Why Higher Pollution Costs Aren't Denting Coal Demand in EU

(Bloomberg) -- If you thought the surging price of fossil-fuel emissions in Europe would hurt coal demand, think again.

The highest prices for carbon credits in a decade have also lifted natural gas, discouraging power stations from making the switch away from coal. As a result, demand remains strong for the dirtiest fossil fuel in the continent that’s doing the most to clean up its economy. Coal prices as a result reached their highest in five years on Tuesday.

Gas futures would need to plunge by more than 20 percent before coal-fired power stations become uneconomic to run, based on current market prices for fuel and electricity, according to Georgi Slavov, head of research at broker Marex Spectron.

“This is highly unlikely” through at least November, Slavov said. “There are no plausible scenarios which support pricing out of coal.”

Why Higher Pollution Costs Aren't Denting Coal Demand in EU

Front-year coal for delivery in Europe has been poised to push past $100 a ton for the first time in half a decade, lifting the cost of electricity across the continent. It’s already exceeded that level for nearer-term contracts.

Demand for coal in China and India is drawing in cargoes that otherwise would land at plants in Europe from the Netherlands to Germany. The Dutch front-year contract recovered from losses early in the year to rise almost 13 percent, climbing alongside gas and oil.

Gas-fired generators, Chinese importers of liquefied natural gas and storage sites in mainland Europe are all competing for the same shipments, stoking the cleaner fuel’s rally. There simply hasn’t been much spare gas supply to allow switching from coal because of carbon’s surge.

Why Higher Pollution Costs Aren't Denting Coal Demand in EU

Higher EU carbon prices just may stick, said Andree Stracke, chief commercial officer at RWE AG’s supply and trading unit. “Twenty euros a ton sounds high, but there’s a certain political will and there’s a certain supply-demand situation that’s creating a new market price level.”

For most of the world’s greenhouse gas output, there’s no price, which gives coal a big advantage.

Chinese coal imports hit 29 million tons in July, the highest level since 2014, while the country’s electricity production hit a record 640.02 billion kilowatt-hours.

Global coal imports are set to reach a record 1.01 billion tons this year, exceeding 2013’s level, which was just below 1 billion tons, according to Guillaume Perret, founder and director of Perret Associates Ltd., a London-based research company.

“The coal market is now facing a structural shortage” of investment, including in mines and logistics, Perret said.

Finally getting rid of coal will probably require more than a carbon price. It’ll certainly include attention to the resulting joblessness of workers in the industry, said Oliver Sartor, a research fellow at French thinktank the Institute for Sustainable Development and International Relations.

Nations including Canada, the U.K. and South Africa are already embarking on a determined shift away from the dirtiest fuel.

“If even South Africa is starting in that direction, there’s no reason why Australia, Germany or Poland can’t do it,” Sartor said. The end game might still be three decades away, but it’s “much closer than some people in the industry think.”

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