Home > Economics - General, Environment > The end of coal

The end of coal

May 23rd, 2015

I have a piece in The Conversation, looking at the continued fall in Chinese demand for coal, and a highly relevant IMF study confirming previous findings that, even disregarding climate change, the health costs of burning coal make it more costly than renewables. So, the idea that the path to development lies through coal is a nonsense. The Chinese government has recognised this and acted, and the same will be true in India before too long.

I’ve reprinted over the fold.

Prospects for global energy markets have been reshaped by two recent pieces of news, one of which helps to explain the other. 
The first  is a report from the International Monetary Fund (IMF), estimating that global fossil fuel use is subsidised to the tune of $5.3 trillion a year (6.5 percent of global GDP). nThe second is the continuing decline in coal production and use in China, which began in 2014. 

To understand the link between the two, it is necessary to look at the way the IMF obtained its estimate.  In part, the estimate refers to subsidies in the traditional sense of the term: for example, policies that provide cheap cooking fuel to urban consumers in many developing countries. However, the majority of the estimated subsidy arises from a comparison between the actual price of fossil fuels and the price that would prevail if fossil fuel users were charged the full costs associated with fossil fuel use, including the costs of pollution, as well as being subject to general sales taxes like the GST.

Given this starting point, the IMF identifies four main forms of subsidy:
*  Traditional or ‘pre-tax’ subsidies, that is, publicly financed payments to producers or consumers of fossil fuels which lead to a gap between the cost of production and the market price
*   Subsidies to motorists arising when revenue from fuel taxes is less than the economic cost of providing (toll-free) road networks
*  The failure to tax appropriately the costs of ‘local’ air pollution, such as smog generated by cars and particulate air pollution from burning coal
*  The failure to tax appropriately the global climatic costs arising from carbon dioxide emissions

Of these subsidies, the costs of the first three are borne by the people of the country concerned, either as imposts on government budgets or in the form of adverse health effects from pollution, while the fourth cost is global. So, in a purely domestic political calculus, the first three kinds of cost must be weighed against the political benefits arising from cheaper fuel.

The striking finding of the IMF, echoing previous work by economists such as Muller, Robert Mendelsohn, and Nordhaus for the United States, is that the third category of costs, smog and particulates, is easily the largest. Within this category,  the biggest cost is due to particulate emissions from coal. 

It follows that, even disregarding impact of climate change, the costs of burning fossil fuels outweigh the benefits in many cases. So, a reduction in fossil fuel use, and particularly in coal use makes economic sense.
Nowhere is this more obvious than in China.  A densely populated country, heavily dependent on coal and with large numbers of inefficient and poorly maintained power plants, China has some of the worst urban air pollution in the world, estimated to kill more than half a million people a year

In an authoritarian regime like that of China, these costs could be disregarded as long as the needs of industry and the imperative of rapid growth were politically paramount.  On the other side of the coin, as soon as concerns about air pollution became pressing, the government has been able to impose changes that would have faced strong political resistance in a more democratic and less unitary system. These include closing down more than 1000 coal mines this year and shutting down all four coal-fired power stations supplying Beijing

The Australian government, and the political class remains in denial about these developments. The decline in Chinese coal demand is seen as a temporary aberration, with demand expected to keep growing well into the 2020s. And even when Chinese coal use finally turns down, the expectation is that India will take its place.

The logic of the IMF analysis says otherwise.  The unpriced costs of burning coal are just as high in Delhi as they are in Beijing, and the development of an urban middle class ensures that they will be taken into account. India is already taxing coal to promote the development of renewables.

The IMF analysis suggests that this is the right policy, but needs to be taken even further.  For the moment, the capacity to expand renewables is too limited to meet India’s growing demand for electricity, so coal use may continue to increase for some time. But the global experience of the boom in solar and wind power has shown that no constraint remains binding for long. In a few years, India’s aspirations to become a “renewables superpower” are likely to be realised.

What does this mean for Australia? Almost certainly, the coal boom that is now fading will never be repeated. For the future, it is our nearly unlimited capacity to generate wind and especially solar power that is likely to be our biggest energy asset.

Categories: Economics - General, Environment Tags:
  1. Quentin
    May 23rd, 2015 at 10:25 | #1

    And this is without the climate picture… Axa, biggest french insurer, thinks the same:

    http://www.bloomberg.com/news/articles/2015-05-22/fossil-fuel-divestment-picks-up-momentum-with-axa-selling-coal

  2. Chris O’Neill
    May 23rd, 2015 at 11:00 | #2

    The Chinese government has recognised this and acted

    and as your citation points out the Chinese government’s action included engineering declining economic growth.

  3. Hermit
    May 23rd, 2015 at 11:48 | #3

    If only this were true of Australia. This recent ABC piece opines that repeal of carbon tax is responsible for our increased coal burning
    http://www.abc.net.au/am/content/2015/s4229505.htm
    That’s despite a manufacturing slowdown and the closure of small plants like Anglesea. I think other key factors are reduced hydro post La Nina and fears of gas price escalation when Gladstone LNG export gets into full swing.

    World wide the International Energy Agency says coal will be the main source of electricity to 2040. By then or earlier most of our big coal fired baseload stations will need to be replaced, notably in the NSW Hunter Valley and Vic Latrobe Valley.

  4. Donald Oats
    May 23rd, 2015 at 16:05 | #4

    If you have money in a super fund, write to the directors and insist that they divest from coal and tar sands businesses, and from banks that loan money to these sorts of projects. Perhaps the directors will respond or perhaps not; in any case, they will have noted the concern and have it in their minds. As more news stories report on the active divestment movement and its increasing momentum, directors of super funds will need to consider their portfolios eventually, and shift away from areas supporting fossil fuel development.

    Lomborg and his ilk claim that poor countries need coal as a stepping-stone energy source; the reality is that in the longer run, many poor countries will be better off simply by-passing the coal stage which developed countries went through, and jumping straight to renewable energy sources like solar and wind. Why use yesterday’s fuel when technological advances make clean fuels quite accessible now?

  5. Chris O’Neill
    May 23rd, 2015 at 18:18 | #5

    says coal will be the main source of electricity to 2040. By then or earlier most of our big coal fired baseload stations will need to be replaced

    But they won’t need to be. That belief is based on the assumption that they would have been replaced by new coal-burning generators financed mainly by cheap loans. Those cheap loans are no longer available for most of the financing cost so the economic life span of existing baseload stations is now much longer than originally expected. Unfortunately the only thing that matters with existing coal-burners is the operating cost and that will be low for as long as there is no Carbon price.

  6. Brad
    May 23rd, 2015 at 19:43 | #6

    wind and especially solar power that is likely to be our biggest energy asset.

    But we can’t stick that on a ship to Japan. With our #2 export in structural decline, are we going to face big problems with declining foreign investment and our terms of trade? What will the impact be and how best to cope?

  7. Hermit
    May 24th, 2015 at 08:02 | #7

    It is a worry if geriatric coal stations are kept going longer than they should. It lead to a boiler explosion in WA
    http://en.wikipedia.org/wiki/Muja_Power_Station
    Units at Tarong in Qld were brought out of retirement after fixing some dodgy steam turbines…see Wiki article. At the same time Swanbank E gas fired station was retired because Stanwell Power said it was more profitable to sell their contracted gas than to make electricity.

    Alinta in SA have said they will retire the remaining Pt Augusta coal station by 2030. AGL say they won’t burn brown or black coal after 2050. If seems unlikely they would keep 1980s built plants going.

  8. jrkrdeau
    May 24th, 2015 at 09:10 | #8

    @Quentin
    Rather impressive video. Someone is thinking ahead but then that’s what an insurance company should do.

  9. James Wimberley
    May 24th, 2015 at 09:37 | #9

    The latest figures on Chinese coal consumption from the national statistics agency in fact show a sharper drop than earlier ones from other, less authoritative but still official sources.

    It is not a credible hypothesis that these figures are rigged to an extent that would falsify the trend. China isn’t the Soviet Union, but an oligarchic state capitalist régime that needs accurate statistics for policy. It is quite ruthless enough to ensure that managers don’t lie more than say American ones. Coal in particular is just about the easiest product in the economy to mensure. If the coal numbers are unreliable, then we don’t know anything at all about the Chinese economy.

  10. Chris O’Neill
    May 24th, 2015 at 13:32 | #10

    @Hermit

    It is a worry if geriatric coal stations are kept going longer than they should.

    Indeed it worries us but the operators don’t care much about us (or their workers), do they?

    It lead to a boiler explosion

    Piping actually which does make an economic difference to the extent that piping is much cheaper to replace than boilers.

    At the same time Swanbank E gas fired station was retired

    Indeed, for the same reason that Muja coal-burning units were re-commissioned, i.e. the price of gas has gone high so in the case of Muja it’s worth going back to coal.

    AGL say they won’t burn brown or black coal after 2050.

    I’m glad I’m not holding my breath waiting for that to happen.

  11. Hermit
    May 24th, 2015 at 14:26 | #11

    To get a visual on how utterly dependent we are upon coal power in late autumn see
    http://empowerme.org.au/market.html#
    Vic, NSW and Qld are the worst culprits. Somehow this has to be completely turned around before mid century not just for climate but also to replace clapped out power stations.

  12. Chris O’Neill
    May 24th, 2015 at 18:31 | #12

    @Hermit

    Vic, NSW and Qld are the worst culprits

    Victoria’s demand peaked out at about 6.3 GW while Queensland’s peaked out at about 7.1 GW.

    Queensland’s peak demand is higher than Victoria’s!?!?!?

  13. Hermit
    May 24th, 2015 at 18:42 | #13

    Qld still have their Boyne Island smelter Vic just closed down Point Henry. Brisbane is 20C time for the electric heaters in Melbourne that’s swimming weather.

  14. Peter Hannigan
    May 24th, 2015 at 22:18 | #14

    @Donald Oats
    You can see your point about not going through the same stepping stones as developed countries in action in telecommunications, with developing countries largely skipping fixed lines to go straight to mobiles – which have a cheaper and less demanding infrastructure to support them.

    In relation to energy it is not just a shift to renewables, but to decentralised generation. A national energy grid is expensive to set up and if a country already has problems maintaining these kinds of assets an approach that ditches them is preferable. Localised renewables fits this well, but not massive centralised generating projects.

  15. Ivor
    May 25th, 2015 at 13:29 | #15

    Is the end of coal, the start of hope?

    Hardly, the last two months CO2 data is available and the atmosphere is now permanently over 400 ppm and the inexorable climb continues completely unaffected by all the protests and cries of danger.

    ftp://aftp.cmdl.noaa.gov/products/trends/co2/co2_mm_mlo.txt

    If you chart the monthly data and set up a 12 month moving average trend line you will see that the trend is a solid continuous increase of 2 ppm per year.

    In 50 years CO2 will be 500 ppm.

  16. Tim Macknay
    May 25th, 2015 at 13:38 | #16

    @Ivor
    If you believe that CO2 from fossil fuel use is a major contributor to atmospheric CO2, then your last sentence will only be true if fossil use use continues in the same manner as the past for the next 35 years. So, to the extent that there are signs a global decline in coal consumption may occur, then yes, there is hope.

  17. Collin Street
    May 25th, 2015 at 15:41 | #17

    > Localised renewables fits this well, but not massive centralised generating projects.

    Sure. But massive centralised generating projects can support bigger graft margins.

  18. Ivor
    May 25th, 2015 at 18:39 | #18

    @Tim Macknay

    It seems to me that a decline in coal still means continuing use of coal. With population increase and Third World industrialisation – the 2ppm/yr trend must continue although it may stretch over 2 or three years.

    The data for the last 40 years shows there has been absolutely no impact on stemming the flow of CO2 into the atmosphere.

    Kyoto has had no beneficial impact whatsoever. It may be arguable that Kyoto etc at least prevented an acceleration in CO2 emissions.

    The data is clear, and the science is clear.

    I am not aware of any policy seeking or even conceiving of reducing CO2 concentrations below 300 ppm.

    So, unfortunately, constant warming is the only option although the rate my fluctuate.

  19. Chris O’Neill
    May 25th, 2015 at 21:55 | #19

    @Ivor

    constant warming is the only option although the rate my fluctuate

    Then it’s not constant.

    On the subject of warming rate, I expect that the GISSTemp May figure for global surface temperature anomaly will probably show statistically significant warming since the last few months of 1998 and the beginning of 1999. At present, it barely misses statistically significant warming since October 1998 with 0.110±0.111?/decade. http://www.skepticalscience.com/trend.php

    Of course, Berkeley and HADCRUT4 krig v2 and hybrid v2 have had statistically significant warming since the end of 1998 for some time now but the global warming denialists put a little more weight on GISSTemp.

  20. Ivor
    May 27th, 2015 at 09:46 | #20

    @Chris O’Neill

    You are playing word games.

    I assume you have not looked at the data. If you did you would see it is constant.

    The constant rate is the averaged rate which smooths out fluctuations. The constant rate is derived from the fluctuations.

    The slope of a constant rate may vary over different time periods.

    Not only that – even if the rate was constantly changing, say if the trend was exponential, it would still be correct to describe the data as constantly following a exponential trend.

  21. Chris O’Neill
    May 27th, 2015 at 21:18 | #21

    @Ivor

    No. Your language was sloppy and you didn’t bother defining your words. That’s not my fault.

  22. Collin Street
    May 27th, 2015 at 21:34 | #22

    > The slope of a constant rate may vary over different time periods.

    in what sense is a rate constant if it varies?

  23. Megan
    May 27th, 2015 at 23:34 | #23

    I’m not backing Ivor…., but let’s say your sales increase by 10% p.a. and it’s a seasonal business.

    You might get all or most of that 10% in a lump somewhere during the middle of the year. So the “slope” looks pretty sad from January to May and looks astronomical from April to July, but when it gets smoothed out when you look at the year as a whole it becomes a 10% slope.

    That might be what he’s saying.

Comments are closed.