By John Kemp
LONDON Dec 17 "There is no denying the controversial reality of coal," Maria van der Hoeven, head of the International Energy Agency (IEA), wrote in its annual report on the coal industry, published on Monday.
"No fuel draws the same ire," she noted. "And yet no fuel is as responsible for powering the economic growth that has pulled billions out of poverty in the past decades."
The report highlights all the contradictions associated with this most controversial of fossil fuels, and the sharp dilemma it poses for policymakers.
"Coal is abundant and geopolitically secure, and coal-fired plants are easily integrated into existing power systems," Van der Hoeven admitted.
Reserves are similar in scale to oil and natural gas. But oil and gas, coal resources are broadly distributed around the world, providing consumers with a measure of energy security.
As a solid fuel with a fairly high energy density, coal is easy to transport and handle. Coal power plants are simple and cheap to build, and produce a predictable and reliable flow of electricity on demand.
Coal is the second-most important source of primary energy, after oil, and consumption has been growing faster than for any other fossil fuel over the last decade.
Coal is playing the most important role in meeting escalating electricity demand in the fast-industrialising economies of China, India and across Southeast Asia.
But in its current form coal is "simply unsustainable," according to the IEA. Coal power stations are responsible for around 60 percent of all carbon dioxide emissions since 2000.
The IEA does not mince its words: "When it comes to a sustainable energy profile, we are simply off track - and coal in its current form is the prime culprit."
COAL IS CLIMATE CHANGE
China accounts for more than half of the growth in coal consumption in recent years and is forecast to retain that role over the rest of the decade. As a result, it is often said: "Coal is China, and China is coal."
But given the role of coal-fired power plants in releasing carbon dioxide, it could also be said "Coal is climate change, and climate change is coal."
The central question is how to tackle the problem. Two broad options have emerged.
The first, favoured by climate campaigners and gas producers like Shell and Exxon, is to replace coal with renewables and cleaner burning natural gas, leaving the coal reserves in the ground unburned.
The second, favoured by coal miners, some electricity producers and tentatively endorsed by the IEA and governments is to find ways of burning coal while emitting fewer pollutants and less carbon dioxide.
Shell and Exxon predict coal's share of the global energy mix will fall in coming decades in favour of more clean-burning gas. "By roughly 2025, natural gas is expected to overtake coal as the second-largest energy source, behind oil," Exxon said in its "Outlook for energy: a view to 2040" published this month.
Shell and Exxon are now among the world's largest gas producers, and both have been quietly lobbying governments in favour of policies that prioritise the use of gas over coal, including carbon pricing and curbs on power plant emissions.
The aim is to guarantee future demand for gas and make it relatively insensitive to prices by ensuring power producers do not revert to burning more coal if gas prices rise in future.
The IEA and governments are much less confident about a rapid transition away from coal combustion. According to the IEA, coal is "set to remain an integral part of our energy mix for decades to come" so "the challenge is to make it cleaner."
Efforts to capture coal plants' carbon dioxide emissions and lock them away safely underground have stalled according to the IEA.
However, this month the U.S. Department of Energy invited applications for loan guarantees worth up to $8 billion to support advanced fossil energy projects, including carbon capture and storage and oxycombustion systems.
According to the IEA, two-thirds of the world's currently known reserves of fossil fuels (oil, gas and coal) must remain unburned by 2050 if the rise in global temperatures is to be limited to no more than 2 degrees Celsius, the target global policymakers have agreed.
Grassroots campaigns such as Bill McKibben's 350.org and the Carbon Tracker Initiative are pressing fossil fuel companies and governments to stop exploring and drilling new reserves, and leave most of those which have already been identified in the ground, so as not to bust the global "carbon budget."
Campaigners aim to persuade major investors (including university endowments, pension funds and mutual funds) to withhold capital from fossil-fuel producing industries in order to force change.
The strategy is modelled on the successful "divestment" campaign waged against companies that did business in South Africa under apartheid during the 1980s and early 1990s.
It was outlined by McKibben in his now-famous article about "Global warming's terrifying new math," published in Rolling Stone magazine in July 2012, and has been developed in more detail by the Stranded Assets Programme at Oxford University's Smith School of Enterprise and the Environment.
The direct effects of divestment are likely to be small, according to researchers at the Smith School. But by stigmatising the provision of capital to fossil fuel producers, the indirect effects can be much larger ("Stranded assets and the fossil fuel campaign: what does divestment mean for the valuation of fossil fuel assets" October 2013).
"The outcome of the stigmatisation process, which the fossil fuel divestment campaign has now triggered, poses the most far-reaching threat to fossil fuel companies," they conclude. "Any direct effects pale in comparison.
"Firms heavily criticised in the media suffer from a bad image that scares away suppliers, subcontractors, potential employees and customers. Governments and politicians prefer to engage with 'clean' firms to prevent adverse spillovers that could taint their reputation or jeopardise their re-election.
"One of the most important ways in which stigmatisation could impact fossil fuel companies is through (the threat of) new legislation."
If campaigners can create a credible threat that governments will impose a carbon tax or other restrictions on fossil fuel production, it will create much more uncertainty about the monetisation of reserves and future cash flows, and could lead to "permanent compression" of price-earnings ratios and reduction in corporate share prices.
Not all fossil fuel companies are equally vulnerable. As with other divestment campaigns the Smith School notes "some players are able to avoid disapproval, while others face intense public vilification.
"A handful of fossil fuel companies are likely to become scapegoats. From this perspective coal companies appear more vulnerable than oil and gas," the Smith School concludes.
Coal combustion releases more carbon dioxide. And the markets for equity and debt in coal companies tend to be less liquid and more fragmented, making them much more vulnerable to an investor boycott.
"Divestment announcements are thus more likely to affect coal stock prices since alternative investors cannot be as easily (found) as in the oil and gas sector."
In the lending and bond markets, "a diminishing pool of debt finance and a higher hurdle rate will have the greatest impact on companies and marginal projects related to coal and the least effect on those related to crude oil," the researchers wrote.
"Due to the phased nature of the process of stigmatisation, investors seeking to reduce their fossil fuel exposure in general are thus likely to begin by liquidating coal stocks."
The coal divestment process has already had some notable successes among large institutional investors. It has also won important support from policymakers.
The U.S. Treasury has informed the multilateral development banks it will not support coal-fired power generation projects other than in exceptional circumstances.
But the divestment campaigners' most powerful allies are in the oil and gas industry. If there is an overall limit to how much fossil fuel can be burned, implied by the global carbon budget, then there is a zero-sum competition between fossil fuel producers.
If oil, gas and coal each comprise roughly one third of global fossil fuel resources, and two-thirds of reserves must remain unburned, putting coal off limits leaves a bigger share of the carbon budget for oil and gas firms.
Five of the biggest oil companies (Exxon, ConocoPhillips, Chevron, BP and Shell) are among 29 major companies operating in the United States that are planning on the assumption the U.S. government will eventually put a price on carbon, according to the New York Times ("Large companies prepared to pay price on carbon" Dec 5).
The Times noted the big oil companies' "slow evolution on climate change policy" and softening hostility to carbon pricing. But it is hardly surprising.
As the Times explains: "ExxonMobil is now the nation's biggest natural gas producer, meaning it will stand to profit in a future in which a price is placed on carbon emissions. Coal, which produces twice the carbon pollution of natural gas, would be a loser."
In the war on coal, as coal producers term it, the coal miners are almost friendless. Major oil and gas producers, as well as the renewables industry, are all willing to join with climate campaigners to point the finger at coal to secure a bigger share of the energy market and divert attention from their own emissions.
In political terms, coal appears doomed, at least in the advanced economies. It generates too many emissions and has too many enemies.
But the industry still has some enormous advantages. In emerging economies like China, India and Southeast Asia, electricity consumption per capita is a tiny fraction of the advanced economies, and is forecast to rise enormously over the next few decades.
Policymakers are under enormous pressure to provide more electric power and ensure its reliability. It is not clear how the enormous unmet demand for more power can be supplied without coal.
Even in the advanced economies, it will be difficult to scale up natural gas production and renewables like wind and solar enough to replace coal entirely.
In 2012, U.S. coal power plants produced ten times as much electricity as wind farms and solar power stations combined, and about a third more than natural gas-fired generators.
Gas-fired output would have to more than double, or renewables would need to rise by an order of magnitude, to displace coal completely.
Little wonder that the IEA and policymakers are focusing on how to burn coal more cleanly with fewer emissions.
The bottom line is that divestment campaigns are unlikely to put coal off-limits entirely, since there are no practical alternatives in the next 20-30 years.
But they will keep up the pressure on policymakers to find ways to limit coal's market share and support innovation designed to cut emissions from coal-fired plants.
In the meantime, divestment campaigns will also support the profitability of gas and oil producers.