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Economics for Coal's Twilight Hours

In the final days of 2015, as severe air pollution grounded 227 planes at Beijing International Airport and forced children and the elderly to remain indoors, the Chinese National Energy Agency announced that it would approve no new coal mines for the next three years and shut 1,000 existing mines. Two weeks later, during Obama’s final State of the Union Address, the US President called for a “transition away from old, dirtier energy sources,” stating his intention “to change the way we manage our oil and coal resources so that they better reflect the costs they impose on taxpayers and our planet.” Following Obama’s address, the US Department of the Interior declared that it would immediately suspend the approval of all new coal leases for at least three years while conducting a full review of the federal coal program; the first in three decades. That the world’s two biggest economies now have moratoriums on new coal mines is perhaps a more powerful signal to the global economy that decarbonisation is imminent than even the historic document signed at COP21 in Paris, which failed to mention coal in the final text.

In the context of international and domestic policy debates, which have, for almost two decades now, fixated upon ameliorating global warming through demand-side economics, like a price on carbon emissions or targets for reductions, a moratorium is a refreshing and compelling strategy. It approaches the issue from the supply-side, regulating the amount of coal available to the market.

At the forefront of policy research into moratoria on new coal mines is the Canberra-based think-tank, the Australia Institute, whose Chief Economist Richard Denniss has written and presented widely on what he calls “the economic and political dynamics […] [of] the coal endgame.” Speaking in London he provided an analogy for the ‘Green Paradox’, which in part accounts for the glut in the market that has seen coal prices drop to a ten-year low: “If you owned a truck full of ice cream and the refrigerator broke, what would you do? You would drop the price and sell as much ice cream as you could.” This is precisely situation that today faces the coal industry as environmental legislation and as pressure from activist groups renders coal a stranded asset. Indeed, with the international community now committed to limiting global warming to 2oC, more than 80 per cent of the world’s known coal reserves are in effect ‘un-burnable’.

Yet, at the same time as international agreements set emission targets, the coal industry is ramping up production. There are more than 2,000 new coal mines projected since 2010 and total coal production is up 50 per cent since world leaders agreed upon the United Nations Framework Convention on Climate Change (UNFCCC) in 1992. Moreover, the world’s two biggest exporters of coal – Australia and Indonesia, which each control larger portions of the world coal market than Saudi Arabia does the oil market – plan to double their exports over the next decade.

It is worth pausing here on Australia, a particularly grievous case. Only weeks after the Federal Minister for the Environment Greg Hunt achieved his what he called his “deeply personal goal and commitment” of securing a strong agreement in Paris, he approved what will be the world’s largest coal mine in the Galilee Basin in Queensland; only one of several proposed mega-mines. It is predicted that the Adani-Carmichel mine alone will contribute more CO2 emissions than the city of New York and some entire countries, like Bangladesh with a population of 160 million. While this may seem blatant hypocrisy from the “best minister in the world” (as Hunt was recently christened in Dubai), Bill McKibben, the American environmentalist, has suggested a more charitable reading: Hunt may simply be caught in “a classic Augustinian trap,” or, as the Saint’s infamous prayer runs: “Please God, make me good – but not yet.”

Given, then, the economic incentives for an oversupply of coal at exactly the moment when global accords are making decisive efforts to curb emissions, a moratorium on new coal mines emerges as an apposite policy. In fact, stakeholders in existing coal mines would benefit from a moratorium, as it would prevent the market from being flooded by their competitors. While the Australian Prime Minister Malcolm Turnbull appears to have wilfully misunderstood this point by conflating it with a ban on all coal mines, the measure has received widespread support to-date, from, for instance from 11 Pacific Island Nations in the lead up to Paris, but also in the Australia media with 61 prominent Australians signing an open letter in the Sydney Morning Herald calling for exactly this measure, including Australian of the Year Fiona Stanley, outspoken footballer David Pocock, and Nobel Laureates Professor Peter Doherty and J.M. Coetzee.

If a global agreement in Paris was presaged by the historic US-China agreement, then we can only hope that the US-China coal moratoria will point the way to a global effort to regulate the supply of coal. To let global governments set targets without the measures to meet them, to let them simply pray like the juvenile Augustine “make me good, but not yet,” is not just irresponsible, it may mean leaving the problem until it is indeed too late.

Louis Klee is the Climate Change and Energy Security Fellow at Young Australians in International Affairs.

This article can be republished with attribution under a Creative Commons Licence. Please email with any questions or for more information.

Image Credit: Jeremy Buckingham (cropped) (Flickr: Creative Commons)

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