Will the bankers kill King Coal?

The most depressing part of the International Energy Agency’s sombre assessment of the world’s energy industry and its impact on climate change was its apparent futility. The fossil fuel industry would barely have blinked, because the main “new policies” scenario painted by the IEA – where world governments talk about action but don’t do much – allows for massive growth of coal, oil and gas-fired energy in the coming decades. 

Indeed, the IEA estimates that nearly as many fossils fuels will be burned and greenhouse gases emitted in the coming 25 years than over the last 110 years under its main scenario. Considering that the danger of this has been clear for the last 25 years, this is a staggering estimate. Little wonder, then, that although the IEA paints a dramatic picture of the sort of action that is needed to meet the world’s stated climate goals, it concedes that “political reality” means this will not likely come to pass.

But if the world’s political deliberations on climate change represent little more than a speed hump for Big Coal and Big Oil, then maybe the financial community might present more formidable resistance. That would be a delightful irony considering the mess that bankers have got us into it now, but naked self interest may, for once, serve a greater purpose and force bankers to do what the politicians daren’t: say no to coal.

At least one big bank thinks they might. HSBC Bank overnight produced a report that stated that there are three key reasons why the IEA’s stark scenario – the world will be locked into a plus 2°C trajectory unless really serious action was taken by 2017 – might be avoided, or at least delayed. These were credit risk, cleantech and stranded assets.

“First, we believe that financiers are already less willing to put capital at risk in inefficient fossil fuel infrastructure,” the bank's analysts wrote, pointing to new principles which are committing financial institutions to effectively adopt emission reduction targets on their loans portfolio, particularly in regards to coal fired power.

HSBC says this declining ceiling of allowed emissions intensity should force more capital to lower carbon technologies. “As the urgency increases, we expect more banks and institutional investors to factor 2°C targets into their financing decisions,” HSBC says.

Really? If they did, that would be truly amazing, because the IEA scenarios are quite brutal, and would be so on their loan portfolio. Soe banks have gotten a lot of publicity signing up to various principles, without a demonstratble change in their loan porfolio, although some extra credit risk might have been priced in. But the fact that bankers and investors are talking like this should not be unexpected. Remember the Mercer report earlier this year, which warned of trillions of dollars at risk from climate change; and the efforts of the IGCC and its related bodies that represent funds totaling $17 trillion, who are also concerned about their exposure. 

Indeed, another of HSBC’s key points is the fear of stranded assets. It points to legislation in Australia and China that is likely to force fossil fuel assets to retire early, or operate below capacity. “We expect the reality of stranded assets to become more noticeable as the decade progresses,” it says. Remember, the IEA said that if concerted action was not taken as early as 2015, then 45 per cent of the world’s fossil fuel plants would have to close early over time to meet the 2°C scenario. That’s a scary prospect for bankers.

Lastly, the bank notes, the IEA may have underestimated the speed at which clean energy can provide economic solutions. It notes, in particular, the impending arrival of wholesale grid parity for solar PV in India, which has to import hundreds of million of tonnes of coal at prices well north of $100 a tonne (well in excess of the subsidised cost of coal in NSW). HSBC says this will eliminate the need for subsidies for solar, and the “fiscal headroom” for more subsidies for abatement solutions that are more expensive, such as carbon capture and sequestration.

This is an extremely potent point. Indeed, the IEA says subsidies will play a vital role if the world was to switch course from its inadequate “new policies” scenario (heading for 3.5°C) to its 450 scenario (aiming for 2°C). Fossil fuel subsidies will need to be cut by $4 trillion to $6.3 trillion over the next 25 years, the IEA says.

This is vastly more than subsidies for clean energy, which will only need to rise $550 billion to $5.6 trillion, because technologies such as wind and solar PV will no longer need help.  Bloomberg New Energy Finance overnight predicted that the "average" wind farm would reach parity with fossil fuels in 2016 and would no longer require subsidies. This means, the IEA says, that more can be allocated to solar thermal, CCS, and nuclear, which despite operating for the best part of half a century still requires governments to stand behind banks and insurers and accept much of the risk.

“Together these three ‘wedges’ may just keep the door to 2°C open for a little longer,” HSBC noted. Let’s hope they are right. Lots of bankers have gotten credit for signing up for lots of well intentioned principles, without a noticeable impact on their loan portfolio, although it is true that credit risk is being priced in. At the very least, the bankers cannot claim this time round that they didn’t know.

But they do face a formidable interest group. The IEA data suggests the difference between the "new policies" scenario and 450 scenario is 2.5 billion tonnes of coal produced a year by 2035. That would be worth around $530 billion a year in lost production revenue based on the IEA’s price forecasts under each scenario (most of it is thermal coal, which falls sharply in value in the 450 case).

The difference for the coal-fired power sector is 12,000 terrawatt hours. At forecast prices of $100/MWh in 2020, that equates to $1.2 trillion a year. Russia alone would have $435 billion a year in fossil fuel exports in 2035 under the New Policies scenario.

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