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Has Coal Come to a Fork in the Road?

About the Project

Fuel mix forecasts tend to fall into one of two categories. One says that coal, and fossil fuels more generally, will enjoy growing demand and supply based on their expected economic competitiveness. The alternative sees fossil fuels, and coal in particular, as falling victim to policies designed to transition to a low carbon economy. Which of these two potential outcomes takes place appears to depend on the extent to which the developing economies that rely on coal for their growth can bear the additional costs of alternatives.

History shows that the future can differ widely from expectations. Only 15 years ago it was common to assume that coal was a declining energy source—a relic of 20th century industrialization. In fact, it has grown more quickly than any other source of energy and, by some estimates, may exceed even oil as the largest component of the global energy mix. Whatever the future holds, it will likely be different than the one imagined. One of the most pressing questions on the minds of policymakers is therefore: what should the future be for coal?

Coal faces an almost certain future of declining demand in the West, contrasted by a very likely increase in consumption in Asia and the rest of the developing world. In particular, China and India have become the central focus of future discussion as, together, they consume over 60 percent of the coal produced in the world. Efficiency improvements in power generation and technology pathways to lowering the environmental impact of coal use do not come without challenges. But success in either of these two dimensions may not produce enough abatement to reverse coal’s negative impacts.

An agreement on climate change at the UN Climate Change Summit (COP21) meeting in Paris would have an enormous potential impact on coal demand provided it incorporates approaches to implementation that ensure compliance. Even then, any significant decline in coal demand would lead to appreciably lower prices than are seen today and could create more headroom to invest in measures that abate the environmental impacts of coal use. The future could see more coal than its detractors intend and less than its promoters hope. However, the long lead times, installed capital stock and relatively low cost of coal as an energy source will ensure that it continues to be an important part of the global energy mix during any reasonable planning horizon.

Key Points

Coal’s future depends on politics and technology. The world currently seems divided between the OECD members—attempting to phase coal out of their energy mix—and much of the rest of the world that is torn between access to cheap energy and its environmental impacts. This leaves governments faced with convincing their citizens to pay for climate change policy before securing access to their basic needs. Regardless of which view prevails:

- Even the externalities of renewable energy development, such as intermittency, reliability and system efficiency impacts, will not be sufficient to prevent coal becoming commercially uncompetitive, particularly if a global climate deal is achieved that imposes carbon pricing.

- China may cease to be a major importer of coal. It is planning to reduce coal’s share in its energy mix and may even reduce coal demand in absolute terms.

- India may pick up the slack resulting from any reduced global coal market role for China. However, India’s ambitious plans to boost domestic production could stymie such hopes.

- For now, coal is winning the ‘battle for Asia’ against natural gas, based on its affordability, but its future depends on successful, widespread adoption of carbon capture and storage (CCS).

Coal is clearly approaching a fork in the road and it will not be long before we have a clearer view of which turning it will take.

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