Published: January 9, 2024
Coal is responsible for more greenhouse gas emissions than any other fossil fuel, making it one of the largest contributors to climate change.
While some power utilities, energy companies and national governments have moved away from burning coal, hundreds of unabated coal-fired power plants and new coal mines are currently being developed, according to S&P Global data.
These unabated coal power plants and mines face the risk of become stranded assets as the global economy moves toward decarbonization.
Financing for these coal operations is still widely available from the private sector: Only 26% of financial institutions assessed in the 2022 S&P Global Corporate Sustainability Assessment do not finance coal or have a policy restricting financing for coal.
The 28th UN Climate Change Conference, COP28, ended with a deal that takes another step toward ending the fossil fuel era. The summit’s global stocktake — an assessment of progress in achieving the Paris Agreement’s goals — called on countries to transition “away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade.” The stocktake had stronger language about one fossil fuel in particular: phasing down unabated coal power.
Coal is responsible for more greenhouse gas (GHG) emissions than any other fossil fuel, and in 2022, coal represented 41% of global CO2 emissions, according to the Global Carbon Budget 2023 report.
While the COP28 deal signals broad agreement around accelerating the phasedown of coal, S&P Global data shows that much of the world is still backing the fossil fuel, from developing new coal mines and building power plants to the financing that enables these activities. These findings illustrate that much work will need to be done to make good on the promises reached at COP28.
An analysis of S&P Global Market Intelligence data finds that hundreds of new coal-fired power plants and coal mines are currently under development around the world. Bringing these mines and plants online would not only exacerbate global warming but also expose their owners to the risk of stranded assets as the broader world economy moves toward decarbonization. Data from the 2022 S&P Global Corporate Sustainability Assessment (CSA) shows that most companies that generate revenue from coal do not assess their climate transition risks, which are risks they could face from changing market or regulatory trends.
The 2022 CSA also shows that a majority of financial institutions do not have policies in place to restrict financing for new coal projects. And the financial institutions that do have coal-related financing restrictions often leave wide gaps that allow some form of financial support for these companies, particularly through fixed income.
The UN's Intergovernmental Panel on Climate Change (IPCC) has found that limiting global warming to near 1.5 degrees C will require achieving net-zero emissions globally by 2050. For coal, that would require phasing out all unabated coal-powered generation by 2040, according to S&P Commodity Insights' Net-Zero Emissions Scenario.
Unabated coal-fired plants are those that operate without the use of emissions-reducing technologies such as carbon capture, utilization, and storage (CCUS). CCUS involves capturing the CO2 generated by burning fossil fuels before the CO2 is released to the atmosphere. The CO2 is then compressed and transported to a storage site. Alternatively, it can be used to make other materials including concrete and plastics, or it can be used for enhanced oil recovery. As of 2022, only two commercial coal-fired power plants had been retrofitted to use CCUS, but more than a dozen projects were in development around the world.
While some regions have started shifting away from unabated coal-fired generation, others are working to build new coal mines and power plants.
Significant potential for coal-related transition risk lies in the Asia-Pacific region, particularly in countries that are not members of the Organisation for Economic Co-operation and Development (OECD). These countries account for the majority of proposed new coal power plants and mining projects in development, S&P Global Market Intelligence data shows.
Developing economies such as those in non-OECD Asia-Pacific countries face significant challenges in transitioning to low-carbon power generation for several reasons, including low implementation capacity for emerging technologies and access to existing cost-effective mitigation technologies, the IPCC has written. But the more that countries lean into new coal developments, the more power stations they risk having to replace or repurpose down the road.
These economies are also balancing other considerations against the need to transition away from fossil fuels — such as making sure electricity remains accessible and affordable and offering viable career opportunities for displaced fossil fuel workers. Developing economies also have less historical responsibility for causing climate change and have argued that they should be able to develop their economies and raise living standards using fossil fuels just as other countries have done in the past.
In the years since the Paris Agreement on climate change was reached in 2015, more than 40 countries have set target years for phasing out coal power.
Even more countries have signalled they are headed in that direction. At COP28, the US and six other countries joined the Powering Past Coal Alliance, which now includes 60 countries that have pledged to phase out unabated coal power. The global stocktake at COP28 calls on all countries to accelerate the phasedown of unabated coal power.
On the ground, however, there is a long way to go to reach countries' goals. Globally, coal’s share of total power generation has dipped slightly since the Paris Agreement, from 39% in 2015 to 36% in 2022, according to S&P Global Commodity Insights data.
On a regional basis, coal-fired generation's share in the electricity mix from 2015 to 2022 declined in Europe and North America but gained a bigger foothold in Asia-Pacific. And that trend is expected to continue going forward.
Coal-based power generation in Europe from 2010 to 2022 decreased 33% from 962 terawatt-hours (TWh) to 646 TWh. An even sharper decline occurred in North America, where annual coal-fired electricity production declined 57%. North America represented nearly a quarter of all coal generation worldwide in 2010; that share fell to only 9% in 2022.
Overall, this has been partly driven by the replacement of an aging coal fleet with cheaper renewables and gas-fired generation. In comparison, generation by coal power plants in non-OECD Asia-Pacific (e.g., China, India, Indonesia and Vietnam) has grown by 76% in the same period to meet the fast-growing electricity demand in the region, powered by a new generation fleet built in the last decade. In 2022, coal-fired generation in non-OECD Asia-Pacific countries made up 72% of total production.
S&P Commodity Insights’ Global Integrated Energy Model indicates that even in scenarios aligned with reaching net-zero by 2050, coal will remain the dominant generation source in non-OECD Asia-Pacific countries for the next few decades and could grow to represent 84% of their combined generation mix by mid-century.
The OECD has designated nonmembers China, India and Indonesia as key partners in Asia-Pacific. Australia, Japan, New Zealand and South Korea are the only OECD members in the region.
One of the biggest climate transition risks for owners of coal-fired generation is the possibility that policy, technological and market changes could prompt the retirement of coal plants before they reach the end of their useful life. In some cases, the retirements could occur before companies have fully recovered their long-term capital investments from the coal plants, making them stranded assets.
Phasing out unabated coal plants by 2040 — as the IPCC wrote would be necessary to keep global warming to 1.5 degrees C — would mean retiring some units, repurposing them to co-fire with lower-carbon fuels, or operating fewer hours annually, before reaching the end of their useful lifetime. Continuing to operate the world's existing coal plants for their typical lifetimes and utilization rates would use up two-thirds of the remaining carbon budget available to limit global warming to near 1.5 degrees C.
Plants that were recently built, as well as any that come online between now and 2040, are particularly at risk of being stranded. S&P Global Market Intelligence data shows that as of Dec. 4, 2023,154 new coal plants are under construction globally and collectively represent 150.3 gigawatts of generation capacity. These figures are limited to plants that S&P Global Market Intelligence tracks but are in line with what other organizations have reported. Assuming all these projects come online, they would create a 6.9% increase in global coal generation capacity from the 2021 levels reported by the International Energy Agency (IEA).
The risks of stranded assets fall disproportionally on low- and middle-income countries, especially in the Asia-Pacific region, where a large share of the global coal fleet has been commissioned in recent years and where new projects are still under development.
Specifically, 92% of new coal-fired power plants under construction are in non-OECD Asia-Pacific countries. China has the most coal-fired power plants under construction globally currently (64), followed by India (34) and Indonesia (25).
More than $1 trillion in capital has yet to be recovered from younger plants in the existing coal fleet, and close to 90% of the coal power capacity that would require early retirement or repurposing to decarbonize the power sector is in low- and middle-income economies such as non-OECD countries, according to the World Bank.
The typical lifespan of coal plants globally can exceed 50 to 60 years, and the global average age of retirement for coal plants is 46 historically. But under the IEA's net-zero pathway scenario, the average age of retirement for coal plants in developing economies would be about 25.
One way for companies to understand their stranded asset exposure is to conduct a transition risk assessment that explores what risks or opportunities the company could encounter under different climate scenarios, such as if the world pursues net-zero emissions by 2050 or aims to limit global warming to 1.5 degrees C.
Out of the 245 power producers assessed globally in the 2022 CSA, 150 (61%) conduct transition risk assessments covering at least some of their value chain. However, that figure is lower in the countries that could face the greatest risk of coal generation stranded assets. Only 43% of utilities involved in power generation in non-OECD Asia-Pacific countries conduct transition risk assessments.
In comparison, 94% of utilities in OECD member countries in the Asia-Pacific region, 74% of utilities in North America, 69% of utilities in Europe, and 48% of utilities in Latin American countries conduct climate transition risk assessments.
Phasing out unabated coal power generation by 2040 also has implications for coal mining. In 2022, electricity and heat accounted for 65% of global coal consumption. But the low-carbon transition is expected to greatly diminish that demand for mined coal. Under energy model projections aligned with net-zero by S&P Commodity Insights, coal demand could shrink by more than half by 2050 from levels experienced in 2022.
Yet new coal mines are still in the pipeline, according to S&P Global Market Intelligence data. Of the 1,947 mines in the dataset, 533 (27%) are in some stage of development. Of the mines in this project pipeline, 112 are under construction, which is the final stage in the development process before a mine becomes operational. Cumulatively, the 533 mines under development around the world could result in a 24% global increase in coal reserves if they all become operational. Coal reserves are a measure of the amount of economically minable coal that currently exists in the ground at mining sites.
Of the projects under development, ones in the construction phase are the most likely to become operational. S&P Global data shows that 55% of all coal mines under construction are in non-OECD Asia-Pacific countries. The majority are in China, which has 47 mines under construction. As for other non-OECD Asia-Pacific countries, India has six mines under construction, Indonesia has five, Mongolia has two, and Pakistan and the Philippines each have one. Australia, which is an OECD member, has 14 mines under construction.
As for mines under construction in other regions, the US and Canada together have 14, Africa has 12, Europe has seven, and Latin America and the Caribbean have three.
The reserves statements — estimates of the amount of coal that could be extracted — of the mines under construction around the world represent 23.6 billion metric tons of coal. Coal emits roughly twice its weight in CO2 when burned, according to the US Environmental Protection Agency. That means the coal represented by mines under construction could generate almost 50 billion metric tons of emissions if extracted and burned. For context, the US emitted 4.9 billion metric tons of CO2 in 2022, according to the US Energy Information Administration.
Despite coal’s role in global warming, and the potential for new coal projects to become stranded as the global economy decarbonizes, financial institutions continue to enable coal development, according to the 2022 CSA. Only a small share of financial firms have strategies in place to phase out or limit exposure to coal. Some firms that have net-zero targets do not have policies that restrict coal financing, and where these policies do exist, they often do not cover the full gamut of financial support a firm offers.
CSA data shows that 22% of assessed financial institutions have a policy in place to restrict financing for coal and 4% do not currently finance coal. That means that while about 26% of firms are taking action on coal financing, nearly three-quarters of the financial sector in the CSA universe is not.
Of the institutions that do have coal-financing restrictions in place, many are not comprehensive enough to remove all sources of funding available and thus leave avenues for coal financing to continue. Financial support for a company involved in coal could come from a bank directly financing a project, but it could also come from general corporate financing through lines of credit or underwriting fixed-income issuance such as corporate bonds.
The majority of fossil fuel financing today occurs through general corporate finance rather than project financing. Between 2016 and 2022, nearly half of fossil fuel financing was in the form of underwriting as opposed to lending, according to the nongovernmental organization Global Energy Monitor.
However, CSA data shows that only 34% of coal-related restrictive policies apply to fixed-income underwriting. That compares to 81% of policies covering infrastructure or project finance, and 76% of policies covering credit lines and lending activities. In other words, many firms with these policies can still finance new coal power or coal mines by underwriting a client’s bonds or other fixed-income products that may ultimately go toward coal projects.
The nuances of financial institutions’ coal policies also matter. Some policies use relative thresholds to restrict a firm from financing, investing in or underwriting clients based on what percentage of the client’s revenue is associated with coal. Policies can also use absolute thresholds based on the amount of coal produced or coal-fired electricity generated.
But these absolute and relative threshold restrictions can fail to cover many coal companies. An analysis of financial institution responses in the 2022 CSA and business involvement screens of S&P Global Market Intelligence data shows that assessed financial institutions use a 28% relative threshold on average for coal mining revenues, even though 39% of companies active in coal mining fall below that threshold. An even bigger gap occurs for coal-power thresholds, which use a 36% share of revenue on average. That threshold covers less than a quarter of companies active in coal-fired generation.
As a result, diversified companies that might produce significant amounts of coal or coal-related emissions can still access financial support if coal accounts for a relatively small share of overall revenue.
Taken together, the coverage, restrictions, and thresholds of coal financing policies currently in force means that they are likely to be ineffective in slowing or stopping the financing of new or expanding coal assets.
As we look ahead, the commitment nations made at COP28 to transition away from fossil fuels paints a cautiously optimistic picture. The global shift away from coal, albeit gradual, is gaining momentum. Countries and institutions are increasingly recognizing the risks associated with coal investments, both in terms of climate impact and future financial viability. But big gaps remain when it comes to removing the sources of private funding for new coal investments.
Despite the agreement reached at COP28, the signals on the ground from individual countries, particularly developing economies, are not as loud. These countries face a higher likelihood of their coal investments turning into stranded assets. The global stocktake emphasis on phasing down coal may indicate that coal-related transition risks for companies and countries could be even greater going forward.
