Coal is the dirtiest source of energy generation and it accounts for approximately 30% of annual global emissions. However, thirty countries have already joined the Powering Past Coal Alliance and are taking actions to phase out coal. Identifying the potential pathways to achieve this phase out is fundamental in order to stop climate change. Investors will also need to be aware about their exposure and understand where and when the biggest losses will occur. In this article we illustrate one potential pathway to phase out coal and explain how Carbon Delta quantifies the potential losses to utilities and extractive companies in this scenario.

Coal Industry faces 221 Billion Dollars of losses by 2050

Figure 1 illustrates a potential global coal phase out pathway from 2019 through to 2050 based on an IPCC scenario reduction pathway. Displayed is installed coal power capacity per country with a rest of the world comparison. The data is gathered from the GCPT1 database. It clearly shows that China, India, Japan and South Africa are expected to lose between 91% and 94% of their coal units by 2050. Sooner than this, the US and Germany are expected to have phased out their coal power plants entirely by 2040.

Anthropogenic activities are estimated to have led to approximately 1.3°C of warming across the globe when compared to pre-industrial temperatures2. However 196 states confirmed joint efforts to limit global warming to 1.5°C as part of the United Nations Framework Convention on Climate Change in Paris. As a result, the International Panel on Climate Change (IPCC) composed a special report on how to limit global warming to that level, which states that greenhouse gas emissions should be reduced by 75 – 90% below 2010 levels by 2050. Fossil fuel combustion is responsible for 65% of greenhouse gas emissions. Coal alone is responsible for 45% of those emissions. As one might expect, socioeconomic pathways which simulate a world which remains below 1.5°C have a considerable decrease (if not complete phase out) of coal. The IPCC outlined the global energy generation for every energy source compatible with an average warming of 1.5°C by the end of this century. According to the report1, coal energy generation must decline by two thirds until 2030 and almost entirely by 2050.

Carbon Delta created a time schedule to determine for each coal power unit worldwide when they will have to be phased out. This is based on both information from the Global Coal Plant Tracker (GCPT)2 database and national commitments to phase out coal from 30 countries. The GCPT contains primary data on more than 12’000 coal combusting units all over the world, including the age, location and ownership structure. Carbon Delta then converts this budget into a defined yearly reduction amount assuming that older coal plants will be phased out first, as they are usually less efficient and more polluting. Then, by identifying the company that owns the units and plants, it is possible to quantify the losses that companies face in the coming 20-30 years.

After the exercise of mapping the coal units to companies Carbon Delta has calculated that in total, utilities and extractive companies will face about 221 billion dollars of losses by 2050 due to loss operative revenue and the asset becoming stranded. However, this amount could increase further should companies continue to invest into new units – ignoring evidence of potentially stranded assets. Figure 1 shows that all power units located in the United States of America and Germany are expected to be phased out by 2040 despite no formal phase out announcement from the United States. It is clear that coal phase out is already occurring due to regulatory and market pressures. In 2018, 23’400 MW of coal fired capacity was shut down in the United States alone, the highest amount taken offline since 2015 and in February of this year, Glencore PLC the global commodities firm announced it will limit coal production for environmental reasons3. Needless to say the increasing competitiveness of renewables with or without subsidies and the society’s changing attitude towards coal and awareness of its key role in global emissions will likely increase the pressure to increase the rate of shutdown in years to come.

What can you do as an investor?

Whichever coal phase out pathway will arise; it seems clear that investors have to take action and re-allocate holdings to avoid large losses that are already beginning and will continue to mount in the next 20-30 years. An investor needs to know when and where coal plants will be shut down in order to understand the potential risk to their investment; therefore the use of quantitative risk models is essential to manage risks. Carbon Delta has extensive research on coal and its potential phase out pathways from national energy mixes; as well as analysis on all publicly traded companies active in coal energy and their exposure to coal and lignite extraction. If you are interested in finding out more about this dataset, please get in touch by sending an email to contact@carbon-delta.com.

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Oliver Marchand

Andrew Black

Business Development Manager

Andrew is part of the business development team for Carbon Delta. He previously worked in asset management where he led sustainability screening for RobecoSAM, supported ESG investing research for pension funds and large asset owners, and launched the 2014 cycle of the Dow Jones Sustainability Indices. He also has an in-depth knowledge of gender equality in the workplace through his work certifying organizations through the leading global assessment and business certification for gender equality – EDGE Certification.
This article is based on research conducted as part of a MSc thesis by Nicole Reichlin who calculated the risks of a coal exit scenario to the financial industry with Carbon Delta in 2019 as part of her economics studies with the University of Zurich.

Questions? Ideas? Talk directly to Andrew
+41 44 552 77 65 | a.black@carbon-delta.com

References

1 IPCC, 2018: Summary for Policymakers. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte, V., P. Zhai, H.-
2 Global Coal Plant Tracker, 2018 (available under https://endcoal.org/global-coal-plant-tracker/) O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, Maycock, M. Tignor, and T. Waterfield (eds.)]. World Meteorological Organization, Geneva, Switzerland, 32 pp
3 https://www.theguardian.com/business/2019/feb/20/glencore-to-limit-coal-production-after-pressure-from-investors-church-of-england