By John Kemp
LONDON, Dec 17 (Reuters) - "There is no denying thecontroversial reality of coal," Maria van der Hoeven, head ofthe International Energy Agency (IEA), wrote in its annualreport on the coal industry, published on Monday.
"No fuel draws the same ire," she noted. "And yet no fuel isas responsible for powering the economic growth that has pulledbillions out of poverty in the past decades."
The report highlights all the contradictions associated withthis most controversial of fossil fuels, and the sharp dilemmait poses for policymakers.
"Coal is abundant and geopolitically secure, and coal-firedplants are easily integrated into existing power systems," Vander Hoeven admitted.
Reserves are similar in scale to oil and natural gas. Butoil and gas, coal resources are broadly distributed around theworld, providing consumers with a measure of energy security.
As a solid fuel with a fairly high energy density, coal iseasy to transport and handle. Coal power plants are simple andcheap to build, and produce a predictable and reliable flow ofelectricity on demand.
Coal is the second-most important source of primary energy,after oil, and consumption has been growing faster than for anyother fossil fuel over the last decade.
Coal is playing the most important role in meetingescalating electricity demand in the fast-industrialisingeconomies 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 foraround 60 percent of all carbon dioxide emissions since 2000.
The IEA does not mince its words: "When it comes to asustainable energy profile, we are simply off track - and coalin its current form is the prime culprit."
COAL IS CLIMATE CHANGE
China accounts for more than half of the growth in coalconsumption in recent years and is forecast to retain that roleover 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 releasingcarbon 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 broadoptions have emerged.
The first, favoured by climate campaigners and gas producerslike Shell and Exxon, is to replace coal with renewables andcleaner burning natural gas, leaving the coal reserves in theground unburned.
The second, favoured by coal miners, some electricityproducers and tentatively endorsed by the IEA and governments isto find ways of burning coal while emitting fewer pollutants andless carbon dioxide.
Shell and Exxon predict coal's share of the global energymix will fall in coming decades in favour of more clean-burninggas. "By roughly 2025, natural gas is expected to overtake coalas the second-largest energy source, behind oil," Exxon said inits "Outlook for energy: a view to 2040" published this month.
Shell and Exxon are now among the world's largest gasproducers, and both have been quietly lobbying governments infavour 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 itrelatively insensitive to prices by ensuring power producers donot revert to burning more coal if gas prices rise in future.
The IEA and governments are much less confident about arapid transition away from coal combustion. According to theIEA, coal is "set to remain an integral part of our energy mixfor decades to come" so "the challenge is to make it cleaner."
Efforts to capture coal plants' carbon dioxide emissions andlock them away safely underground have stalled according to theIEA.
However, this month the U.S. Department of Energy invitedapplications for loan guarantees worth up to $8 billion tosupport advanced fossil energy projects, including carboncapture and storage and oxycombustion systems.
STIGMATISING COAL
According to the IEA, two-thirds of the world's currentlyknown reserves of fossil fuels (oil, gas and coal) must remainunburned by 2050 if the rise in global temperatures is to belimited to no more than 2 degrees Celsius, the target globalpolicymakers have agreed.
Grassroots campaigns such as Bill McKibben's 350.org and theCarbon Tracker Initiative are pressing fossil fuel companies andgovernments to stop exploring and drilling new reserves, andleave most of those which have already been identified in theground, so as not to bust the global "carbon budget."
Campaigners aim to persuade major investors (includinguniversity endowments, pension funds and mutual funds) towithhold capital from fossil-fuel producing industries in orderto force change.
The strategy is modelled on the successful "divestment"campaign waged against companies that did business in SouthAfrica 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 RollingStone magazine in July 2012, and has been developed in moredetail by the Stranded Assets Programme at Oxford University'sSmith School of Enterprise and the Environment.
The direct effects of divestment are likely to be small,according to researchers at the Smith School. But bystigmatising the provision of capital to fossil fuel producers,the indirect effects can be much larger ("Stranded assets andthe fossil fuel campaign: what does divestment mean for thevaluation of fossil fuel assets" October 2013).
"The outcome of the stigmatisation process, which the fossilfuel divestment campaign has now triggered, poses the mostfar-reaching threat to fossil fuel companies," they conclude."Any direct effects pale in comparison.
"Firms heavily criticised in the media suffer from a badimage that scares away suppliers, subcontractors, potentialemployees and customers. Governments and politicians prefer toengage with 'clean' firms to prevent adverse spillovers thatcould taint their reputation or jeopardise their re-election.
"One of the most important ways in which stigmatisationcould impact fossil fuel companies is through (the threat of)new legislation."
If campaigners can create a credible threat that governmentswill impose a carbon tax or other restrictions on fossil fuelproduction, it will create much more uncertainty about themonetisation of reserves and future cash flows, and could leadto "permanent compression" of price-earnings ratios andreduction in corporate share prices.
Not all fossil fuel companies are equally vulnerable. Aswith other divestment campaigns the Smith School notes "someplayers are able to avoid disapproval, while others face intensepublic vilification.
"A handful of fossil fuel companies are likely to becomescapegoats. From this perspective coal companies appear morevulnerable than oil and gas," the Smith School concludes.
Coal combustion releases more carbon dioxide. And themarkets for equity and debt in coal companies tend to be lessliquid and more fragmented, making them much more vulnerable toan investor boycott.
"Divestment announcements are thus more likely to affectcoal stock prices since alternative investors cannot be aseasily (found) as in the oil and gas sector."
In the lending and bond markets, "a diminishing pool of debtfinance and a higher hurdle rate will have the greatest impacton companies and marginal projects related to coal and the leasteffect 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 ingeneral are thus likely to begin by liquidating coal stocks."
COMMON ENEMY
The coal divestment process has already had some notablesuccesses among large institutional investors. It has also wonimportant support from policymakers.
The U.S. Treasury has informed the multilateral developmentbanks it will not support coal-fired power generation projectsother than in exceptional circumstances.
But the divestment campaigners' most powerful allies are inthe oil and gas industry. If there is an overall limit to howmuch fossil fuel can be burned, implied by the global carbonbudget, then there is a zero-sum competition between fossil fuelproducers.
If oil, gas and coal each comprise roughly one third ofglobal fossil fuel resources, and two-thirds of reserves mustremain unburned, putting coal off limits leaves a bigger shareof 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 inthe United States that are planning on the assumption the U.S.government will eventually put a price on carbon, according tothe New York Times ("Large companies prepared to pay price oncarbon" Dec 5).
The Times noted the big oil companies' "slow evolution onclimate change policy" and softening hostility to carbonpricing. But it is hardly surprising.
As the Times explains: "ExxonMobil is now the nation'sbiggest natural gas producer, meaning it will stand to profit ina future in which a price is placed on carbon emissions. Coal,which produces twice the carbon pollution of natural gas, wouldbe a loser."
In the war on coal, as coal producers term it, the coalminers are almost friendless. Major oil and gas producers, aswell as the renewables industry, are all willing to join withclimate campaigners to point the finger at coal to secure abigger share of the energy market and divert attention fromtheir own emissions.
STILL ESSENTIAL
In political terms, coal appears doomed, at least in theadvanced economies. It generates too many emissions and has toomany enemies.
But the industry still has some enormous advantages. Inemerging economies like China, India and Southeast Asia,electricity consumption per capita is a tiny fraction of theadvanced economies, and is forecast to rise enormously over thenext few decades.
Policymakers are under enormous pressure to provide moreelectric power and ensure its reliability. It is not clear howthe enormous unmet demand for more power can be supplied withoutcoal.
Even in the advanced economies, it will be difficult toscale up natural gas production and renewables like wind andsolar enough to replace coal entirely.
In 2012, U.S. coal power plants produced ten times as muchelectricity as wind farms and solar power stations combined, andabout a third more than natural gas-fired generators.
Gas-fired output would have to more than double, orrenewables would need to rise by an order of magnitude, todisplace coal completely.
Little wonder that the IEA and policymakers are focusing onhow to burn coal more cleanly with fewer emissions.
The bottom line is that divestment campaigns are unlikely toput coal off-limits entirely, since there are no practicalalternatives in the next 20-30 years.
But they will keep up the pressure on policymakers to findways to limit coal's market share and support innovationdesigned to cut emissions from coal-fired plants.
In the meantime, divestment campaigns will also support theprofitability of gas and oil producers.
