hit hardest) and towards the power sector. Around $300 billion in fossil fuel investments is left stranded by stronger climate policies. A lack of clarity over policy would increase the risk of investments becoming stranded, although carbon capture and storage provides an increasingly important hedge for fossil-fuel assets against the possibility of under-utilisation or early retirement. Full report here.
The challenge is great but the coal sector faces a growing global movement against it. And even locally, according to today’s Lowy Poll, global warming is back as an issue, surviving the Coalition assault upon it:
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This year, 45% of Australian adults now say that ‘global warming is a serious and pressing problem. We should begin taking steps now even if this involves significant costs’. Concern isup 5 points since 2013 and 9 points since 2012.
‘After successive polls revealed declining concern about climate change between 2006 and 2012, this year’s Poll shows that the trend-line has turned, and that Australians’ concern about climate change is now on the rise’, said Alex Oliver, Director of the Poll.
When asked about international policy on global warming and carbon emissions, 63% of Australians say the government should be taking a leadership role on reducing carbon emissions. Only 28% say it should wait for an international consensus, and a fraction (7%) say the government should do nothing.
Then there is the rapidly growing stranded assets movement, which has begun to suck in even some Australian superannuation managers. Change is in the air, peeps, it’s long and arduous but it’s happening.
It’s not all gloom for the sector of course. There’s always Hector to keep its spirits up:
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.
