Carbon Critical

September 30, 2021

COP26: Goodbye Coal, Hello Oil and Gas

A Chinese announcement made clear that coal power is finished. But there’s a way to go before the same can be said of oil and gas.

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With just six words, President Xi Jinping put another nail in coal’s coffin: “No more newbuild coal power projects abroad,” the Chinese leader told the UN General Assembly on September 21. While the details are still to be announced, this should put an end to 40 gigawatts’ worth of coal power plants that Chinese institutions had been planning to finance abroad. That’s equivalent to all the German coal plants put together.

This is very, very good news for the climate, and it comes a full month ahead of the COP26 conference in Glasgow. Climate diplomats should allow themselves a brief celebration, especially because Xi’s announcement followed pledges by the European Union and the United States to increase the climate aid they give to poorer countries. But the diplomats are a greedy bunch, for good reason: the idea of the 2015 Paris Agreement is that countries should raise their targets as soon as they hit them. As encouraging as it is for coal to be on the way out, there is a lot of work to do to make possible similar announcements on the other fossil fuels.

Even Dictators Have Limits

China’s pledge demonstrates the power of political leadership. Xi is forcing Chinese firms to forego short-term opportunity to secure long-term benefits for the planet (and boost Chinese diplomacy). For better or worse, whether he is speaking about ending freedom of speech in Hong Kong or coal financing in Indonesia, Xi’s word is law.

But even surprise announcements by dictators generally have to fall within the range of what the mainstream population is willing to contemplate, to fit in the “Overton Window.” The Chinese leader felt able to pull the plug on coal projects abroad because they are less useful and profitable than ever.

Coal power has been in terminal decline over the past half decade because it is generally cheaper to generate electricity from gas or renewables. A report by E3G, Ember, and Global Energy Monitor shows that 76 percent (in capacity terms) of the new coal power plants that were in planning as of 2015 have since been cancelled. In that same period, the researchers report, 44 countries have committed to “no new coal,” and many more have begun to phase out their existing coal plants; China intends to start reducing its gargantuan domestic consumption of coal from 2026. Xi’s finance announcement followed recent moves by South Korea and Japan to end public coal finance, and the advanced economies that constitute the G7 said in May 2021 that “international investments in unabated coal must stop now.”

So public finance for coal was drying up even before Xi’s announcement. The director of the International Renewable Energy Agency, Francesco La Camera, said in June that “we are far beyond the tipping point of coal,” citing new research showing that in much of the world it is actually cheaper to build new renewables than to keep existing coal plants running. Most Chinese-financed foreign coal power plants that had been announced since 2014 had already been cancelled anyway, according to the China Belt and Road Initiative Center. The fact that more and more insurance firms have been refusing to underwrite coal projects in recent years has made it easier for governments to give up on the dirtiest fossil fuel. And although private investors from the US and Japan have continued to provide major financing for coal, the environment is getting worse for them too: even the asset management giant Blackrock is making flimsy promises about coal divestment.

Basically, Xi was able to kill coal because it was already a dead man walking.

Again, this is not to say that the Chinese government doesn’t deserve credit for its decision. China could conceivably have kept financing coal despite the headwinds, perhaps to keep business interests happy and workers employed or to ensure that indebted developing countries owed Beijing a favor. Thanks to all these announcements on coal phase-outs, COP26 may well be the moment where coal is “consigned to history”—one of the key goals of the summit’s British hosts. But it will also be the conference where the uphill battle to phase out oil and gas first begins in earnest.

If Norway Won’t Stop Drilling…

COP26 in November will bring the official launch of the Beyond Oil and Gas Alliance. Members are expected to immediately stop giving permits for new oil and gas exploration and “restrict domestic oil and gas production in line with … Paris Agreement goals.” Denmark and Costa Rica, both climate leaders, are spearheading the initiative. Costa Rica has never extracted oil and wants to keep it that way. Denmark, the largest producer of oil in the EU, voted to stop granting licenses for new exploration in December 2020. 

Both countries want to get others to join before the formal announcement. In light of new academic research showing that the majority of oil and gas reserves must stay in the ground to limit warming to 1.5 degrees Celsius, it would be quite reasonable for leaders ostensibly committed to that goal to advocate a stop to new drilling. The International Energy Agency argues that there is no room for new investments in oil and gas if global emissions are to hit net-zero by 2050.

Still, getting others to join won’t be easy. One might think that, say, New Zealand would be a good candidate. In August, the country told Reuters it was “learning more about the initiative.” Prime Minister Jacinda Ardern says all the right things about climate protection, and her government took on the domestic fossil fuel industry with a surprise ban on new offshore oil and gas exploration in 2018. But that ban notably allowed new onshore drilling to continue, and so far there is no word that New Zealand will join the alliance, even though the oil and gas industry accounts for just 1.4 percent of the country’s GDP. If progressive, climate-conscious New Zealand isn’t on board with the Beyond Oil and Gas Alliance, it is doubtful that the Costa Rican and Danish diplomats will have wasted any time inviting their Russian or Saudi counterparts.

In short, political climate pledges operate within the bounds of economic reality. Denmark says its ban on new drilling will cost the government about $2 billion in revenue, a significant but manageable loss of short-term income. The United Kingdom and Norway, which each produce more than 10 times as much oil and gas as Denmark does, are not ready to stop the cash flowing. At the UN General Assembly in September UK Prime Minister Boris Johnson told the world to “grow up [on climate change],” but his government’s new North Sea strategy still allows for some new drilling. In Norway the Green party, which campaigned on calls for an immediate halt to new drilling and a complete stop of oil production by 2035, seriously underperformed in the September 2021 election. It will probably not be a part of the next governing coalition led by Jonas Gahr Støre of the Labor Party. “I believe that calling time on our oil and gas industry is the wrong industrial policy and the wrong climate policy,” Støre said as he cast his ballot.

Reducing Demand and Supply—Together

It is, then, not necessarily the absence of political will that inhibits pledges to stop drilling for oil and gas. It is the fact that the world still needs those fossil fuels for everyday life to a much greater extent than it does coal. That’s one reason why the White House national security adviser writes letters to OPEC asking them to pump more oil to keep it cheap; why the UK has to consider bailouts of gas-reliant firms when fossil gas prices spike ahead of a major climate conference; why, horrifyingly, G20 governments still spend hundreds of billions a year to subsidize oil and gas production. Humans must reduce demand for oil and gas to make tight restrictions on supply more feasible.

Fortunately, many jurisdictions are taking steps to weaken petroleum’s stranglehold on the world economy, raising carbon prices, rejecting new pipelines, and restricting future purchases of devices that drive demand for oil and gas, like gas furnaces and combustion-engine cars. Technological progress continues to reduce the cost of clean energy as well.

So, one day, at a future COP, the oil and gas industry will hopefully be weak enough that politicians beyond Costa Rica and Denmark can credibly commit to its planned obsolescence. For now, the attendees in Glasgow can celebrate the fact that King Coal’s long reign is coming to an end.

Noah J. Gordon is INTERNATIONALE POLITIK QUARTERLY’s climate columnist.

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