TASNEEM SAMODIEN: Why the return to coal won’t last

Recent reports on the increasing global consumption of coal indicate that the numbers are expected to hit 2013’s record level as the global energy supply crunch continues. This has fuelled fears that the use of coal is “returning”.

But fossil fuels such as coal, oil and gas have not “returned”; their prices are simply cyclically high, driven by the invasion of Ukraine by Russia. The increase in fossil fuel prices is a transitory reaction to the Russian supply being detached from the market, not an indication that global commitment to clean energy has reduced. 

The global transition to net-zero emissions is underpinned by a legally binding international treaty on climate change adopted at COP21 in Paris in 2015, commonly referred to as the Paris Agreement. Investment in renewable energy sources in fact remains well supported, with the world’s largest emitter, China, and the world’s largest economy, the US, accelerating their investment in clean energy. 

China tripled its investment in solar panels this year as the country intends to build the world’s largest renewable energy fleet. In August the US committed over $380bn to clean energy through the Inflation Reduction Act in support of its bold attempt to increase clean energy production to 81% of the US total energy mix by 2030, from its current level of below 30%.  

But the challenge that the intensive energy requirements of certain industries, such as chemical production, cannot be met by renewable energy alone is real, and as a result these are unlikely to achieve the net-zero emissions target by 2050. 

The cause is the shortage of critical resources, the geographic spread of available resources, and the financial and socioeconomic impact of a wholesale abandonment of fossil fuels on developing countries and those whose economies are dependent on them.

The International Energy Agency estimates that 5-million people in the oil, gas and coal-producing industries could lose their jobs by 2030, with job losses more pronounced in communities that are dependent on fossil fuel production and conversion.

It is therefore unsurprising that governments have announced big investments in renewable energy sources while simultaneously continuing to support their domestic fossil fuel industries.

The commitments of the Paris Agreement relative to the supply and demand fundamentals in key natural resources highlight a looming mismatch between the world’s climate ambitions and the availability of resources that are essential to realising those ambitions. 

Industrial activity contributes about 25% of global carbon dioxide emissions, with four industrial processes responsible for 85% of emissions: iron and steel, aluminium, chemical and petrochemicals, and cement and lime production. 

At this stage there are few existing commercially viable solutions to reduce emissions across these activities without compromising the quality and quantity of their output. While renewable energy will play a critical role in reducing the emissions profile of these activities, it will have to be supplemented by alternative fuels as well as advanced technologies such as carbon capture and storage and efficiency software to achieve the net-zero emission target.

Based on the selection of available alternative fuels as well as the stage of technological advancement, the International Renewable Energy Agency forecasts that the 2050 target is likely to be missed by at least a decade. 

While the transition to renewable energy is necessary and is actually well under way, we view this transition as a multi-decade, multigenerational process that will gather momentum well beyond the stated deadlines of 2030 and 2050.

As investors we have a responsibility to encourage and drive this change while closely monitoring investment opportunities and assessing the progress being made.

• Samodien is a research analyst at Old Mutual Private Client Securities.