Coal energy generates more electricity in the U.S. than any other source of energy, yet its future is as dark as a coalmine. Environmental regulations are raising costs for coal-powered plants, emissions are becoming a bigger problem both here and abroad, and China is looking to cap its use of coal in search of cleaner energy sources.  

Add it all up and the coal industry is hanging on by a thread. If recent industry predictions are true, it may be less than two years before coal consumption worldwide peaks and starts a downward trend that will eventually render the fuel obsolete.

2016 may be a peak for coal energy

A recent report by the Institute for Energy Economics and Financial Analysis (IEEFA) shows that China's coal usage may peak in 2016 and decline thereafter. That's a huge blow for the coal industry, which has relied on exports to China for demand as demand in the U.S. has waned.

The problem for the coal industry is that China has driven consumption growth over the past decade. You can see below that global coal consumption has grown but China has driven the market. Meanwhile, developed markets in the U.S. and Europe are using less coal than they were 10 years ago.

<a href="http://ycharts.com/indicators/world_coal_consumption/chart/"><img src="http://media.ycharts.com/charts/c9b598ad853e186d4f4259caf9ae5f86.png" alt="World Coal Consumption Chart" /></a><p style="font-size: 10px;"><a href="http://ycharts.com/indicators/world_coal_consumption">World Coal Consumption</a> data by <a href="http://ycharts.com">YCharts</a></p>

The reasons China is moving away from coal provide a more fundamental problem for the industry. The country's largest cities are covered in smog and it's starting to be a major health concern, leading to a move away from coal to cleaner sources of energy. Natural gas, solar, and wind energy are seen as better options than coal.

Economically, China is one of the biggest countries seeing major benefits from solar and wind energy, which are really where the country's future lies. It's both the largest manufacturer of solar and wind products in the world and the largest installer of solar and wind electricity  generation. That will continue as costs for both energy sources fall and become cheaper than new coal plants, something we're already seeing today.  

Coal energy stocks are off limits for investors

The coal industry has been struggling for years but if it's true that China's demand will peak in 2016 there's almost no hope of a recovery. Investors should be fleeing coal stocks if they haven't already.

You can see below that losses for Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI), and Alpha Natural Resources (NYSE:ANR) have been piling up for years. If things are getting worse there's almost no hope of a recovery. Even a massive consolidation, which has been happening for years, may leave only a few surviving companies and they'll be operating a diminished asset base. It's too risky for investors to try and bet which companies may make it when there are so many lucrative opportunities in the energy sector. 

<a href="http://ycharts.com/companies/BTU/chart/"><img src="http://media.ycharts.com/charts/e6c0c53427d84c9d3fa8546aabc56736.png" alt="BTU Net Income (TTM) Chart" /></a><p style="font-size: 10px;"><a href="http://ycharts.com/companies/BTU/net_income_ttm">BTU Net Income (TTM)</a> data by <a href="http://ycharts.com">YCharts</a></p>

The coal industry had well over a century dominating the U.S. electricity market but its days at the top are numbered. Before long, we could be saying the same thing for China and when that's the case the industry's days will be numbered. In fact, they might already be.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.