The End Of Coal
Pleiades sent in this snippet here from Crikey for which I can’t find the link. It’s here wholus bolus for you:
As the former head of a financial research team, I recall dealing with an exposure to a brown coal-fired power generator. At the time, evidence was mounting that climate change impacts were quite likely, but they seemed to be far enough into the future not to worry us that much. Our debt exposure to the power generator did not mature until 2027; and who could predict what might or might not happen over that period of time?
For this investment, it wasn’t so much the physical effects of climate change that I was concerned about — it was the risk that market or regulatory impacts could make or break the project in the meantime. If we’d factored in a sizeable carbon tax, even in 2015, it would have seriously affected the prospective performance of our investment. When the uncertainty of future cash flows increases, the market value of the investment generally falls.
The emergence of new research from the highly respected Potsdam Institute in Germany has made the issue of market and regulatory impacts resulting from climate change very real. The timeline for significant impacts on investment returns is now finite, with estimates of 2015 becoming a reality. As Paul Gilding and I argue in our forthcoming paper entitled Carbon-Induced Financial Disruption, the investment implications of this research are breathtaking.
The Potsdam Institute research says that, if we are to have a reasonable chance of containing global warming to within 2 degrees, we only have a “budget” of 890 billion tonnes of CO2 emissions. This is a fixed budget, because carbon stays in the atmosphere for hundreds of years. So what is important is how much we emit — not when we emit it. If we continue to burn fossil fuels in line with our current business-as-usual approach, then we use up our budgeted emissions by 2024!
To add insult to injury, the quantum of fossil fuels required to emit 890 billion tonnes of CO2 is equivalent to only 25% of proven, economically recoverable reserves. This means that, in theory, 75% of known proven and probable reserves have no economic value.
This has startling implications for investors because there will either be (a) some form of global action that will seek to limit warming to 2 degrees; or (b) no effective action, with the consequence being runaway climate change. These are the only two options we have. The first one severely devalues our fossil fuel reserves as we scramble to reconfigure global energy networks; and the second one, while possibly maintaining the market value of those reserves for longer, is like driving off the edge of a cliff.
Coming back to the brown coal-fired power generator for a moment — won’t carbon capture and storage (CCS) technology ride to the rescue? There is little doubt that CCS in combination with coal-fired power generation can work. The problem is that a carbon price of $US50-100 per tonne is required to make it commercially viable. Therefore it is not competitive with investment in energy efficiency and most renewable energy sources. Placing faith in CCS to mitigate carbon exposure is a very risky investment strategy.
There is a commitment by the world’s largest emitters — including the EU, US, China and India — to limit warming to 2 degrees. How this commitment will play out is anyone’s guess. We are, however, left with two clear conclusions:
- Governments will have to follow through on their commitments to act unless they, and their electorates, prefer more destructive outcomes in the future; and
- At some stage, markets will price in those policy implications, and they could do so ahead of policy actions.
Now that we have an emissions budget and we comprehend how meagre it is, it puts a sharp limit on the window of time we have for policy actions.
The prospect of large-scale, major change and energy transformation is not automatically bad for long-term economic activity. For example, the International Energy Agency forecasts that $US10.5 trillion in additional capital spending would be required for energy infrastructure under a proactive response to climate change between now and 2030. But we cannot escape the fact that large-scale change will produce a reasonable level of protracted disruption to economies and markets.
This is all interesting because we keep coming to the fork in the road and we always seem to go in the wrong direction. This is really disturbing. Yet, it does bring to fore the problem that if coal is out and devalued as an energy source, then it’s going to impact the structure of our economy greatly – however, if we don’t readjust our usage of coal the environment will force us to undergo a massive readjustment to how our economy operates.
In a related vein, here’s something from NatGeo:
A new study seeks to shake up the assumption that use of coal, the most carbon-intensive fossil fuel, is bound to continue its inexorable rise. In fact, the authors predict that world coal production may reach its peak as early as next year, and then begin a permanent decline.
The study, led by Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin, and published in the August issue of Energy, predicts that by mid-century, the world’s coal mining will supply only half as much energy as today.
The idea that the world will face “peak coal” as soon as 2011 flies in the face of most earlier estimates and analysis.
(Related: “The High Cost of Cheap Coal”)
The London-based World Coal Institute, an industry group including the largest international coal producers, says “the use of coal will rise 60 percent over the next 20 years,” and that “coal will last us for at least 119 years.” And the U.S. Energy Information Administration, in its most recent international outlook, projects that coal consumption for electricity will grow more than 50 percent by 2035 unless policies are put in place to stop the growth of greenhouse gas emissions.
However, the Patzek study paints a far different picture—and not because people will use up the last of the coal in the ground. Rather, the world will finish off the coal that is easy to reach and high-quality—the coal that produces a large amount of energy per ton, the new study says. What remains will often be of lower quality, and progressively harder to dig up and bring to where it is used.
(Related: “Mine Tragedy Amid Push to Produce More“)
The study’s prediction for the time of the peak—actually a peak in the energy produced by global coal production—may not turn out to be exactly right, Patzek said. “I’m not saying that on July 1, 2011, there will be a peak.”
But the main thrust of the study is stark: “We are near or at the peak right now,” he said.
If true, this could have a vast impact on the world economy.
Coal-fired power plants supply 40 percent of the world’s electricity, and energy for two-thirds of the world’s steel production.
“If we are right,” Patzek’s study said, “major restructuring and shrinking of the global economy will follow.”
Many countries are counting on coal to continue powering their economies for decades to come.
“The United States is the Saudi Arabia of coal,” said President Barack Obama earlier this year, referring to estimates that the United States has the largest coal reserves of any country. Citing the huge stores and the need for clean energy, Obama made the remark at the launch of a task force to study how to deploy technology to “clean up” coal, through carbon capture and storage technology, in the next 10 years.
(Related: “Lighting a Fire Under Clean Coal”)
However, Patzek argues that the reserves estimates of the United States and other countries overstate how much coal is actually practical to mine and use.
“In my study, I disregard completely these [reserve] estimates,” Patzek said. “They’re not credible.”
“The only estimate that’s credible,” he argued, “is what actually comes out of the mines, and how you project that into the future.”
The rest of it makes for interesting reading. Just how are we going to value these resources going forwards?