This is the first in a two part series by Fergus Green, climate policy consultant and researcher, London School of Economics and Political Science and Richard Denniss, chief economist, The Australia Institute. This post examines trends in coal demand. Part two will focus on proposals to regulate supply, including the call for a moratorium on new coal mines.

Ask a climate scientist what keeps them up at night and chances are it’s the potential for continued warming of the climate to trigger a tipping point — an abrupt, system-wide change that is difficult or impossible to reverse — in one or more of the Earth’s key climatic systems.

Compared with these growing risks to physical systems, the pace of human action to tackle the causes of climate change can seem grindingly slow. But human systems have tipping points, too; something that can seem impossible one day can suddenly acquire an unstoppable momentum.

Right now, we are arguably experiencing a tipping point in the global use of coal.

For years, the coal industry and its political supporters have clung to 'business as usual' forecasts (such as those produced by the International Energy Agency) that point to continuing growth in coal demand for decades, insisting that such forecasts are evidence of the fuel’s strong future.

It may come as a shock to those who genuinely believed the forecasts, then, to see consensus crystallise around the notion that coal consumption is peaking. In September, Goldman Sachs forecast that global coal consumption would peak before 2020. Even that now looks conservative: on Monday this week, the Institute for Energy Economics and Financial Analysis (IEEFA) made the call that global coal consumption likely peaked in 2013.

Whether IEEFA’s call turns out to be accurate, we will not know for sure for some time. But the headline numbers are striking. According to IEEFA’s analysis:

Beyond China’s 5.7% year on year decline to date in 2015, US domestic coal consumption is down 11%, Germany is down 3%, the UK is down 16%, Japan is down 3%, Canada is down 5%, and Turkey is down 13% year over year. With Russia’s economy in recession, we wouldn’t expect consumption growth [in] coal there. Korea is flat, Indonesia is down 2% and Mexico is down 1%.

Against this, only two major coal-consuming economies are reporting positive growth in 2015. Indian coal consumption is up 3-6% year on year, while Australian coal consumption is up marginally, following the Abbott Government’s repeal of Australia’s carbon price, which had previously caused Australian coal consumption to decline.

There are multiple factors causing this rapid shift in the fortunes of coal.

Critically, for the prediction that the peak has passed, the key factors are long-term structural trends. One common factor is competition for electricity generation from zero-emissions wind and solar photovoltaics and (especially in the US) from lower-emissions gas. Another is the increased regulation of coal, as regulators impose stricter standards on emissions of carbon dioxide and local pollutants, requiring companies increasingly to internalise the environmental and social costs of their activities.

Local pollution, health and climate concerns are also provoking grassroots opposition to projects spanning many countries and all parts of the coal supply chain. A rapidly growing financial divestment movement is having a delegitimising effect, placing coal in the same category as tobacco, asbestos and other toxic products, and so paving the way politically for increased regulation.

These and other factors have different weights across local contexts. Consider the variations among the three largest coal consumers, China, the US and India, that are collectively responsible for more than 70% of global coal consumption.

In China, which consumed more than half of total global coal consumption in 2014, the end of a decade-long boom in construction and energy-intensive manufacturing (steel, cement etc) has slowed greatly the growth in China’s demand for energy. Meanwhile, acute public concern about air pollution, that is estimated to kill 4,000 people per day, and caused primarily by the burning of coal, is leading to ever-stronger policies to limit coal and shift the energy mix toward other sources. Coal use likely fell by around 6% year on year in the 9 months from January to September 2015. Even the International Energy Agency concedes its forecasts of coal growth in China are well out of date and that 'the rapid growth of Chinese coal demand is over'.

In the US (11.7% of 2014 global consumption), record low US gas prices, record expansions of renewable energy (9 gigawatts of wind and 8 gigawatts of solar in 2015), and flat electricity demand have contributed to thermal coal consumption declining 11% year on year.

In India (9.3% of 2014 global consumption), electricity growth in the year to September was only 3.1% and steel production (which uses coking coal) has stagnated, according to IEEFA’s analysis. This slow growth largely reflects challenges facing India’s electricity system, in which retail prices are set lower than wholesale generation costs, meaning state distribution companies face losses on every additional unit of electricity they sell (decentralised solar PV systems are able to bypass this problem).

Declining consumption in China and elsewhere, moreover, has caused prices for traded coal to slump, in turn rendering uneconomical the construction of many new supply projects, such as mines and transport infrastructure.

Watching these economic, regulatory and social phenomena unfold, hard-headed investors and financial analysts are concluding that coal’s future is limited and that companies whose business models depend on coal are of little value, a sentiment reflected in such companies’ languishing share prices.

Moreover, coal companies are becoming increasingly isolated politically. As the corporate world perceives increasing risks of binding carbon budgets, the oil and gas industries have begun to split the fossil fuel camp and stake their greater claim to the remaining budget. Coal, after all, is the highest-emitting and lowest-value of the three fossil fuels. (The motivations of the oil and gas executives in criticising coal are no doubt self-serving, but their political-economic heft could be helpful to the fight against coal.) In a sign of the industry’s growing desperation, coal companies have even started fighting publicly amongst themselves.

Various dynamics complicate the endgame for coal, which we consider in our next post. Moreover, these dynamics differ between thermal and coking coal.

Image courtesy of UN Photo