(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, June 23 Two-thirds of the world's
already discovered reserves of oil, coal and natural gas must
remain unburned if the rise in average global temperatures is to
be limited to 2 degrees Celsius by 2050, according to the
International Energy Agency.
But coal miners and oil and gas companies round the world
allocated $674 billion to finding even more reserves and new
ways of extracting them in 2012/13. Much of this investment
risks being wasted, according to the Carbon Tracker Initiative,
which is campaigning to get investors to think again.
("Unburnable carbon 2013: wasted assets and stranded capital")
"It is possible that much of this additional spending would
prove fruitless. At worst, these assets might be 'stranded'
forever," Martin Wolf, the celebrated chief economics
commentator of the Financial Times, wrote in a sympathetic
review recently. ("A climate fix would ruin investors" June 17)
Carbon Tracker Initiative is part of a broader divestment
movement pressing universities, pension funds and other socially
responsible investors to boycott shares and loans in fossil fuel
companies to force them to leave the oil, gas and coal "down
there". ("Stranded assets and the fossil fuel divestment
campaign: what does divestment mean for the valuation of fossil
fuel assets?" Oct 2013)
The divestment campaign has drawn a swift response. Major
oil and gas companies such as Exxon and Shell reject the claim
that their exploration and development spending is being wasted.
"We do not believe that any of our proven reserves will become
stranded," Shell wrote in a letter to investors on May 16.
"While the stranded asset notion may appear to be a strong
and thought-through case, it does have some fundamental flaws,
and there is a risk that some interest groups use it to
trivialise the important societal issue of rising levels of
carbon dioxide in the atmosphere," the company complained in a
GAMBLING ON INACTION
There is an obvious inconsistency between companies
continuing to invest in developing more fossil fuels while
governments maintain they are still committed to the 2 degree
According to Wolf: "Something will have to give: either the
world will abandon its pledge to keep emissions below the level
thought to produce a temperature rise of 2C, or the fossil fuel
companies are holding stranded assets and investing in unusable
ones. Investors are implicitly betting on the former
He concluded: "Major energy producers do not believe
governments will do what they promise. They envisage a very
different and quite unrevolutionary energy future in which the
reserves they now possess and those they plan to develop will
all be burnt."
Wolf is right about the contradiction between investment
policies and climate targets. It is more likely the world will
miss the 2 degree target than that fossil fuel reserves will be
PUTTING COAL BEYOND USE
Rather than oil or gas, the primary target of the divestment
campaign is coal, which emits far more carbon dioxide when
burned for electricity production.
"Coal companies appear far more vulnerable than oil and
gas," according to researchers at Oxford University's Stranded
Assets Programme. "Coal not only contributes to climate change
but also releases harmful pollutants with short-term and
visible, health and environmental consequences."
In the first phase of the divestment process, concerned
investors are likely to begin by liquidating their holdings in
coal companies, the Oxford researchers explain, before moving on
later to oil and gas producers.
Several prominent U.S. universities and European pension
funds have already sold their shares in coal companies.
If the total amount of carbon that can be burned in the next
few decades is constrained by an overall "carbon budget", and
coal is the most polluting fossil fuel, it might seem to make
sense to put coal reserves off limits first.
Some of the big oil and gas companies have quietly supported
this idea, hoping to replace dirty coal with clean-burning gas
and bump up demand for their own products in the process.
The unspoken alliance of climate campaigners and gas
companies appears to have convinced the Obama administration.
Cutting coal consumption and replacing it with gas is the
central objective of new U.S. regulations on power plants at
home. ("Regulatory impact analysis for the proposed carbon
pollution guidelines for existing power plants" June 2014)
And the U.S. Treasury has stated it will not provide
financial support for any new coal-fired plants in poor
countries. ("Guidance for U.S. positions on multilateral
development banks engaging with developing countries on
coal-fired power generation" Oct 2013)
COAL REMAINS INDISPENSABLE
The stigmatisation campaign against coal, in the words of
the Oxford researchers, is already well underway and has notched
up some notable early successes.
Recent successes in developing shale gas and oil have led
some campaigners to imply the world could do without coal.
But the effort to put coal off limits is doomed to fail.
Coal resources will remain an essential part of the energy mix
far into the future.
Coal accounts for roughly a third of known fossil fuel
resources (excluding highly unconventional resources such as
methane hydrates which are unlikely to be developed in any
Gas and oil appear much more abundant than before thanks to
the shale revolution. But they would start to look scarce again
if coal was put off limits and the entire power generation
sector switched to gas.
On a global scale, switching entirely from coal to gas would
put a tremendous strain on gas supplies and push prices sharply
higher. It would be a windfall for gas companies but not for
Coal also has important benefits for energy security. Coal
reserves are much more widely distributed around the world than
the other fossil fuels. Major developing economies with
fast-growing energy demand, including China and India, have
abundant coal resources but relatively little oil and gas.
Shale oil and gas could change that calculation, since they
are more widely distributed than conventional oil and gas, but
their widespread development still lies in the future.
In the meantime, coal is cheaper than oil and gas, available
from a broader range of suppliers, and the major emerging
economies have more of it at home. Coal is therefore vital to
energy security in developing economies.
For these reasons, coal has been the fastest-growing source
of energy in the 21st century, driven by growth in emerging
markets. Coal is the second-largest source of primary energy
after oil and the largest source of electricity.
"Coal has been, is and will be the backbone of modern
electricity and the bedrock on which the modern world is built,"
according to the World Coal Association. ("The public image of
coal: inconvenient facts and political correctness" May 2014)
The trade association has an obvious interest in promoting
the future of coal, but that does not make its claims any less
There is no conceivable energy future over the next 30 to 40
years in which coal does not play an enormous role.
The divestment campaign, however well intentioned, will
therefore fail. While it might shut down some of the ageing U.S.
coal mines in Appalachia and Kentucky, it will not dent the
developing world's prodigious demand for coal-fired power.
CLEANER AND MORE EFFICIENT
If coal is set to remain a big part of the energy mix,
however, the way it is burned will have to change. Coal power
plants in China and other developing economies are creating
killer smogs, which are poisoning the population as well as
spewing billions of tonnes of greenhouse-causing carbon dioxide
into the atmosphere.
In future, coal must be made to burn more cleanly (to cut
air pollution) and more efficiently (to reduce the amount of
greenhouse gas emitted for every kilowatt-hour of electricity
In both cases, the challenge is to bring the whole fleet of
coal-fired power stations up to the standards of the best.
Even in the United States, more than half of coal-fired
power plants are over 40 years old. China and India, too, have
lots of very old facilities. Most of these old plants are too
small to reach maximum efficiency and employ outdated
technology. ("Focus on clean coal" Nov 2006)
The average power plant in the United States or China
achieves a thermal efficiency of just 33 percent. For every
three units of energy contained in the fuel burned in the plant
only one unit of usable electrical energy is delivered to the
grid. In India, the percentage is even lower.
But modern plants built on a scale of 500 or even 1,000
megawatts, with ultra-supercritical boilers, can achieve thermal
efficiencies of 40 percent or more, burning less coal to produce
the same amount of power.
Even higher efficiencies are possible if instead of burning
the coal directly it is gasified and the gas is then used in a
combined cycle system (first driving a gas turbine and then a
steam turbine). Integrated gasification and combined cycle
plants are tricky to build and operate but could achieve thermal
efficiencies of 45 percent.
China, India and even the United States are now building
power plants that are larger, far more efficient and with better
pollution-control technology. Modern coal-fired power plants can
make a contribution towards slowing climate change, in
combination with more use of natural gas, renewables such as
wind and solar, nuclear power, and energy efficiency measures on
the demand side.
The question is how to shut down the fleet of old power
plants that fall far below these standards. "To reduce
emissions, replacement of the oldest plant should be a high
priority, but it is rarely economic, and electricity demand
growth dictates that these plants often remain open," the
International Energy Agency explained in 2006.
In the United States, the Obama administration is now
attempting to force these old power plants to shut or undertake
expensive upgrades by introducing strict rules on pollution and
China, India and other developing countries will eventually
have to overhaul their own older coal-fired plants if they are
to enjoy clean air and contribute to global efforts to limit
The realities of the energy system mean there has to be a
future for coal.
Even in the United States, with its shale gas boom, coal is
still expected to account for 30 percent of power generation by
2025, down from 37 percent currently. In Asia, coal's share is
currently much higher and cannot conceivably be replaced by gas.
To limit the impact, however, coal will have to be burned in
power plants very different from most of those in existence
Rather than trying to shut down the coal industry,
campaigners would be more effective if they focused on trying to
modernise the electricity sector to use newer, larger, cleaner
and more efficient power plants.
(editing by Jane Baird)