SAYING GOODBYE TO COAL?

Despite its universal condemnation as the ‘dirty fuel,’ coal thrives. What will it take to stamp it out?

Coal continues to top global demand pushing asides all the loud declarations about fixing timelines for its phasing out at the Glasgow Summit 2021. Expert reports provoked the pushback against coal consumption that unless coal consumption was not decreased by more than two-thirds within this decade, the goal of limiting global temperature rise to 1.50 was unachievable. Going by the current production rate, coal consumption, at best, will decline by less than a fifth!

A flurry of pledges marked the Glasgow Summit that included an end to the construction of new coalfired power plants and stopping the financing of coal mines. Apparently, there has been little impact on the ground as coal remains the world’s most polluting fuel in use today. The sanctions on Russian oil and gas gave coal a fresh lease of life, leading to a record-high coal consumption in 2022. Although the energy shock has subsided, global coal demand is still expected to experience a slight increase this year.

AN ENERGY-HUNGRY WORLD

Coal contributes to local pollution, where it is extracted and used, while its continued usage inflicts lasting harm to our planet’s climate. Unfortunately, finding a viable replacement for this concentrated energy source has proven increasingly challenging. The transition from wood and charcoal to coal marked the first major energy shift in the iron industry during the early 1700s. By 1900, coal had become the primary fuel for industrial purposes, surpassing biomass and accounting for half of the world’s fuel consumption. Oil then emerged as the next significant energy source, initially replacing whale oil for lighting and producing gasoline as a by-product of kerosene production. However, oil found its true calling in the transportation sector, particularly with the advent of the Ford Model-T in 1908 and the post-World War II boom in personal mobility.

International investors are not the only source of funding for coal-related industries. Banks in countries like Indonesia, China and India, which are significant consumers/ producers of coal, have no hesitations in financing its extraction. Many of these institutions are state-owned and prioritise securing a stable energy supply.

Over the 20th century, our energy system transformed, transitioning from direct utilisation of fossil energy to a significant reliance on fossil fuels for electricity generation. In essence, the narrative of energy transitions has revolved around the continuous pursuit of fuels that offer greater energy density and convenience compared to their predecessors.

The dangers posed by fossil fuels, particularly coal, are too well known to merit further elaboration. Suffice to say global warming, the most consequential fallout is surpassing anything witnessed in the world’s geological history.

Renewables offer a glimmer of hope, and even if their costs have been rapidly declining, they cannot match the affordability of coal. Climate advocates wish to target electricity generation, the biggest culprit in coal consumption, to mitigate the effects of the dirty fuel.

Geopolitical Roadblocks

Ultimately, all governance issues boil down to politics, whether domestic or geopolitical. Energy, a source of great geopolitical leverage, was mired in the Great Game between nations for centuries and continues to modern times.

Mitigating the impact of climate change entails reshaping a multi-trillion-dollar energy industry (oil, gas and coal) that lies at the core of the global economy and people’s livelihoods. It demands immediate investments with uncertain, long-term outcomes to reduce our dependence on fossil fuels, especially coal. Such decisions are particularly difficult for politicians, who often prioritise policies that offer immediate and visible local benefits to appease voters.

An enduring policy climate necessitates gaining and sustaining support from a diverse array of stakeholders, including rival politicians, business leaders, and civil society.

Naturally, their perspectives will differ, and the absence of consensus, combined with real pressures influencing the policymaking process, contributes to the inherent political complexities surrounding climate action. The Global North, which has both the finan- cial means and technological wherewithal, has been focussed on reducing greenhouse gas emissions stemming from their energy-intensive lifestyles. This ignores that the solution lies in a ‘whole of the humanity’ approach because energy is consumed by all, rich and poor, inhabiting the planet and impacted by climate.

While the public discourse surrounding climate change often neglects this second objective, it is essential for developing countries to also embark on a cleaner trajectory. The imperative to provide cleaner and increased energy access for developing countries intensifies the overall challenge. Excluding the developing world from the solution would render it ineffective and incomplete.

The abundance and affordability of fossil fuels present a significant obstacle to transitioning away from them. Technological advancements have led to a surge in oil production, tapping into resources that were previously known but economically unfeasible to extract.

This trend is likely to persist in the foreseeable future. However, the challenge lies in the imperative to shift away from oil and other fossil fuels while they remain abundant and inexpensive—a task that is far from easy.

Financial Constraints

In the fight to save our climate, numerous deadlines and commitments have been set. But unfortunately, there is many a slip between the cup and the lip. In the battle to phase out coal, numerous commitments and promises are deferred until later in the decade, while others solely apply to new customers or new mines. Consequently, estimations indicate that 60 major banks channelised $13 billion toward the largest coal produc- ers worldwide last year. The optimistic outlook for 2021 was partly based on pledges made by major global banks, lenders, and investors. More than 200 predominantly Western financial institutions announced policies restricting investments in coal mining and coalfired power plants.

A noteworthy development is the participation of lenders representing 40 per cent of global banking assets in the Net-Zero Banking Alliance, which aims to align portfolios to achieve net-zero emissions by 2050.

The expectation was that reducing financial support for fossil fuels would aid global decarbonisation efforts by increasing the cost of capital for such projects, dissuading investments, and ultimately reducing the coal supply. However, the current coal boom is exposing the limitations of this approach.

It is important to note that numerous pledges and commitments regarding reducing coal usage come into effect only in the later years of this decade. Additionally, many of these pledges specifically target new customers or new mines while excluding miners who derive only a portion of their revenues from coal.

Furthermore, there are inherent limitations to what a group of financial institutions can accomplish. Domestically, interest lobbies bring pressure on them to relent as a decline in coal-related industries has a blowback effect on the livelihood of the geographical areas where such industries are located. This has its implications for local and national politics.

International investors are not the only source of funding for coal-related industries. Banks in countries like Indonesia, China and India, which are significant consumers/ producers of coal, have no hesitations in financing its extraction. Many of these institutions are state-owned and prioritise securing a stable energy supply. None of these entities has joined the Net-Zero alliance, indicating a disparity in their commitment to climate goals.

Another significant source of capital comes from private investors globally. While some major oil and mining companies are divesting their coal assets, instead of being phased out, these assets are being acquired, and in many cases, expanded, by private funds.

Unfortunately, financial measures to limit coal and other fossil fuels do not directly address the underlying demand for these fuels. On the other hand, such commitments may have created a false sense of security, leading to a lack of additional actions companies and governments take to reduce coal consumption.

The most effective way to phase out coal is by reducing its demand. This can be achieved by making alternative, greener energy sources more affordable and diminishing the allure of coal. Implementing proper carbon pricing, even if initially limited to Western countries, would reduce global fossil fuel demand. Additionally, a well-designed carbon border tariff, which imposes taxes on imports from countries utilising dirtier forms of energy, could incentivise manufacturers worldwide to adopt cleaner production methods.

The Dilemma

The transformation of a deeply entrenched fossil fuel-dependent system cannot be achieved overnight. The transition away from fossil fuels is an immense undertaking that the energy industry and global leaders have long been aware of but have been slow to address. Despite the aspirations of climate activists, a sudden and radical elimination of fossil fuels would have severe economic repercussions, leading to a global economic depression.

The crux of the challenge lies in a decision between capitalising on the advantages of fossil fuels as an affordable and geopolitically crucial energy source or prioritising the long-term sustainability of our planet by leaving the majority of these resources untapped in the ground.

We are undergoing a gradual transition from fossil fuels to renewable energy, expected to span over a generation. Technological advancements, pricing, convenience, reliability and politics primarily influence the pace of this transition.

The positive aspect of decarbonisation is that, in the long term, a renewable resource-based energy system will be more cost-effective than the current outdated and polluting system. Investments in developing and implementing this new energy system will yield financial benefits.

However, public subsidies may be necessary during the transition to prevent harm to individuals who cannot afford the upfront capital required for adopting new technologies. Additionally, utilities transitioning from fossil fuels to renewables may also require subsidies.

Assessment

Transitioning away from a deeply rooted reliance on fossil fuels cannot be accomplished quickly. It is a monumental endeavour that the energy industry and world leaders have been aware of for quite some time, yet progress has been sluggish.

The central challenge revolves around a crucial decision: whether to continue capitalising on the benefits of fossil fuels as a cost-effective and geopolitically significant energy source or to prioritise the long-term sustainability of our planet by leaving a significant portion of these resources untapped beneath the Earth’s surface.

Obviously, the choice is hard to make, but if the future of our planet is at stake, then sacrifices would have to be made, irrespective of the cost.