Peak Coal? Not Any Time Soon

Every December, the International Energy Agency (IEA) produces a report that looks at the projected demand for coal over the next 5 years.  For those of us concerned about the environmental impact of carbon emissions, the report offered a glimmer of hope.  According to the authors, the demand for coal is expected to grow 2.3% annually each year through 2018.  This rate is down from the 3.4% annual growth experienced between 2007 and 2012. 

Unfortunately, while the rate of growth in coal demand may be slowing, there is little reason to believe that total coal production will decline anytime soon.  Today, coal is the second largest energy source worldwide making up 40% of the total electricity needs.  As the chart below shows, three countries, China (47%), the United States (14%) and India (9%) account for almost 3/4 of coal demand.  Two of these countries, China and India, continue to grow relatively rapidly and, whether we like it or not, energy consumption is closely linked to economic growth.  Today, approximately 280 gigawatts of coal burning power station capacity is under construction around the globe and much of it is in India and China.

In the U.S., growing exports have been a boon to the coal industry which has seen domestic demand decline in the face of tougher environmental regulations and competing cheap natural gas.  In 2012, U.S. companies shipped approximately 114.2 million tons of coal abroad or approximately three times the level of a decade earlier.  A good deal of the ore comes out of Wyoming’s Powder River Basin which is home to some of the country’s least expensive mines.

Of course, the business of making economic forecasts can be tricky.   Remember the often cited prediction by one commentator upon seeing waste piling up on Manhattan streets in the late 1800s that “…by 1930 horse manure would reach the level of Manhattan’s third story windows.”  What the prognosticator failed to contemplate was the possibility that human invention (ironically in the form of the combustion engine) would alter events. 

But trying to clean up coal and use it effectively has been devilishly difficult.  Billions of dollars have been spent on efforts to capture carbon emissions and store them underground with little success. 

To date, the widespread use of coal has made sense; the fuel is both abundant and inexpensive when compared to alternative energy sources.  But coal’s relative attractiveness may finally be changing.  Last fall, the U.S. government passed regulations effectively requiring all new electric generating plants to burn clean coal. Several banks such as the IMF have refused to lend against projects with poor carbon footprints and China has toughened environmental regulations especially in areas around eastern coastal cities plagued by particularly bad air quality. 

Ultimately, how China handles its energy needs will be the dominant factor in determining coal production in the years ahead.  The country is the largest consumer worldwide using three times as much coal as the United States.  Most of the demand inside the country comes from the electricity generating and industrial sectors.  Importantly, central government efforts focusing on modernizing coal-fired electric plants and fostering the use of alternative fuels such as nuclear and natural gas could well have some success in the years ahead (see chart above). 

Growing environmental pressure and emerging cheaper fuel sources, appear to be slowing the rate of growth in coal production.  But unseating coal’s position as the world’s dominant fuel source will require a multi-pronged approach focusing on improved energy efficiency, regulatory mandates and technological breath-throughs.  Let’s hope the global community is up to the task.