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Blood And Gore: Coal Is Becoming A Stranded Asset

 
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Power station - Image by Flickr user MacJewell, used under Creative Commons license

Power station - Image by Flickr user MacJewell, used under Creative Commons license

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In case you hadn't noticed, it's Halloween. So how could we not comment on an article whose byline reads Gore and Blood?

Their topic may be slightly esoteric, but it has big implications for our energy future.

It's all about stranded assets--those that lose economic value well ahead of their anticipated useful life.

In this case, reserves of fossil fuels--particularly coal--lying unused whose values may decrease as legislation and technology improvements force them into obsolescence.

Coal: future stranded asset?

Whether by regulation or education, the automotive industry and several others are spending more and more to cut their contribution to climate change, in the form of emitted carbon.

On the regulation side, that's partly influenced by "carbon budgets"--limits to restrict the carbon output, and therefore energy usage--for companies in industry.

But these long-term carbon budgets to reduce fossil fuel use mean huge amounts of existing fuel reserves won't be monetized.

The authors suggest that this could cause the current energy-market bubble to burst, as investors start to perceive that the value of those assets will fall.

Al Gore and David Blood, writing in The Wall Street Journal, worry that carbon-based energy investors are making the same mistake as those who invested in sub-prime mortgages before the global economic crisis in 2007 and 2008.

Those investors, say Gore and Blood, ignore the risk of these stranded carbon assets as governmental policy attempts to mitigate the effects of climate change.

Coal reserves in particular, which are typically viewed as valuable and a major part of energy generation around the globe, are particularly susceptible to the stranded-asset risk as regulation and advances in technology for greener options become the norm.

Fixing the problem before it's a problem

They suggest that the best option is divestment--encouraging investors away from portfolios that might carry high carbon-related risks and towards those which don't, such as alternative energy.

Of course, there's some bias here. Still, even those not convinced by climate change arguments face the specter of changes wrought by governmental policy. Investing in an industry facing increasingly expensive regulation doesn't seem wise whatever your political or economic outlook.

The writers suggest that renewable energy is becoming cost-competitive in some areas without subsidies, so future success for alternative energy will no longer be solely based on regulatory mandates.

The situation is pressing enough that energy companies themselves are looking towards alternatives--even if investors aren't.

Coal exports are already dropping in the U.S, and even coal-heavy China is finally implementing means to reduce its horrific pollution problems.

Those data points hint fairly strongly that the value of coal will decline in future, and that investors really are overlooking the risk of stranded assets.

The bottom line? Continued use of carbon-based fuels might not only be bad from an environmental standpoint, but less than ideal on an economic level, too.

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