How will phasing out Coal affect the global financial market?


Coal is a major and leading contributor to air pollution.

Reducing coal imports fosters energy independence

My view investors should divest from Coal

At present, Coal is responsible for more than one-third of global CO2 emissions, which is a major contributor to adverse effects on the environment and public health such as respiratory problems, cardiovascular diseases and even lung cancer, and loss of biodiversity. The research conducted has shown that phasing out coal yields substantial local environmental and health benefits that outweigh the direct policy costs because of the shortening of the energy supply.

 “A great tide has turned. Finally the world stands united against the central environmental challenge of our time, committed to cutting the carbon pollution that’s driving climate change. This agreement sets us on a course of verifiable gains we can build on over time. It provides real protection for people on the front lines of climate chaos. It speeds the global shift away from dirty fossil fuels and toward cleaner, smarter energy options to power our future without imperiling our world. And it sends a clear message to our children: we will not abandon you to pay the price for reckless habits that wreak havoc and ruin on our planet and lives. A crisis that took centuries to get here won’t go away overnight. But climate change has met its match in the collective will of a united world. Our challenge now, in our country and all others, is to make good on the promise of Paris, by turning the action we’ve pledged into the progress we need.” – Rhea Suh, President, Natural Resources Defense Council

Why Coal phase-out?

Climate Change

Reaching the Paris Agreement goals of limiting global warming to well below 2°C with efforts to keep it to 1.5°C requires a rapid coal phase-out and other fossil fuels for electricity generation by 2050 in G20 countries with reductions of approximately two-thirds by 2030, according to the IPCC’s Special Report Global. Therefore phasing out Coal globally by 2040 from the electricity sector is the single most vital step to achieve the emissions reductions needed to limit global warming to 1.5°C and meet the objectives of the Paris Agreement.

Health Benefits

Coal is a major and leading contributor to air pollution. It is also the most carbon-intensive fossil fuel. Burning of coal releases pollutants, including particulate matter (PM), sulfur dioxide (SO2), and oxides of nitrogen (NOX), such as NO2, that cause severe damage to the respiratory system. Most emissions from Coal occurred in the electricity sector, and coal-fired power plants contribute to the global burden of cardiovascular disease through the emission of particulate matter.

Globally coal burning is responsible for estimated more than 800,000 premature deaths every year and many millions of cases of serious and minor illness. This also has economic implications, e.g., increased healthcare costs and a higher number of lost working days.

Costs

Renewable energy has rapidly emerged as the lowest cost option to generate electricity in almost all countries around the world, making Coal increasingly unattractive economically. It is estimated that electricity generation from new renewable energy infrastructure will become cheaper than even new coal infrastructure by 2025. Batteries are increasingly becoming cost-effective (with a 79% decrease in costs since 2010), increasing the flexibility of electricity systems, and are starting to compete with fossil fuel alternatives.

Stranded Assets Risk

Economic shifts and policy changes may turn coal-fired power plants into stranded assets or non-performing assets that rapidly lose value or become liabilities. This process has already started in some G20 countries.

Energy Independence and Fiscal Benefits

Reducing coal imports fosters energy independence, improves the balance of payments and can reduce geopolitical tensions.

Energy Access

Off-grid renewables allow increased energy access in developing and emerging markets.

Why Coal Divestment?

The Coal sector is experiencing a shift in financial trends and in market fundamentals that concern investors. Coal’s financial performance has been so poor that many major investors have divested Coal in normal rebalancing processes as they shed poorly performing assets. At present, we have the technologies that can replace Coal, and phase out is a relatively cheap and easy option to reduce emissions.

Laws have been formulated to protect the public from the devastating health and environmental effects of coal combustion and have raised the cost of operating coal plants. The investor-owned utilities are not adding new coal plants; instead, they are focusing on determining the appropriate schedule for retiring the existing plants. The power sector has invested billions of dollars in modification and technology to switch to natural gas that makes a future return to Coal highly unlikely.

What is the current Coal-scenario globally?

The G20 countries obtained about 30% of the primary energy supply from Coal, and it is the largest contributor to greenhouse gas emissions. Within the G20, South Africa (68%), China (64%), India (44%) and Australia (33%) have the highest coal share in domestic primary energy supply. It is even higher considering their electricity mix.

In the United States, Coal has irrevocably lost demand and investment to cheaper, cleaner alternatives like natural gas and renewable energy.

Even in abroad for every new coal plant built around the world, two have been canceled since 2010. The rate is significantly higher in places like Europe, South Asia, Latin America, and Africa. In India, the cancellation rate since 2012 is six-to-one. In China, consumption of Coal declined in 2014 while renewables capacity expanded, and the economy grew by 7.3 percent.

According to IEEFA, over 100 and counting globally significant banks and insurers have announced their divestment from Coal mining and/or coal-fired power plants. Needless to say, that when major investors act, global momentum increases.

Insurance companies divest Coal investments across their asset portfolio and restrict the provision of insurance, while banks restrict lending and underwriting to Coal companies or projects.

Mining companies are losing billions in financing, raising the cost of capital and jeopardizing projects as global investors shift away from heavy industry in favor of cleaner sectors.

Coal Demand and Production is Declining Globally

Future coal demand and production are uncertain and have been declining in many markets. The coal generation in the United States decreased from 48.2% of the electricity mix to 37.4% from 2008 to 2012, a 10.8% drop in just four years. In the U.S., total coal consumption decreased by 17.6% as the use of Coal for electricity has also decreased during the same time frame. Understandably, the future of U.S. Coal use is bleak.

Globally, things are not much better for Coal. The European Union reduced coal consumption by 17.8% from 1995 to 2013. China, the largest contributor to Coal demand in recent years, is probably nearing peak coal demand as it adopts clean energy policies.

Additionally, if world governments adopt the 2-degree global warming limit, global Coal CO2 emissions would need to be reduced by nearly 60% (from 2011) by 2035 – undermining long-term coal demand globally.

Stock Values of Coal are Decreasing

Coal’s equity performance has also been poor, and on its own, provides a strong incentive to divest to protect portfolios from deeper losses. The Coal sector’s financial performance has been hemorrhaging in the past four years, especially among U.S. companies.

The Dow Jones U.S. Coal index containing some of the largest U.S. coal companies is now down 81.3%. Peabody, once the world’s largest Coal company, is making losses of 88.7%. Global Coal stocks have had an identical poor performance in the past years.

Bloomberg’s Global Coal index dropped nearly $40 per share, down from $70 to $31 since 2011. Similarly, the global Coal stock ETF (electronically traded fund) KOL Market Vectors – Coal decreased 71.62%, even during the S&P 500’s bull market. This means that $100 invested in the S&P 500 would return $156 while $100 invested in the KOL ETF would return $28, a $128 difference. Hence, Coal is simply the wrong place to locate investments.

Stranded Assets Expose Coal’s Financial Risk

The global Coal industry is at risk of compounding its cash shortfall with write-downs due to stranded assets. A potential $230 billion of CAPEX spending is at risk of becoming “stranded assets,” or assets that become worthless due to market changes.

Stranded assets have the potential to further harm the financial performance of Coal investments, in addition to Coal’s diminished price resulting from excess production and reduced demand.

A study by Energy Transition Advisor and the Carbon Tracker Initiative estimates that 50% of Chinese Coal production, two-thirds of the global export market, and a substantial portion of the U.S. Coal market is currently producing Coal at a loss below its break-even cost. Assets may also be stranded by increasingly stringent environmental regulations, making coal investments unprofitable.

Investors Recognize Risk and are Taking Action

Financial institutions are recognizing the growing risk of the falling Coal market and Coal’s stranded asset risk, and they are taking action. A coalition of over 340 global investors (managing $24 trillion) is calling for a low-carbon and climate-resilient economy in coordination with the United Nations.

Already, over 180 institutions have committed to completely divesting from fossil fuels, representing $50 billion in assets under management. Large institutions are also divesting specifically from Coal holdings, including Storebrand ($74 bill), Swedish State Fund AP2 ($35 bill), Scottish Widows Investment Partnership ($233 bill), and the Stanford University Endowment Fund ($18 bill).

The Bank of England and the Norwegian Sovereign Wealth Fund have both publicly acknowledged the risks of stranded carbon assets, and the World Bank has stopped investing in Coal projects in most circumstances.

To Conclude…

Given the market forces working against Coal, investors should divest from Coal and other fossil fuel holdings and instead use their financial resources to invest in clean and sustainable energy solutions.

Comparte Investment team asks do you have “Nivesh Ki Aadat”.

(About Author:  Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh / Enquire