The end of a ‘just transition’ on coal. There will be disruption.

Aug 20, 2021

Last week’s report by the IPCC (the Intergovernmental Panel on Climate Change) shows that the prospects of achieving a ‘just transition’ to a green economy have all but disappeared.

That is because we are no longer talking about a transition. We are talking about sudden, dramatic changes. We are talking disruption.

The world could have achieved a transition if it had started taking serious action ten or twenty years ago. But too much time has been lost. And each month we wait, the higher the cost of disruption becomes.

The best source of information on the economic dimension of this is a major international research project, called the Inevitable Policy Response (IPR). It was prepared by a body called the Principles for Responsible Investment which in turn was established by the UN, but now offers advice to financial institutions and other investors.

A core idea in it is that markets have yet to fully price in the policy changes that will inevitably occur as we lurch towards global climate goals.

There is a ratchet mechanism built into global policy. Individual countries reveal their pledges, at COP26, in November this year. These are then subject to a global stocktake in 2023 and then new pledges are made in 2025. These pledges can be no weaker than those made previously.

This cycle keeps repeating. The IPCC report shows that, so far, governments have failed to make adequate pledges to deal with climate change.

The policy changes governments make, as they realise that the pledges they’ve made won’t do enough to prevent warming, will repeatedly mean tighter policies.

Inevitably this will lead to major repricing in markets. Perhaps there will be just one major shock to prices in maybe a couple of years. Perhaps there will be a series of shocks.

We can’t predict the exactly timing of price changes. But we can predict their direction. Anything to do with fossil fuels will lose most, eventually all, of its value.

The latest IPR report, from 4 months ago, highlights ten areas where it sees policy change as inevitable. Top of the list is Carbon Border Adjustment Mechanisms, sometimes called carbon tariffs.

We’re looking at a carbon price of about 75 US dollars (roughly 100 Australian dollars) per tonne of CO2 by 2030, an end to coal-fired power generation and an end to the production of internal combustion engine cars and eventually of petrol stations.

It doesn’t matter what any Australian government thinks about these things, if it does nothing the decisions will be out of its hands anyway.

EU actions from last month put the end to internal combustion engine production at 2035 at the latest, but changes in technology and individual countries could bring that about earlier.

Soon electric cars, trucks and buses will not only be cheaper to run than internal combustion versions, they’ll also be cheaper to sell.

The EU also announced they will start Carbon Border Adjustment Mechanisms in 2026 with cement, iron, steel, aluminium, fertilisers and electricity.

Mining in some instances will expand, in others it would halt.  You can expect global thermal coal exports to pretty much cease. US coal share prices lost 90% of their value over three years (see chart).

Coking coal, which is an ingredient in steel making and which is what most of the existing mines in central Queensland produce, has a longer life span than thermal coal. But there are now techniques for making steel without coking coal. They are presently too expensive, but that will change. When it does, we can wave goodbye to those exports too.

There is a lot of talk of the transition from fossil fuels to clean energy, and the need for a just transition.  And that’s all fine — except that what we are going to see is not a transition. It is a disruption — like the disruption from the horse to the car in barely a decade.

Over a short period, from the turn of last century, passenger transport went from mostly horse to mostly car. In the 1900 May Day parade in New York City, you saw nearly all horses, just one car. In 1913, it was nearly all cars, just one horse.

There’s a disruption now not just because of the inevitable policy response, but also because of the changing economics of energy.  Solar energy prices have plummeted, and will continue to fall. Battery prices have plummeted, and will continue to fall. Energy produced by coal, gas, oil and nuclear has not and will not. So the vast majority of new energy investments in developed countries are in renewables.

There would be huge changes, even if policy did not get involved.

Saying that we want to hang on to technologies that will increasingly be associated with stranded assets — essentially anything to do with fossil fuels — will not prevent the inevitability of disruption. It will just deal us out of the picture.

We are not looking at a transition to new ways of doing things, which will involve new ways of work and new jobs. We are looking at disruption, in energy production and in the transport and other systems associated with it.

Disruption creates lots of new jobs, but it destroys lots of old ones, and transforms many others.  We should not be thinking of a just transition, but of how do we get a just disruption.

And on that, there is question about going back to the ‘old normal’.

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