Why Smart Investors Aren’t Putting Their Money in Stranded Assets

The fossil-fuel research that came out last week courtesy of the University College London in the journal Nature is far too important and substantial to be dismissed or ignored, even by well-intentioned defenders of the status quo.

The research, by Christophe McGlade and Paul Ekins, states in painstaking detail what skeptics of proposed coal-production expansion have been saying for quite some time: that the vast majority of the planet’s known coal reserves will remain where they are if we are to avoid overheating the Earth to the point of triggering a magnitude of climate havoc we can only begin to imagine.

From an investment point of view, this means fossil fuels now and in the future are a poor risk.

Governments of more than 200 countries have agreed that an increase in the average global surface temperature of the Earth of more than 2 degrees Celsius (3.5 degrees Fahrenheit) would prove catastrophic. Experts the world over say that if that limit is passed, sea levels will most likely rise and climate patterns will change in profound and destructive ways.

The work by McGlade and Ekins, published under the headline “The Geographic Distribution of Fossil Fuels Unused When Limiting Global Warming to 2°C,” sums up what this risk means for our collective “carbon budget,” that is, what we can bear to add to the global atmosphere.

It concludes that 82 percent of all known coal reserves must stay put, buried safely beneath the ground. That places these vast reserves—in Australia, Canada, the U.S. and Russia—squarely in the dustbin of “stranded assets.” This is coal that simply won’t be mined if intelligent public policy prevails (and I’m predicting that intelligent public policy will prevail).

The findings of McGlade and Ekins can be seized upon by leaders now as a powerful argument against encouraging further development of coal reserves, and to inform the Big Question: How will we collectively manage the inevitable transition from a carbon-intensive global economy to one that is fueled more prudently and safely by renewable sources?

The first step is to stop investing in new fossil fuel developments that are going nowhere. These include the proposed expansion of coal-export facilities in the northwestern U.S., where coal-industry proponents are angling to have expensive infrastructure built to ship coal stripped from the Powder River Basin of Montana and Wyoming to foreign markets that in all likelihood don’t even exist. And they include the proposed Galilee Basin rail infrastructure in northern Australia, the almost finished but yet-to-be-commissioned Abbot Point coal port and the Newcastle Terminal 4 expansion proposal.

From a purely financial point of view, the research is another clear indication of the headwinds facing the coal industry—along with policy changes in China, the rise of electricity-market energy efficiency, increasingly internationally-integrated grids, and a significant step up in gas, wind and distributed solar with storage generation capacity. As such, seaborne thermal coal market has inevitably entered structural decline, which by definition is a long-term shift that transcends cyclical ups and downs.

Even without the environmental angle, it is globally significant that China announced just this month a $645 billion water-infrastructure investment program through 2020. Because China has 20 percent of the world’s population but only 7 percent of its available fresh water, solving water scarcity is a key government policy. That’s relevant in this discussion because coal mining and coal-fired power generation are very water intensive.

The McGlade/Ekins research notes, too, that carbon capture and storage (CCS), is not the coal-industry white knight it is sometimes made out to be, and that it is “too expensive, too late, and too inefficient” to make much difference.

Thermal coal, in other words, is not where the smart money is.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia.