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 $US674 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 detailed response.
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 target.
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 possibility.”
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 stranded.
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 US 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 US regulations on power plants at home. (“Regulatory impact analysis for the proposed carbon pollution guidelines for existing power plants” June 2014)
And the US Treasury has stated it will not provide financial support for any new coal-fired plants in poor countries. (“Guidance for US 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 foreseeable timeframe).
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 everyone else.
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 true.
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 US coal mines in Appalachia and Kentucky, it will not dent the developing world’s prodigious demand for coal-fired power.
If coal is set to remain a big part of the energy mix, however, the way it is burned will have to change.