Session 14: Financial and fiscal support for fossil fuel supply
Moderator: Ron Steenblik
Who is financing coal mining?
Aaron Atteridge, James Phare, Fabio Sikanski, Jesse Burton
The growing movement of international financial institutions announcing divestment from coal assets suggests there has been a rapid shift in the finance sector's perception of coal. Yet at the same time, coal production continues at record high levels, and new mines are being planned and developed. So if some of the big institutions are divesting, who is financing coal mining? In this paper we reveal the financial institutions and investors providing both debt and equity finance to coal mining projects in South Africa, Colombia and Indonesia. We present analysis of the complicated legal ownership structures of coal mines, their capital structure, which banks have been involved as direct lenders to miners or as book-runners and under-writers for bond issues, and who is buying the securities. Data comes from the Thomson Reuters database, Yahoo Finance, and several other commercial databases of financial transactions globally. As a conference presentation, we will show examples using the visualisation platform developed specifically for exploring the complicated web that companies are using to set up and fund mining projects. To this picture, we also add insights from interviews with local finance institutions in South Africa and Colombia, to understand the nature of their relationship with coal mining, their perspectives on investment going forward, and what they see as future financial challenges for coal miners. This work has a significant contribution to make to discussion about tackling the supply of fossil fuels sector globally, by bringing into the light and better understanding a set of actors that are key to whether mining continues or not.
Divestment prevails over the green paradox when anticipating strong future climate policies
Nico Bauer, Christophe McGlade, Jérôme Hilaire, Paul Ekins
Fossil fuel market dynamics will have a significant impact on the effectiveness of climate policies. Both fossil fuel owners and investors in fossil fuel infrastructure are sensitive to climate policies that threaten their natural resource endowments and production capacities, which will consequently affect their near-term behaviour. Although weak in near-term policy commitments, the Paris Agreement on climate signalled strong ambitions in climate change stabilization. Many studies emphasize that the 2 °C target can still be achieved even if strong climate policies are delayed until 2030.
However, sudden implementation will have severe consequences for fossil fuel markets and beyond and these studies ignore the anticipation effects of owners and investors. Here we use two energy–economy models to study the collective influence of the two central but opposing anticipation arguments, the green paradox and the divestment effect, which have, to date, been discussed only separately. For a wide range of future climate policies, we find that anticipation effects, on balance, reduce CO2 emissions during the implementation lag. This is because of strong divestment in coal power plants starting ten years ahead of policy implementation. The green paradox effect is identified, but is small under reasonable assumptions.
Are fiscal incentives for the oil business in Brazil really necessary?
Patricia Pedra, Alexandre Szklo
From an economic, social and environmental perspective, it is worthwhile to assess if oil rents from petroleum production in the Brazilian pre-salt fields are being appropriately perceived by the State, given the current long-lasting fiscal incentives to the industry in Brazil. Crude oil accounts for 40% of the country´s primary energy consumption, and is key to its trade balance (e.g., the third export good in value in 2017). After the discovery of the oil province called pre-salt, the Brazilian government expanded to 2040 and deepened the terms of the special tax regime called Repetro that provides tax exemptions to the oil industry. However, in the light of an economic recession allied with increasing social problems and commitments to a low carbon world, the question that arises is weather these fiscal incentives are truly needed to make pre-salt projects economic attractive. By evaluating pre-salt fields, this study shows that, for some fields, fiscal incentives are not necessary, being, then, hidden subsidies. The IRR of these fields can reach 20-28% p.a., without Repetro. Besides, when the learning process that is happening in pre-salt is considered, IRR becomes even bigger, highlighting that projects over 2,000 mln barrels can be feasible without Repetro.
Stranded Assets, Carbon Risks, and Coal Mines in Indonesia
Sonny Mumbunan, Christian Silangen and Agus Sari
Coal mines are prone to stranded assets, whereby coal reserves suffer from a loss in value or turn into liabilities because of risks that are related to carbon emissions and climate change. This paper applies a cash cost approach and estimates the value of the stranded assets of Indonesia’s coal industry ‒ one of the world’s leading coal producers. It attempts to reflect the findings for (a) an increase in domestic coal consumption in response to declining international prices; (b) coal revenues captured by the state; and (c) the country’s contribution to reducing carbon emissions. This paper argues that coal reserves might not be directly stranded in spite of the presence of carbon risks, and therefore offers another perspective in the literature of stranded assets for fossil fuels context. It also views with reservation, the fall in coal revenues as a result of stranded assets. Further, in coping with stranded coal assets, the paper maintains that the intended carbon emissions reductions in the energy sector renders some inconsistency to the intention.