(John Kemp is a Reuters market analyst. The views expressed arehis own)
By John Kemp
LONDON, June 23 (Reuters) - Two-thirds of the world'salready discovered reserves of oil, coal and natural gas mustremain unburned if the rise in average global temperatures is tobe limited to 2 degrees Celsius by 2050, according to theInternational Energy Agency.
But coal miners and oil and gas companies round the worldallocated $674 billion to finding even more reserves and newways of extracting them in 2012/13. Much of this investmentrisks 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 wouldprove fruitless. At worst, these assets might be 'stranded'forever," Martin Wolf, the celebrated chief economicscommentator of the Financial Times, wrote in a sympatheticreview recently. ("A climate fix would ruin investors" June 17)
Carbon Tracker Initiative is part of a broader divestmentmovement pressing universities, pension funds and other sociallyresponsible investors to boycott shares and loans in fossil fuelcompanies to force them to leave the oil, gas and coal "downthere". ("Stranded assets and the fossil fuel divestmentcampaign: what does divestment mean for the valuation of fossilfuel assets?" Oct 2013)
The divestment campaign has drawn a swift response. Majoroil and gas companies such as Exxon and Shell reject the claimthat their exploration and development spending is being wasted."We do not believe that any of our proven reserves will becomestranded," Shell wrote in a letter to investors on May 16.
"While the stranded asset notion may appear to be a strongand thought-through case, it does have some fundamental flaws,and there is a risk that some interest groups use it totrivialise the important societal issue of rising levels ofcarbon dioxide in the atmosphere," the company complained in adetailed response.
GAMBLING ON INACTION
There is an obvious inconsistency between companiescontinuing to invest in developing more fossil fuels whilegovernments maintain they are still committed to the 2 degreetarget.
According to Wolf: "Something will have to give: either theworld will abandon its pledge to keep emissions below the levelthought to produce a temperature rise of 2C, or the fossil fuelcompanies are holding stranded assets and investing in unusableones. Investors are implicitly betting on the formerpossibility."
He concluded: "Major energy producers do not believegovernments will do what they promise. They envisage a verydifferent and quite unrevolutionary energy future in which thereserves they now possess and those they plan to develop willall be burnt."
Wolf is right about the contradiction between investmentpolicies and climate targets. It is more likely the world willmiss the 2 degree target than that fossil fuel reserves will bestranded.
PUTTING COAL BEYOND USE
Rather than oil or gas, the primary target of the divestmentcampaign is coal, which emits far more carbon dioxide whenburned for electricity production.
"Coal companies appear far more vulnerable than oil andgas," according to researchers at Oxford University's StrandedAssets Programme. "Coal not only contributes to climate changebut also releases harmful pollutants with short-term andvisible, health and environmental consequences."
In the first phase of the divestment process, concernedinvestors are likely to begin by liquidating their holdings incoal companies, the Oxford researchers explain, before moving onlater to oil and gas producers.
Several prominent U.S. universities and European pensionfunds have already sold their shares in coal companies.
If the total amount of carbon that can be burned in the nextfew decades is constrained by an overall "carbon budget", and coal is the most polluting fossil fuel, it might seem to makesense to put coal reserves off limits first.
Some of the big oil and gas companies have quietly supportedthis idea, hoping to replace dirty coal with clean-burning gasand bump up demand for their own products in the process.
The unspoken alliance of climate campaigners and gascompanies appears to have convinced the Obama administration.
Cutting coal consumption and replacing it with gas is thecentral objective of new U.S. regulations on power plants athome. ("Regulatory impact analysis for the proposed carbonpollution guidelines for existing power plants" June 2014)
And the U.S. Treasury has stated it will not providefinancial support for any new coal-fired plants in poorcountries. ("Guidance for U.S. positions on multilateraldevelopment banks engaging with developing countries oncoal-fired power generation" Oct 2013)
COAL REMAINS INDISPENSABLE
The stigmatisation campaign against coal, in the words ofthe Oxford researchers, is already well underway and has notchedup some notable early successes.
Recent successes in developing shale gas and oil have ledsome 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 mixfar into the future.
Coal accounts for roughly a third of known fossil fuelresources (excluding highly unconventional resources such asmethane hydrates which are unlikely to be developed in anyforeseeable timeframe).
Gas and oil appear much more abundant than before thanks tothe shale revolution. But they would start to look scarce againif coal was put off limits and the entire power generationsector switched to gas.
On a global scale, switching entirely from coal to gas wouldput a tremendous strain on gas supplies and push prices sharplyhigher. It would be a windfall for gas companies but not foreveryone else.
Coal also has important benefits for energy security. Coalreserves are much more widely distributed around the world thanthe other fossil fuels. Major developing economies withfast-growing energy demand, including China and India, haveabundant coal resources but relatively little oil and gas.
Shale oil and gas could change that calculation, since theyare more widely distributed than conventional oil and gas, buttheir widespread development still lies in the future.
In the meantime, coal is cheaper than oil and gas, availablefrom a broader range of suppliers, and the major emergingeconomies have more of it at home. Coal is therefore vital toenergy security in developing economies.
For these reasons, coal has been the fastest-growing sourceof energy in the 21st century, driven by growth in emergingmarkets. Coal is the second-largest source of primary energyafter oil and the largest source of electricity.
"Coal has been, is and will be the backbone of modernelectricity and the bedrock on which the modern world is built,"according to the World Coal Association. ("The public image ofcoal: inconvenient facts and political correctness" May 2014)
The trade association has an obvious interest in promotingthe future of coal, but that does not make its claims any lesstrue.
There is no conceivable energy future over the next 30 to 40years in which coal does not play an enormous role.
The divestment campaign, however well intentioned, willtherefore fail. While it might shut down some of the ageing U.S.coal mines in Appalachia and Kentucky, it will not dent thedeveloping 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 powerplants in China and other developing economies are creatingkiller smogs, which are poisoning the population as well asspewing billions of tonnes of greenhouse-causing carbon dioxideinto the atmosphere.
In future, coal must be made to burn more cleanly (to cutair pollution) and more efficiently (to reduce the amount ofgreenhouse gas emitted for every kilowatt-hour of electricitygenerated).
In both cases, the challenge is to bring the whole fleet ofcoal-fired power stations up to the standards of the best.
Even in the United States, more than half of coal-firedpower plants are over 40 years old. China and India, too, havelots of very old facilities. Most of these old plants are toosmall to reach maximum efficiency and employ outdatedtechnology. ("Focus on clean coal" Nov 2006)
The average power plant in the United States or Chinaachieves a thermal efficiency of just 33 percent. For everythree units of energy contained in the fuel burned in the plantonly one unit of usable electrical energy is delivered to thegrid. In India, the percentage is even lower.
But modern plants built on a scale of 500 or even 1,000megawatts, with ultra-supercritical boilers, can achieve thermalefficiencies of 40 percent or more, burning less coal to producethe same amount of power.
Even higher efficiencies are possible if instead of burningthe coal directly it is gasified and the gas is then used in acombined cycle system (first driving a gas turbine and then asteam turbine). Integrated gasification and combined cycleplants are tricky to build and operate but could achieve thermalefficiencies of 45 percent.
China, India and even the United States are now buildingpower plants that are larger, far more efficient and with betterpollution-control technology. Modern coal-fired power plants canmake a contribution towards slowing climate change, incombination with more use of natural gas, renewables such aswind and solar, nuclear power, and energy efficiency measures onthe demand side.
The question is how to shut down the fleet of old powerplants that fall far below these standards. "To reduceemissions, replacement of the oldest plant should be a highpriority, but it is rarely economic, and electricity demandgrowth dictates that these plants often remain open," theInternational Energy Agency explained in 2006.
In the United States, the Obama administration is nowattempting to force these old power plants to shut or undertakeexpensive upgrades by introducing strict rules on pollution andcarbon emissions.
China, India and other developing countries will eventuallyhave to overhaul their own older coal-fired plants if they areto enjoy clean air and contribute to global efforts to limitclimate change.
The realities of the energy system mean there has to be afuture for coal.
Even in the United States, with its shale gas boom, coal isstill expected to account for 30 percent of power generation by2025, down from 37 percent currently. In Asia, coal's share iscurrently much higher and cannot conceivably be replaced by gas.
To limit the impact, however, coal will have to be burned inpower plants very different from most of those in existencetoday.
Rather than trying to shut down the coal industry,campaigners would be more effective if they focused on trying tomodernise the electricity sector to use newer, larger, cleanerand more efficient power plants. (editing by Jane Baird)
