ANALYSIS: Cheap coal trumps climate to elevate risk of high-carbon lock-in

Published 19:51 on October 12, 2015  /  Last updated at 20:55 on October 12, 2015  /  Asia Pacific, China, Climate Talks, International, Japan, Other APAC  /  No Comments

Low prices and reliability are trumping climate concerns as emerging economies keep fossil fuels at the forefront of plans to feed massive growth in energy demand, while campaigners are forced to look beyond weak UN negotiations in an effort to stop them.

Low prices and reliability are trumping climate concerns as emerging economies keep fossil fuels at the forefront of plans to feed massive growth in energy demand, while campaigners are forced to look beyond weak UN negotiations in an effort to stop them.

Current carbon-cutting pledges by countries are set to drive a rise in global temperatures to 2.7C, well above the 2C limit nations agreed and on course to induce catastrophic storms, droughts and floods this century, researchers at Climate Action Tracker (CAT) found.

With INDCs covering almost 90% of global emissions already in, it appears that coal is set to remain the dominant source of power across Asia-Pacific, the world’s fastest-growing region where many nations are racing to keep pace with soaring energy demand while lifting their populace out of poverty.

CAT judges that even by achieving its INDC, China’s emissions would grow by 33-44% above 2010 levels by 2030.

India’s INDC states that “coal power will continue to dominate power generation in future”, which some calculations suggest may double the country’s emissions between 2012 and 2030, while the Philippines may build as many as 39 new coal-fired plants between 2015 and 2020.

India would likely meet and even outperform its self-imposed targets with existing policies, but projected growth in coal consumption will still outpace the increase in renewables, according to CAT’s Bill Hare.

“This continued growth in coal-fired power generation would lead to a greater lock-in of carbon-intensive power infrastructure in India than appears necessary. Locking in such infrastructure will have a long-term impact on warming,” he said.

“Ultimately, a transition away from fossil fuels in the longer term is a critical part of keeping the 2C goal a possibility, and countries, companies and consumers will all play a part in that,” said Jonathan Grant of consultancy PwC.

He pointed out that efforts were being made to clean up existing coal plants and put the fuel under pressure with policies including emissions and efficiency standards, carbon pricing and targets to lower its share in countries’ energy mixes.

CHEAP COAL

But market forces are not helping lure Asian economies away from coal. The last year has seen crude oil and coal prices plunge to their lowest in a decade, amid decreasing consumption and a surge in production worldwide.

Coal prices have tumbled by more than half in the last five years, as investments in increased capacity swelled supply while demand, especially in western countries, declined amid new environmental regulations. Prices for delivery in Europe next year fell to a record $48.50/tonne last week, and aren’t likely to recover for at least three years, analysts say.

Since 2000, US and EU coal consumption has fallen by 150 million tons of oil equivalent (toe) to 727 million toe, while Asia-Pacific demand has risen 60% to 2.8 billion toe, according to BP’s Statistical Review of World Energy.

From 2000-2014, China accounted for 1.3 billion toe or 83% of the world’s additional demand, with India providing 210 million toe, or 14%. However, China’s huge growth in coal use is levelling off amid a slowing economy and a shift towards relying more on service industries and less on manufacturing.

“The decrease in demand in Europe and the lack of growth in China has been offset by additional growth in other countries,” said Guillaume Perret, of coal trading researchers Perret Associates. He sees Asian demand stable or increasing for at least the next 15 years.

With the cost of most renewable energy technologies still requiring government support, even in the most advanced economies, most developing nations are choosing to seek more cost-efficient generating technologies.

The cost of onshore wind energy in China is $77/MWh, while coal-fired power remains significantly cheaper at $44/MWh, according to BNEF figures updated this month.

“Given that coal maintains cost and availability advantages in many locations and the growing demand for energy in emerging economies, coal is still expected to be a major component of the energy system in 2030,” said PwC’s Grant.

Or, as an anonymous coal trader put it, quoted in a presentation by BNEF: “In the old world, I’m selling whale oil. In the developing world, I’m selling crack cocaine.”

DIVESTMENT DRIVE

Amid slim prospects of the UN climate pact driving post-2020 ambition beyond the current batch of INDCs, environmental campaigners are seeking alternative avenues to prevent the construction of hundreds of new coal plants, all of which could run for another 50 years.

The divestment movement, led by NGOs such as FossilFree, seeks to persuade investors to pull funds out of coal-related investments, and claims that more than 450 institutions representing $2.6 trillion are withdrawing. The majority to date are pension funds, foundations and faith-based organisations, but include Norway’s Sovereign Wealth Fund, Nordea Bank AB and a growing number of university endowments.

The past year has seen western banks such as Morgan Stanley, ANZ, Citigroup, BAML and French banks pledge not to finance unabated coal plants.

The World Bank has said it will only lend to such projects in exceptional circumstances.

However, regional lenders are still actively supporting coal.

The Japan International Cooperation Agency is arranging funding for four 600 MW plants in Bangladesh, while Japanese finance is also behind plans for further coal units in India and Indonesia.

Emerging economies led by China have also set up multinational lending agencies such as the New Development Bank and the Asia Infrastructure Investment Bank, but it is not clear whether these institutions will finance coal power and outflank the divestment movement.

POLLUTION PUSH

Meanwhile in the major Asian economies, campaigners say effects other than climate change, for example urban pollution, are bringing public pressure to bear on government planners.

“In China, the biggest discussion in this field is a coal consumption cap that NGOs and research institutes want the government to include in its 13th Five Year Plan (2016-2020),” said Li Shuo of Greenpeace China.

“We think such a coal cap, if it is stringent enough, can help alleviate air pollution and bring China to a low-carbon trajectory.”

India, however, appears less willing to engage and is adamant that coal is at the centre of its development agenda, said Greenpeace India’s Nandikesh Sivalingam.

“There are many efforts made by government to dilute policies that provide safeguard for the environment and communities, in order to enhance coal mining and other developmental projects.”

“Air pollution, displacement, environmental degradation and water crisis will be key issues that may create the required public pressure to persuade the government,” he added.

By Alessandro Vitellinews@carbon-pulse.com

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