Coal and Cancun

To first approximation, the political struggle over climate policy can be reduced to the future of coal. The Cancun climate talks are going nowhere because of a stalemate between the United States and China, which each account for about a quarter of the world's greenhouse gas emissions. China gets about three quarters of it electricity from coal, the United States close to half, and neither country is willing to confront its coal industry head-on.

Countries like the UK and Germany, which have been systematically winding down their coal industries, have cut their greenhouse gas emissions sharply and are inclined to stick with the Kyoto formula--first the industrial countries reduce their emissions, then the developing countries. That principle of "differentiated responsibilities" is considered sacrosanct in the Third World. But the United States wants the fastest developing countries, China in particular, to join the industrial in emissions cuts.

That in essence is why Cancun is deadlocked, just as Copenhagen was this time last year.

So if it's a question globally of whether to systematically reduce carbon emissions or to reduce reliance on coal, Big Coal is winning the Big Political Battle. On the ground, however, where it's a question of costs, resources, and technology, coal may be starting to lose. The two biggest factors in play? The revolution in unconventional gas, which already is transforming the future of fossil fuels in the United States and soon may have a similar impact in China. And the world market in coal, which could be undergoing the same kind of transition we have witnessed in world oil during the last decade.

Speaking last week at Platt's Global Energy Outlook Forum in New York City, reporter Bill Holland of Platts Gas Daily cited two recent reports--one from Credit Suisse, one from Deutsche Bank--both concluding that if natural gas prices are at $4 per million BTUs, there is no poiint in building a new coal-fired power plant in the United States and little point in continuing to operate one. As it happens, current U.S. gas prices are roughly $4/mBTU, and futures prices as far out as twelve years are in the vicinity of $5/mBTU and never higher than $6/mBTU. So there's little prospect, Holland concludes, that it will make sense for U.S. utilities to remain as dependent on coal as they are now.

To be sure, some very large coal plants are  continuing to be brought online in the United States. But tighter restrictions on emissions of mercury, SO2 and NOx already are in the works, so even if EPA's soon-to-be-released carbon restrictions are relatively lax, operators of coal plants are sure to see their costs rise quite sharply. Credit Suisse estimates that almost a third of current coal-generating capacity in the United States is subject to no controls whatsoever. As regulation firms up and inexpensive "fracked" gas increasingly enters the picture, demand for coal could drop as much as 30 percent and demand for gas rise as much as 15 percent, Credit Suisse estimates.

Natural gas already is making rather sharp inroads into coal generation in the United States, causing domestic demand for coal to drop somewhat. But the global picture is the opposite. China, whose voracious appetite for coal is generally explained in terms of its seemingly inexhaustible supplies, recently has turned into an importer of significant scale. Those who haven't already lost their short-term memory will recall that early in the last decade China suddenly emerged in the world petroleum market as an importer, which turns out to have signaled the run-up in world oil prices that has the most important single feature of the global economy since mid-decade. Proponents of King Hubbert's "peak oil" theory, which had correctly predicted a peaking in the United States, claimed vindication.

Now similar claims are being made about coal. Writing in a recent issue of Nature, Richard Heinberg and David Fridley argue that economically recoverable reserves in the major producing countries may be much lower than the conventional wisdom has had it, and that China's coal production could peak as soon a 2015. If China's imports continue to grow at current rates, the country will be buying the equivalent of total Asia-Pacific coal exports. Two years ago, the world's entire seaborne trade in coal amounted to barely more than a fifth of what China alone consumes annually.

Hubbert correctly foresaw that U.S. oil production would peak in the early 1970s. In terms of energy content, U.S. coal production peaked at the end of the 1990s, Heinberg and Firdley note.

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