Coal – dirt poor or filthy rich?

The German return to coal power is now official.

My grandmother’s house will be powered by a brand new coal power station for about 15 years, at least. And another station near Leipzig got a nod to continue on its merry way too. That’s the deal which Chancellor Angela Merkel reached with the state legislators this week.

There will also be large subsidies made available for coal power stations and regions reliant on them. I suppose it’s time to give back to the industry that powered Germany for so long. Reuters reports:

The affected states of Brandenburg, Saxony and Saxony-Anhalt in the east and North-Rhine Westphalia in the west will get up to 40 billion euros in compensation from Berlin. Affected companies will get 4.35 billion euros.

Shares in RWE, Germany’s largest operator of coal-fired power plants, rose as much as 3% to 30.3 euros on the news, their highest level since Sept. 25, 2014.

Climate change campaigners will be furious. And they’ll have to move camp too. The government agreed to preserve the forest they had occupied to protect it from mining.

Hambacher Forst became a symbol of climate change and environmentalism when it was threatened with being mined for its coal. But not any more. So the black stuff will just have to come from elsewhere instead.

35% of German coal imports are from Russia. And, presumably, the environmental campaigners and protesters will move there to stop it…

Before we continue, I’ve got a conflict of interest in all this. Not only will my grandmother get cheap coal power from a brand spanking new coal plant in what was recently voted the Greenest City in Europe. My ancestors were coal miners too.

A visit to my grandmother traditionally involves seeing two local landmarks. The Zeche and the Gasometer.

The first is a coal mine and production facility turned museum. The second is just what it sounds like if you don’t say it with a German accent, turned into a museum and art installation. It has a gigantic, and I’m talking gigantic, model of the earth floating in the humungous metal void that used to be full of gas. Projectors show clouds – or coal emissions, I can’t tell – floating above the continents.

So dirty power and I have a family history. And a future thanks to the recent German power deal.

But I haven’t invested in a coal stock. For those of you who read earlier Exponential Investor articles about Germany’s coal plant expansion, Uniper’s share price is up three and a half per cent on the recent news and remains up about 300% since its inception in 2016.

Not bad for spun off unwanted fossil fuel assets during a clamp down on emissions. But I’m not advocating you buy in, despite the recent news. There’s a better angle.

In Japan, the rollout of emissions-free oil is in the news. The last of four new refuelling stations is up and running. It’ll fuel the buses that’ll get lots of media attention during the Olympics.

For the sceptics amongst you, the energy used to make the emissions-free oil for these four stations is being offset with… a lot of spending on carbon offsets by Shell. So it is actually green. Sort of.

More than 100 emissions-free oil stations are now dotted around Japan and the number is growing rapidly. As is the number of buses using the stuff to move.

The constraint remains the same though. How do you produce the stuff? And how do you offset the carbon emissions of producing it?

Ironically enough, the Aussie company set to ship emissions-free oil to Japan in the future is burning coal to do it. And the ship that’s moving the emissions-free oil to Japan – the first of its kind – runs on diesel.

Which begs today’s question: what if carbon offsetting is the real boom in all this?

Think about it. All the pledges we’ve seen are about going carbon neutral. This involves a combination of green stuff and emissions offsetting for anything that isn’t green enough. The focus of investors seems to be on the former. But what about the latter?

I’ve criticised the Grubble plenty in the past – the Green Bubble. And carbon offsetting is part of that Grubble. But maybe that’s a mistake.

If green energy fails, will carbon offsetting become the investor paradise as a result?

If nations are compelled to go emissions neutral, but green energy doesn’t work out so well, then traditional energy combined with carbon offsets may be the way to go instead.

Solar and wind energy deliver disappointing and unreliable energy, in my view. They need backups. And those backups will need offsetting. The worse solar and wind perform, the more offsetting will be in demand.

So, perhaps a bet on carbon offsetting is the best way to bet on the Grubble. If Tokyo’s showpiece of emissions-free oil relies on carbon offsetting to work, that’s a rather big hint I’m on to something.

But it’s tough to profit from carbon offsets, as an investor. I’ve got our energy investing experts on the case though. More on that soon.

While Germany turns to coal, the EU has released the first information about its European Green Deal. The name refers to America’s New Deal, which took place during the Great Depression. During being the key word there – it didn’t end it.

The European Green Deal will be even less successful than the New Deal. In fact, it’s an attempt to clean up on past mistakes, much as US President Roosevelt’s Second New Deal had to be.

The EU’s plans may sound dramatic and novel, but they’re really just updates to existing emissions targets and initiatives, as well as plugging the hole in what’s called carbon leakage. Because the EU is harsh on emissions, companies just emitted elsewhere…

That’ll come to an end under the EU’s carbon border tax. The question is how. Will European firms move the rest of their activities abroad too?

Foreign governments certainly hope so. They see the EU’s carbon border tax as an attempt to make government policy outside the EU’s jurisdiction. A trade war like measure designed to bring companies back to Europe.

If climate change and green policies become part of the trade war, look out!

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Commodities

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