The Kyoto implications for coal: the new challenges

Australia, the largest exporter, supplied 92 Mt of metallurgical coal and 79 Mt of thermal coal in 1999 (total exports of 171 Mt). The FOB value of coal exports was about $A8.3 billion accounting for around 13% of Australia’s commodity exports (10% of total merchandise exports and 7.5% of total exports of goods and services). Australia delivers just under 50% of its total steam coal exports to Japan.

The circumstances of the coal industry in Australia, USA and Canada show a further difference: Australia exports about 75% of production while Canada’s coal industry is almost 90% export-focussed. The USA is the reverse with exports accounting for less than 8% of production in 1998, with a decline to around 5% in 1999.

Of the three major Annex B coal exporters, Australia is the most trade-exposed in terms of the Kyoto Protocol: highest thermal coal export tonnage – and Japan as a significant customer.

Indonesia has an impressive record of achievement – from a producer of less than 1.0 Mt of coal per annum at the beginning of the 1980s to a producer of about 70 Mt and exports of more than 50 Mt today. Like Australia, Indonesia exports are around 75% of total coal production. Some competitors differ: Colombia exports 88% of production, while RSA exports 30% of production. China places only a very small percentage of total coal production on the world market (around 3%), although this may have implications for foreign exchange and shipping/port activities in China.

The USA coal industry faces significant Kyoto adjustment costs – more than half (55%) of its electricity was generated from coal in 1998. Under Kyoto conditions, the DOE EIA modelling shows the collapse of the domestic coal industry. The USA Western coalfield (which is mainly sub-bituminous coal) carries the majority share of this burden – more than 75% of the reduction – but this is a key US low-sulphur coal source.

The EU-15 coal market is expected to continue to decline in the short-term as part of the adjustment process associated with the restructuring of the electricity sector as a competitive market.

EU-15 hard coal consumption in 1998 was around 250 Mt, down 100 Mt (over 28%) on the 1990 level of 350 Mt. "Local" production has declined at an even faster rate as imports have expanded rapidly under competitive market conditions. Demand for coal by the EU-15 steel industry – around 60 Mt per annum – could be "exported" to countries without Kyoto targets if the EU steel industry becomes less competitive under Kyoto

Japan is the world’s largest coal importer at about 130 Mt per year with half (65 Mt) destined for its steel industry. Like the EU, the Japanese steel industry will be vulnerable to lower cost steel production from countries not applying Kyoto conditions – and the related coal trade will move to the new (non-Annex B) source of the demand.

Conclusion

If the Kyoto Protocol is ratified and enters into force, significant costs will be imposed on coal – and the impact will not be trade-neutral. There is a dramatic variation in coal demand across both producer and consumer countries. The Kyoto outcome is very dependent on who ratifies – EU-15, Japan, USA – and technical innovations over the next two decades.

Competitive energy markets will be required to minimise the adverse impact of the changes and to create the incentive for technology-based least-cost solutions.

Renewable energy subsidies distort the market and reduce the opportunities for technological change and innovation for other fuel types under any system of GHG targets. Reserving a minimum market share (by government policy fiat) of electricity to be sourced from renewables – a renewables quota – is the most damaging of these subsidy arrangements.

Market quotas/shares create a class of suppliers dependent upon government protection – and undermine market efficiency and innovation.