New research by the Carbon Tracker Initiative (CTI), the London-based NGO that invented the concept of “stranded assets” (aka the “carbon bubble”), claims that “the tide is turning against coal exporters”. After taking on the oil and gas industry, CTI has for the first time calculated the risks faced by the coal sector from slowing demand in combination with climate change policies. It concludes that most new coal mines will not be economic.
The Carbon Tracker Initiative has made waves in recent years with its reports on the “stranded assets” that it says the major oil companies have on their balance sheets, i.e. oil and gas reserves that can never be produced if climate policy starts to bite and investment in alternative energy will continue to grow. Both ExxonMobil and Shell have seen themselves forced to issue responses to their investors disputing the claims of CTI. (For more on this, see http://www.energypost.eu/carbon-tracker-blasts-shells-response-stranded-assets-challenge/)
Today CTI has published a new risk analysis of the much smaller – but in terms of greenhouse gas emissions more important – coal industry. The coal sector has already been in steady decline recently. As CTI points out, the Bloomberg Global Coal Equity Index has lost half of its value over the last three years. “Coal prices are down, returns are down, share prices are down”.
Coal producers, says CTI, are “waiting for a rebound in coal prices”, but that rebound won’t come. It would require “significant increases in demand”. In reality, says CTI, demand is likely to fall. Most important, CIT is expecting a peak in China’s coal demand by 2016, and a gradual decline in Chinese coal consumption thereafter, as a result of efficiency measures, increased renewables, hydro, gas and nuclear and tougher policies to cut air pollution.
According to CTI, “China’s desire to reduce imports will cascade through the seaborne [export] market, impacting prices and asset values for export mines in the US, Australia, Indonesia and South Africa. The rapid displacement of coal in the US domestic market has seen US producers try and switch to exporting, but that window is already starting to close.”
CTI also notes that as a result of the coal demand peak in China, “Chinese carbon dioxide emissions may peak before 2020, given that these emissions have historically tracked coal demand so closely. Such a peaking would send a powerful message that all countries can target strong, cleaner economic growth, reduce poverty and manage their carbon emissions at the same time.”
Climate policies in the EU and US will do the rest: “The European Union’s Energy Roadmap to 2050 and the US Environmental Protection Agency’s recent Clean Power Plan show that the construction of new coal plants will be severely constrained in Western markets.” India, potentially the biggest market after China, “has to overcome infrastructure and financial constraints if it wants to import greater volumes of coal.”
The CTI report, which uses a “low-demand scenario” created by the Institute for Energy Economics and Financial Analysis (IEFFA), shows that new mines (greenfield projects) are particularly at risk of being economic. Over 60% of greenfield projects require prices that are unlikely to emerge, says CTI.
Note that the scenario CTI uses is assuming a carbon price consistent with the International Energy Agency’s so-called “New Policies Scenario”. This means they apply a carbon price assumption in countries where there is one or where there is relative certainty one might be introduced within the forecast period to 2035. But what if the carbon price will go higher? As it happens, just last week, a group of investors with $24 trillion in assets called on governments across the globe to “put a stable, reliable and economically meaningful price on carbon”. It would make the future for coal even darker.