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October 05, 2014
Coal Keeps Getting Riskier for Investors
    by Robert Kropp

The Carbon Tracker Initiative projects that as the demand for coal exports slows in China, $112 billion in planned future coal mine expansion and development is at risk of losing money.

Because coal currently provides about 80% of its electricity, China accounts for almost one-third of the world's greenhouse gas (GHG) emissions. And as coal producers have seen their markets dry up elsewhere—because of regulation in the European Union, and the natural gas boom in the US—they have increasingly looked to coal exports to China as their lifeline.

But as Greenpeace East Asia has reported, air pollution in Chinese cities has had devastating health effects. “Air pollution will remain a serious problem in China as long as coal continues to be the country's major energy source,” the nongovernmental organization (NGO) stated.

In April, after Premier Li Keqiang declared a “war on pollution,” China completed the first revision of its Environmental Protection Law since 1989, which, according to the China Greentech Initiative, “represents a step forward for environmental governance.” And in September, China announced that it will establish a national emissions trading scheme that it intends to launch in 2016.

All of which strongly suggests that the global market for coal, already on decline, is about to enter a freefall, and that investors might want to reconsider their investments in the sector. A recent report from the Carbon Tracker Initiative (CTI) should help those investors who might not yet recognize that coal has already become a risky investment.

“Profit in thermal coal is already hard to find in today’s market,” the report states. And with peak coal demand in China potentially peaking as soon as 2016, price and asset levels will continue to fall. “Deploying additional capital expenditure into high cost production is risky,” the report warns, “especially for new mines.”

Overall, CTI’s analysis “highlights $112 billion of future coal mine expansion and development that is excess to requirements under lower demand forecasts,” and “shows that high cost new mines are not economic at today’s prices and are unlikely to generate returns for investors in the future.”

“The world is changing for the fossil fuel industry, especially the coal sector which is facing a shrinking demand window,” Mindy Lubber, President of the Ceres network stated. “Investors want assurances that capital is not being spent on high-cost, high-carbon projects that may not be competitive as global coal demand declines.”

In 2013, a coalition of 70 institutional investors organized by Ceres and CTI wrote to 45 of the largest fossil fuel companies, requesting that the companies report on the exposure to and management of risks associated with stranded assets.

“There is a realization that ignoring climate risk and hoping it will go away is no longer an acceptable risk management strategy for investment institutions,” Anthony Hobley, CEO of CET, stated in the report’s foreword. “Pension funds are under increasing pressure to articulate how they are addressing the need to both mitigate emissions and adapt to changing climates and markets. Investors need to ask whether the writing is on the wall for coal as constraints continue to be added.”


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