China Coal Spending of $21 Billion Seen Risked by Climate Rules

Spending by Chinese companies of $21 billion last year on coal reserves might be wasted amid tougher environmental rules and weaker growth in electricity demand, according to a report released today.

Tighter restrictions on greenhouse-gas discharges may cut China’s total power output by as much as 40 percent from 2012 levels by 2020 under an aggressive scenario, the Carbon Tracker Initiative and the Association for Sustainable and Responsible Investment in Asia, environmental groups focusing on investment and finance, said in the report. Demand for coal imports could drop rapidly, they said, forcing exporters to seek new outlets and threatening to strand assets.

China is the world’s largest producer and importer of coal, according to the U.S. Energy Information Administration. It’s also the biggest emitter of greenhouse gases blamed for rising sea levels, droughts and floods, the World Bank says. Nations are negotiating a global climate treaty to be signed in Paris in 2015 that would require all countries to act to cut climate pollution from 2020.

“China’s ‘Great Coal Cap’ could feasibly peak China’s thermal coal demand in the near-term, presenting a significant risk of asset stranding for those investing on a business as usual future,” said Anthony Hobley, chief executive officer of London-based Carbon Tracker. “Questions need to be asked whether committing billions of capital to increase thermal coal supply in a shrinking market is a wise use of capital.”

Electricity Demand

Smaller gains in China’s gross domestic product mean there are “signs of slowing” in absolute power demand growth, according to the report. The nation’s coal usage climbed the least in a decade in 2012, it showed.

The two groups advised investors, particularly those owning shares of Australian and Indonesian coal exporters, to assess their value at risk from intensified regulations on coal burning in China. The country imported 232 million short tons of coal in 2012, 60 percent of which came from Australia and Indonesia, according to the EIA.

The groups also urged Chinese coal companies to disclose more information on planned capital spending and ensure that they take the likelihood of lower demand for power into account.

“There is an opportunity for both China and other countries to ease the potential disruption and risks associated with stranding assets,” they said. “Investors and financial institutions with significant assets at risk should be supported in developing a plan of action for managing the stranding process.”

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