China’s Pollution is a Lump of Coal for Australian Fossil Fuel Barons
December 24, 2013
As reported here, more signs that China’s coal fired party is drawing to a close – as critical air pollution and water shortages – as well as climate concerns, mount.
Kieran Cooke for Climate News:
Australia has been growing rich from exporting coal and other resources to China. The good times could be coming to an end, says a new report.
LONDON, 23 December – Coal mining companies in Australia have been enjoying the good life in recent years, making millions of dollars from feeding the seemingly insatiable energy appetites of Asia’s tiger economies – particularly that of China.
But a new report by the Smith School of Enterprise and the Environment (SSEE) at Oxford in the UK warns that Australia’s coal mining party could be coming to an end.
It says coal demand in China looks likely to fall in the years ahead due to concerns about climate change and other factors, leaving billions of dollars of investments in Australian coal mining projects in jeopardy.
The report, Stranded Down Under, details the considerable growth of Australia’s coal production in recent years. Coal has been one of the main reasons behind the continuing health of the country’s economy – it now accounts for 16% of the total value of exports.
Producers want to increase output from the present level of around 440 million tonnes per year to 550 million tonnes by 2020, the main part of production going for export.
Altogether investments of AU$100bn (US$90bn) involving 89 projects are planned over the next 15 years according to Australia’s federal Bureau of Resources and Energy Economics (BREE).
Water running short
The conservative Coalition government led by Tony Abbott, elected to office earlier this year, is rolling back taxes and environmental regulations in order to encourage mining investments.
The report says weakening global coal prices, plus a likely decline in coal demand in China – by far Australia’s biggest export market – make the outlook for these projects very uncertain.
“Demand below expectations – and lower coal prices as a result – would increase the risk that coal mines, reserves and coal-related infrastructure could become mothballed or abandoned.”
At present China accounts for half the world’s coal consumption: it imports more than 30% of its annual needs from Australia.
The report says concerns about the environment and the chronic air pollution experienced by many cities in China will lessen the role of coal in the country’s energy mix. Coal needs a lot of water – whether for “washing” or for driving steam turbines.
“Increasing water scarcity could also adversely impact coal demand, while domestic shale gas and changing international gas markets will result in more coal-to-gas switching.”
‘Stranded assets’ are assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities. They can be caused by a range of environment-related risks and these risks are poorly understood and regularly mispriced, which has resulted in a significant over-exposure to environmentally unsustainable assets throughout our financial and economic systems. Current and emerging risks related to the environment represent a major discontinuity, able to profoundly alter asset values across a wide range of sectors. Some of these risk factors include:
Environmental challenges (e.g. climate change, water constraints)
Changing resource landscapes (e.g. shale gas, phosphate)
New government regulations (e.g. carbon pricing, air pollution regulation)
Falling clean technology costs (e.g. solar PV, onshore wind)
Evolving social norms (e.g. fossil fuel divestment campaign) and consumer behaviour (e.g. certification schemes)
Litigation and changing statutory interpretations (e.g. changes in the application of existing laws and legislation)
The Stranded Assets Programme at the University of Oxford’s Smith School of Enterprise and the Environment was established in 2012 to understand these risks in different sectors and systemically. We test and analyse the materiality of stranded asset risks over different time horizons and research the potential impacts of stranded assets on investors, businesses, regulators and policymakers. We also work with partners to develop strategies to manage the consequences of stranded assets.
While growth rates and a structural economic shift from investment to consumption are significant determinants of China’s future coal requirements, there are other factors shifting China’s demand and in ways that are likely to reduce demand below levels currently expected by market participants. Many of these factors are related to the environment and could force owners and operators to re-evaluate the viability of coal projects already developed, as well as those recently proposed – particularly in Australia given its growing dependency on China as an export market.
Demand below expectations, and lower coal prices as a result, would increase the risk that coalmines, reserves and coal-related infrastructure could become mothballed or abandoned. Many planned greenfield projects and mine expansions in Australia were considered feasible based on high coal prices. If prices are low and stay that way, many of these projects will not go ahead. Prices could also drop to the point where it is in the interests of miners to cease production, resulting in stranded mines and dependent infrastructure such as railways.
Shifts already well underway in China are a serious concern over air pollution, a desire to reduce greenhouse gas emissions and to reduce exposure to volatile international commodity markets, particularly in oil and gas. This has resulted in the massive deployment of non-fossil energy driven by new policy frameworks, falling technology costs and the emergence of carbon pricing, which are trends set to continue and grow. Increasing water scarcity could also adversely impact coal demand, while domestic shale gas and changing international gas markets will result in more coal to gas switching. These factors are all likely to reduce China’s growth in coal imports below levels currently expected.