This is the second in a two part series by Fergus Green, climate policy consultant and researcher, London School of Economics and Political Science and Richard Denniss, chief economist, The Australia Institute. Part one examined trends in coal demand; now the authors turn their attention to supply.
Like a good joke, the end of the coal age is all about timing. Even boosters of the coal industry now agree its demise is inevitable, but that concession relates only to the end result, not the speed with which it is pursued. The battle is about how long the endgame takes to play out, and the amount of coal that gets mined and burned in the process. This post explains the economic and political dynamics that complicate the coal endgame and sets out one key policy response that those fighting to preserve a liveable climate would be wise to promote.
In the simple version of economics, small climate policy steps, like carbon pricing, all other things being equal, take us gradually closer to the desired level of emissions reduction; higher carbon prices cause consumers to use a bit less energy and producers to invest a bit less in fossil fuels.
But other things don't always stay equal. The simple economic models used to shape climate policies are not nearly subtle enough to anticipate the likely response of the corporations and countries affected by those policies. What if, for example, the owners of billions of tonnes of coal, when they realised their 'resource' might be worthless in 20 years’ time, decided to dig it up and sell it faster than originally planned?
Since world leaders agreed to reduce emissions in 1992, world coal production has risen 50 per cent. Today, with the industry’s demise looking ever more likely, the pace of coal expansion is quickening. Australia and Indonesia, the two largest exporters, both plan to double coal exports in coming decades. Just one of the new mines, the Adani/Carmichael mine in Queensland's Galilee basin, is expected to produce more than 2 billion tonnes of thermal coal. The annual emissions from burning Carmichael’s coal will be greater than the annual emissions of Bangladesh’s 160 million residents.
This extraordinary expansion, in a market where demand for coal is now falling (see our last post) will, of course, further lower the (already low) price of coal.
This might, superficially, seem crazy — and, viewed collectively, it is. But at an individual level, it is entirely rational for the owners of coal to sell coal cheaply, flooding the world market, in anticipation of future carbon prices or regulations. Such behaviour is consistent with what economists call the 'green paradox'.
Luckily, an economically rational and politically expedient solution presents itself: in addition to regulating demand for fossil fuels (through carbon prices for example) we must also regulate the supply of coal.
One important supply-side policy has recently been called for by the President of Kiribati, Anote Tong: a global moratorium on the construction of new coal mines and mine extensions (not, as Malcolm Turnbull implied, a cessation of all coal mining). President Tong's call has already been supported by 11 other Pacific countries and voices as diverse as Lord Nicholas Stern, Naomi Klein, David Pocock, and Nobel Prize winning scientists.
President Tong recently wrote to all world leaders asking for their support. And this is where the proposal gets politically interesting. While small island states calling for deep climate action is not new, this particular measure creates new political and diplomatic alliances and fissures. [fold]
Whereas demand-side proposals to reduce emissions, such as emission reduction targets and carbon prices, unite coal industry participants in political opposition, a moratorium divides them according to their current market share and their enthusiasm for building new supply, within and across national borders.
The logic is straightforward. In the absence of a moratorium, the falling price of coal (as expanding suppliers flood the market) will impose significant costs on those who own, lend money to, work in, and receive tax revenue from existing mines. For example, controversial new mines in Australia’s Galilee basin and Liverpool plains will lead to job losses and mine closures not just in other parts of Australia, but in the US and other coal exporting countries such as Colombia and South Africa. These existing producers and their stakeholders would therefore benefit in the short term from the proposed moratorium.
The same economic logic explains why Glencore, for example, has spent two years calling on its rivals to reduce their output and why there are few, if any, US coal miners looking to expand.
Ultimately, the political economy of a moratorium means that it should be more likely to be adopted than big demand side measures that have been stalled for the last two decades.
While it is true that some developing countries — China and India, for example — may strongly oppose such a moratorium, it could be phased in, applying to developed countries first, or limited initially to new export coal mines. Moreover, international mechanisms could be developed that provide incentives for countries to lock away their fossil fuels early, for example, along the lines proposed recently by two Oxford economics professors, or by explicitly recognising commitments to keep fossil fuels underground as contributions to global mitigation efforts.
While simple moratoria are never as popular among economists as the creation of complicated new markets, they have a history of political and policy success. For example in Australia, asbestos is banned, some states ban uranium mining, and certain ozone-depleting gases are being phased out according to a legislated schedule. In 1989 the Australian Government was also instrumental in obtaining an international treaty-based moratorium on mining in Antarctica.
A moratorium on new coal mines is not the only thing that the world needs to tackle climate change. But there is no plausible scenario in which a world that is reducing greenhouse gas emissions needs more mines and lower coal prices.
It doesn't take a lot of economic modelling to explain that when you are in a hole, it makes sense to stop digging.
Richard Denniss’ recent lecture at the London School of Economics and Political Science, 'Export coal in a changing economic climate: The economics and politics of a moratorium on new coal mines', is available here.
Image courtesy of Flickr user Leeds Tidal
