Practical analysis for investment professionals
04 February 2016

Humanity Will Leave Coal Behind, But When?

Coal has done a lot for humanity. It literally took us out of the cold.

It powered the first industrial revolution, which fueled countless advances that have made the world altogether more livable. And today hundreds of thousands of people make a difficult living pulling it out of the ground, and millions more precede them.

Of course, that is rapidly changing. In West Virginia, once the heart of coal country, less than half of all civilian adults are employed. The decline of the coal industry is not just an American phenomenon. Heilongjiang, Jilin, and Liaoning provinces in northeastern China, once the country’s industrial heartland largely because of their abundant coal resources, have long since fallen behind and are now among China’s slowest growing.

It’s not that hard to figure out why. Over the past five years, the price of coal has decreased sharply. The Dow Jones US Coal Index trades at its lowest levels ever. The industry is in a tough spot.

And that’s before you even consider carbon emissions. Bloomberg ran an excellent story entitled “2014 Was the Hottest Year on Record.” A year later, they followed that up with a similarly titled piece, “2015 Was the Hottest Year on Record.”

I hope you can see where I’m going with this. It is not controversial to say that the earth is warming. The only question is: What happens next? There are physical, transition, and liability risks to get familiar with, and investors should not waste time.

In his excellent curation of the best resources to help investors with this, my colleague Usman Hayat, CFA, observed that despite all the headlines climate change generates, “curiously there is little if any coverage of the phenomenon in traditional investment textbooks.” Time to bone up.

There’s no question that there is an intersection. Arch Coal, long one of the largest coal producers, just filed for bankruptcy.

A driving reason for that: There is a strong case that we won’t be burning coal forever. It’s cheap, but dirty. It provided 41% of the world’s electricity in 2013, but to understate the case, new coal projects are unpopular. In the United States, coal-burning power plants account for about 39% of the electricity generated but 77% of the sector’s carbon dioxide emissions.

What compounds the problem for the coal industry is that continuing to use coal is a choice the world makes. And given the environmental costs associated with that choice, the world might be inclined to change its mind. So we decided to ask CFA Institute Financial NewsBrief readers how many years they thought it would take for coal to be phased out as an energy source. There wasn’t much of a consensus among our 730 respondents.


How many years until coal is phased out as an energy source?

Coal-poll


At least 42% of our readers project they will be dead before it happens. I got that number on the back of an envelope, but I think it’s not far from the truth. The average global life expectancy was 71 years in 2013, so if one were to assume our readers are all 20 years old, “It’ll take more than 50 years” and “I’ll be dead before it happens” are basically the same statement.

And they might be right. Coal power plants keep being built. It takes a lot of assuming to think that coal will go away soon.

Or perhaps not. As my colleague Svi Rosov, PhD, CFA, noted on Twitter, that sure looks like an S curve in adoption. These are widely thought to indicate a mature if saturated market. Technological disruption is always possible.

And it’s tough to handicap, but there is a compelling argument that that’s happening. The ranks of solar workers in the United States now outnumber coal miners. There has been discussion of a cheaper-than-coal fusion reactor. That may sound like the stuff of science fiction now, but many realities of daily life today would have seemed just as farfetched 20 years.

And if the rumor that the White House wants to impose a $10-a-barrel fee on oil to fund green transportation proposals has any validity, the act of politics I mentioned in my earlier tweet is at least somewhat more likely.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Sloane Ortel

Sloane Ortel has worked in investment management since 2006 and joined CFA Institute in 2010.

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