Monday, August 20, 2012

Using coal exports as a lever for climate action

Co-authored with Zane Alcorn. Originally published at RenewEconomy.

In the first part of this article, we provided evidence that suggests Australia’s current coal exports, and more so their projected doubling by 2020, is unlikely to be replaced by other international coal exporters, should Australia withdraw from the market.

We argued that restricting Australia’s coal exports could constrict the demand for coal – by pushing up the international market price. Our LNG exports could follow a similar path.

We drew on the report Laggard to Leader: How Australia can lead the world to zero carbon prosperity, published by climate and renewables think-tank Beyond Zero Emissions. The argument in that report is for a moratorium on increasing coal and LNG exports, and seeking agreements with other countries to begin phasing out those exports in tandem with deploying and developing renewable energy.

We can get a sense of just how much Australia can affect prices for these commodities, simply by looking at what the January 2011 Queensland floods did to coal prices. Around 34 per cent of Australia’s coal exports were affected (and Australia exports around 27 per cent of the world’s traded coal; that means there was a drop of nearly 10 per cent in traded coal).

While metallurgical (coking) coal prices spiked by as much as 150 per cent, “Thermal coal prices were also pushed up, with the benchmark price for thermal coal to Japan, Australia’s largest coal buyer, settled at a record $129.85 per tonne in April 2011.”

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So what can restricting Australia’s coal exports leverage, and how is the best way to do it?

Laggard to Leader suggests a process of “cooperative decarbonisation” to achieve these ends, not a unilateral phase-out without talking to our trading partners. To consider this in practical terms, it helps to know a little about the fossil fuel markets that Australia participates in.

Australia, as the report makes clear, is the world’s biggest coal exporter. Of course, most coal internationally is not traded, but is burned in the country where it is mined. But for some nations, coal is an essential import.

Japan is Australia’s biggest customer for coal. According to the Australian Coal Association, “Japan takes 39.3 per cent of Australia’s black coal exports – the largest share, with a total of 115.3 million tonnes exported last financial year.” Australia has a number of other significant customers, but none come close to Japan for quantity.

The figure for Japan here includes metallurgical coking coal for the steel industry, as well as thermal coal (for power generation). Beyond Zero Emissions will in the future launch a report on industrial processes, which will look at the issue of coking coal in more detail.

However, we already have research indicating what renewable energy technologies are best to supply the electricity of the future.

Japan’s 2011 thermal coal imports (for electricity generation) totalled 101,206,718 tonnes; Australian coal made up 66 per cent of that. Their next biggest supplier was Indonesia, who supplied 21 per cent.

Japan, having few energy resources on their own turf, import a lot of all fossil fuels (and uranium). LNG is one of their biggest sources of energy for electricity.

In 2011, Australia supplied 18 per cent of Japan’s LNG, just behind the top supplier, Malaysia (19 per cent). Since Japan switched off their nuclear plants following the Fukushima reactor disaster, Qatar (15 per cent) has overtaken Indonesia (12 per cent) who used to be in third place. LNG, rather than coal, is the main fuel being used to replace nuclear capacity at this stage.

According to the US Energy Information Agency, Japanese electric and gas companies and trading houses have signed contracts with various large LNG projects in Australia. Most significant is the Chevron-led Gorgon project, which will provide up to 2 Bcf/d (billions of cubic feet per day) of LNG to Asian markets by 2014. In 2012, Mitsui and Mitsubishi purchased a 15 percent stake in Australia’s Browse LNG project that will supply at least 1.6 Bcf/d of natural gas from the Browse Basin in Western Australia.

As we also outlined in the first part of this article, if Australia restricts and reduces its coal supply, other exporters are unlikely to be able to make up the shortfall. LNG markets are different to coal, but we can expect some similar dynamics. Australia is likely at current rates to grow to be the world’s largest LNG exporter by 2020.

Is there a risk from unilateral Australian action? Japan is a wealthy country, and one of the world’s manufacturing and engineering powerhouses. It would be great to see Japan become a renewable energy powerhouse too, but they face challenges getting there – not least, the transition away from their now-unpopular fleet of nuclear power plants.

If Australia were to simply withdraw supply of coal and gas, this could conceivably push Japan to switch back to prioritising its nuclear fleet – which is mostly still turned off, due to public pressure after the Fukushima meltdown.

Using nuclear capacity will keep carbon emissions down in the short term, but it may not help Japan to transition to truly clean renewable energy. Just as with coal in Australia, renewables must compete with established power sources, that have all the economic and political advantages of a long incumbency. Yet a transition to renewables in an economy as large as Japan would boost renewables worldwide.

There are some good initial signs. On July 1, Japan’s feed-in tariff for renewable energy came into effect. A feed-in tariff has been the most successful measure around the world, to date, for promoting the uptake and development of renewables.

Paul Gipe notes that “Japanese tariffs for solar PV are among the highest, if not the highest, in the world. Some suggest that the solar PV tariffs and the tariffs for wind energy are in fact unnecessarily high.”

The high coal and LNG prices that would follow an Australian cap and phasedown could also provide windfall profits to those industries in other major exporter countries – including Indonesia, Malaysia, South Africa, and so on. Would those windfall profits then be invested in developing renewables? There is no guarantee they will not be re-invested in expanding and entrenching the coal and gas industries.

With the latest dire climate science in mind, there should be no doubt that Australia must rapidly phase out its coal and gas exports. But acting unilaterally is not ideal. We don’t want perverse outcomes that further entrench the fossil fuel industry (perhaps including Australian-based mining companies) outside our borders.

We can talk to our trading partners and see what measures will bring others along with us. It might make our ride smoother as well as theirs.

Cooperative action
It would be great to co-operate with Japan by phasing out our coal exports in tandem with a program to develop the renewable resources to replace coal in both countries.

Our sunny solar resources in Australia would go well with Japan’s engineering and manufacturing capability in this project, and key technologies like solar-thermal power plants would become cheaper for all countries from the experience gained in such a partnership.

Indonesia and Malaysia might do very well initially, if coal and gas prices stay high (or increase). But climate change is going to be disastrous for these poor third-world nations. Wind power is already cheaper than using oil fuel, and Indonesia (last in the world for installed wind power) is now making a start to develop it.

Premium payments for what remaining coal and gas these countries export before they, too, phase out could be linked to implementing a transition to renewable energy. But making cheap renewable energy available will be essential.

Technology transfer and financial assistance would be consistent with principles of international justice: the accumulated carbon emissions by rich countries has denied poor nations the opportunity to develop with cheap fossil fuels. Making clean energy cheap for them is only fair.

Of course, this is only a hypothetical scenario, and only looking at our own region. It remains to be seen what will be negotiable with even the few countries mentioned.

Decisions by other market players further afield, like Russia and the Gulf states with gas, or USA and Colombia with coal, will also have effects that would need to be considered.

Such diplomacy can’t be planned too far in advance, any more than a game of chess; but we can familiarise ourselves with the board and the pieces in play.

But however these ideas are put into practice, the example thus set could spur other countries in other regions to take action as well. As we have pointed out, the political impact of a moratorium and co-operative phase-out could be even greater than the economic impact.

Climate change demands immediate action. As Laggard to Leader points out, if we are to have reasonable chances of salvaging an inhabitable climate, the whole world must begin rapidly reducing its emissions by 2015 – or 2020 at the very latest, for somewhat worse odds than the earlier date. Yet even 2020 is earlier than the current pace of UN negotiations is likely to achieve.

Australia can’t make emissions cuts for the rest of the world, nor can we easily force the UN process to agree to such a plan in time, simply by participating in the worldwide negotiations.

Indeed, it would be unusual for a country to take a position to such negotiations that is better than their own domestic policy already enacted.

But by seizing the initiative, Australia could set some important decarbonisation plans in train, and hopefully give new life to the UN process. As we have demonstrated, Australia has a unique position in the global fossil fuel markets.

This position carries sufficient weight to leverage some steps toward decarbonisation that will be both effective, and mutually beneficial to the nations involved – without damaging, and more likely helping, the broader UN process.

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