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The Outlook for Coal: Economics, Climate Policy, and Technology

March 24, 2010
Climate change policy is deemed to have a significant impact for the coal industry.  Coal accounts for 20% of global greenhouse gas emissions.  In 2007 Coal’s contribution to Australia’s net Greenhouse Gas Emisssions was 37%.  

A low-carbon future can be sometimes perceived in the public debate as precluding coal, for all but the most starry-eyed enthusiasts of clean-coal technology including Carbon Capture and Storage (CCS).  The Economist writes of  ‘the illusion of clean coal’.  Some have drawn parrallels between the coal industry lobby, and the tobacco industry in years prior to substantial regulatory and court action against it.

But what is the truth (in a non-philosophical way)?  Would an effective climate policy that meets objectives of the UNFCCC spell the beginning of the end for coal? Do economics and realpolitik assure its future?

Viewed through the lens of Australian interests, it is easy to see why there is concern if greenhouse gas abatement measures should impact coal demand.  Coal royalties contributed approximately $500m to the New South Wales State coffers directly through royalty payments in 2007-8 – about a doubling in revenue in just four years.  At year-end 2009 the royalty, following royalty rate increases of 1.2% and favourable market conditions, was due to reach $1.5 bn. 

The Australian Coal Association points out some further interesting statistics: that coal is the No.1 export earner at $55bn per annum, and supports 130,000 jobs directly and indirectly.  Australia has about 6% of the world’s recoverable coal resources.  It has over 100 open-cut and underground mines and produces over 400 Mt per annum. 

While Australia utilises a fairly significant proportion of recovered coal in coal-fired generators (63 Mt/annum), particularly brown coal (which doesn’t transport well), a large part of the overall demand is from overseas.  According to the ACA, more than half of production is sent overseas.  It goes on:

 Exports of black coal in 2007-08 totaled 252 Mt with a value of $24.4 billion comprising 137 Mt of coking coal valued at $16.0 billion and 115 Mt of thermal coal valued at $8.4 billion.  

 For calendar year 2008, 261 Mt was exported with a value of $46.6 billion – 135 Mt of coking coal valued at $32.3 billion and 126 Mt of thermal coal valued at $14.4 billion.  Preliminary figures for 2008-09 are 262 Mt valued at $54.6 billion – 125 Mt of coking coal valued at $36.7 billion and 136 Mt of thermal coal valued at $17.9 billion. ABARE has forecast that in 2009-10 the level of exports will remain about the same, but with a value returning to more like the 2007-08 level at $28.4 billion.

Coal is Australia’s largest commodity export representing 19% of the total value of goods and services exported in 2008-09 (p). Australia also remains the world’s largest exporter of coal with just over a quarter of total exports globally. In 2008 Australia exported just over half of the world’s coking (metallurgical) coal (52%) and 17% of its thermal coal. Coal was exported to 37 countries from Australia in 2008. Main destinations (and share of exports) were Japan (45%), South Korea (15%), the European Union (11%), Taiwan (10%) and India (9%).

 What is interesting about these end-markets is that China has been outside the top five export destinations for Australian coal.  However, in absolute and consumption growth terms China is far more significant. 

2008-2009 data from the ACA seems to support this, with China now edging ahead of both India and the EU as an Australian export market.

China is both the largest producer and consumer of coal in the world, and has the third-largest resources.

Coal Consumption of key export markets (historic and projected)

Source: EAI data

 China utilises coal for both industrial and power generation purposes, and coal accounts for over 70% of China’s total primary energy consumption.  China continues to shut down inefficient, dangerous, and polluting smaller mines, and transport bottlenecks and pricing means that there have been domestic shortages of thermal and coking coal.  Despite having increased production almost 3-fold in the last ten years to approximately 3 bn short tons per annum, China has become a net imporer and, in 2009, China imported over 100 Mt of coal.

The drivers for continued growth in demand don’t look like disappearing in a hurry – quite the opposite. 

The Energy Information Agency (EIA) points to continued importance of coal in power generation, both in relative and absolute terms.  There is approximately 600 GW of thermal installed capacity in China, with actual and projected power shortages driving further high installation growth rates.  In one year alone (2006), China installed a further 90GW of coal-fired power generation.

Power Generation by Fuel Type in China

Source: EIA

The following chart shows expected Non-OECD electricity generation by fuel, reflecting similar importance throughout emerging markets of coal as an energy resource:

Source: EIA

World electricity demand is projected to grow at 2.5% annually to 2030.  Over 80% of the growth takes place in non-OECD countries.  Globally, additions to power generation capacity totals 4800 GW by 2030 – almost five times the existing capacity of the U.S.  According to the IEA, 28% of the additions occur in China, and coal will actually increase its share of power generation – to 44% of total.

Not a week goes by without press reports of strategies to further invest in coal-fired generation – this week the Philipinnes and Russia.

What can we conclude from this? 

Irrespective of climate policy, it looks like the world is locked in to substantial high absolute levels and growth rates of coal-use.   This is driven by demand fundamentals:  it is a plentiful, cheap, energy feedstock for both industry and electricity generation.  GDP growth rates will continue to stoke demand for energy and materials.

To quote Wesley Snipes in the 1992 film ‘Passenger 57’:

Always bet on black

International climate policies do not look likely to significantly affect the outlook for consumption and demand  for coal in the near-term.

What can occur, however, is for the pattern of supply to change.  Patterns might change according to factors including transport and production costs, as well as new supply from other markets coming on-stream.  These factors can be influenced by Governmental climate policy.  The Australian coal industry is seeking equalisation payments should any emissions trading scheme (Carbon Pollution Reduction Scheme – CPRS) be brought in, so that international competitiveness is not lost. 

Australian Government Treasury modelling, in Chapter 6 of its report ‘Australia’s Low Pollution Future: The Economics of Climate Change Mitigation’ notes the relative decline in terms of trade caused by carbon pricing on coal mining.  Modelling outputs suggest a decline relative to the reference scenario of between -26 to -42% in gross output.  The impacts are greater if Carbon Capture and Storage (CCS) is not viable.  Interestingly, the report also attributes some loss of output to lower world demand – presumably resulting from international climate policies – ‘especially after 2025’.  This assumption relies on global carbon pricing being in place.

However, in Australia, as recent Coalition policy on parental leave corporate contributions demonstrates, and on which the Sydney Morning Herald so clearly reported, carbon pricing is just one of many conditions – and not necessarily the most influential – that impact operating costs. 

Australian companies are not the only ones being impacted by national policies and objectives – there are no perfect regulatory vacuums in which companies operate!  In China, after all, generators and mines are arbitrarily shut down by central Government edict.

Let’s hope that clean coal technologies, including Carbon Capture and Storage, work.  Otherwise, based on what seems to be an unavoidable trajectory of coal-use, there will be even more of a scramble to reduce emissions from other sectors in order to compensate in order to meet greenhouse gas stabilisation targets – or the risk of reaching dangerous anthropogenic change will be enhanced.

However, there is a potential driver for investment in abatement technology for those with an incentive to ensure the continued dominance of coal in power generation:  cold, hard cash.  CCS would enable continued markets for the raw commodity, and imply a valuable new technology and services market.

In the CCS roadmap, the IEA estimates that CCS investment requirement is 3% of the total low-carbon technology investment that is needed to achieve the BLUE Map scenario goal of halving CO2 emissions by 2050.  The additional cost of CCS is likely to amount to USD $350-400 bn per year by 2050, representing an additional cost (for thermal generation) of over 40%, with a cumulative cost of around $5 trillion.  CO2 transport and storage will add a further $0.6-1.6 trillion through 2050 (Note: it seems odd to be providing installed cost estimates without these two critical cost components.  It is like calculating project Levelised Electricity Cost without the grid connection cost component included – it adds up to pretty expensive Marginal Cost of Abatement of GHG emissions).  In the medium term (2030-2050) most of this investment must be in non-OECD countries.

This is quite a large potential export market. 

Last year we provided an overview of the status of some international CCS investment initiatives in this post

AEA Technology was commissioned by the British Government in 2008 to ascertain the market value of CCS to the UK economy – by geography and technology.  The report concludes that early demonstration plant implementation is critical in order for UK industry to benefit from technology and services sales – rapidly worth GBP 1.5 bn, up to GBP 3 bn in 2030 GVA.

If the market for coal is to continue to grow – as it seems – nations and industry clusters with vested interests will be keen to gain a march on the competition for this significant new global market.  This market will be driven, ironically, by the very same climate policy that could otherwise threaten the industry.

As such, it seems likely that Australian coal interests will continue to resist domestic measures so as not to threaten international trade competitiveness for local commodity extractors.  At the same time, successful technology development would assure continued international markets for the raw material (in case others regulate coal-fired generation and thereby squeeze demand) and possibly secure a new export market in technology. 

In order for the competitive advantage in technology and know-how to emerge for national industry clusters, and in the absence of a market mechanism (e.g emissions trading) which would incentivise these costly projects, cold, hard, public cash will be required – and is already forthcoming.  This is particularly critical in today’s economic climate, where corporations are far less inclined to take on technologically- and commercially-risky capital-intensive investments.  Projects have already been shelved. 

The Australian Government is putting its money where the ‘national interest’ lies: it is funding the Global Carbon Capture and Storage Institute, as well as the National Low Emissions Coal Initiative to the tune of $100m annually and $400m aggregate respectively.  The NLECI will be co-funding by Coal21 and State Governments, with a view to enhancing strategy and technology development.

 Under the NLECI, the Carbon Storage Taskforce delivered a report in September 2009 – the National Carbon Mapping and Infrastructure Plan.  The report is entirely Australia-focussed, with no view expressed as to technology commercial value as a driver.  However, the value proposition is implicit.  In December last year the Australian Government announced the commitment of a $120m funding tranche for feasibility work on four CCS projects.

The Queensland Government requirement that any new coal-fired generation should be ‘CCS-ready’ is an interesting development. 

Condoning further coal-fired generation in the hope that it might one day be retrofitted with CCS does not tally with the pressing need to find large, early cuts in greenhouse gas emissions.

 However, if no enabling market price incentive or regulation is forthcoming in major jurisdictions, then wide-spread deployment of technology may be very limited, given the additional retrofit and installation cost.  

Clean coal technology must first be proven to be commercially viable in technical, real-world, and economic perspectives.

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