After a bit of prognosticating I am left with the strong view that Coal is going to get heaps more expensive within a decade.

The reason is simple arbitrage. Right now fuel for an oil fired (i.e. petrol/diesel) vehicle is roughly 8 times the cost of energy to equivalently propel an electric powered vehicle. This is a serious anomaly and the market narrows such anomalies.

The market will quite predictably respond to the anomaly by either making oil cheaper or electric power more expensive or both, so that the cost difference between these power sources is small.

The market will achieve this response by flooding the world with electric powered vehicles. This will drastically increase demand for coal (due to increased demand for generation) and thus raise the price of coal to perhaps 5 times present levels. Coal generators will go the full capacity 24/7 and this will see a big jump in generation in what are now considered the off-peak times.

We can expect that the coal demand will rise faster than the supply bottlenecks (new mines and export pathways, rail, ports etc). Current coal prices are only anomalous in that they are very cheap right now.

Once the coal’s “vehicle fuel price” is fully expressed, renewables will no longer suffer from being more expensive than coal.

So a rapid increase in coal demand could parodoxically pave the way for widespread renewable adoption. Our leaders will of course be caught “totally by surprise” by this.

I guess we should prepare for more blackouts and expect a serious hike in your electricity bills in the next decade. Those rooftop solar panels are going to come in handy for security of one’s personal electricity supply.

A pre-emptive worldwide depression could prevent such a hike in coal prices. Although on the flipside such a price hike will probably induce a depression. After the event the causal bi-directionality will probably be apparent.

I believe you haven’t considered three key factors. Remember the goal here is domestic decarbonisation.

Firstly the initial proposal was clear that the levy is not lost to the exporters, value is retained by them. The most sensible interpretation is that they get in return for the levy a saleable carbon credit equal to the value of the levy. The reason is simply that the levy is applied to a domestic activity that generates a valid carbon credit and it is central to the proposal that the government must ensure and warrant this. That credit can either be sold by the coal exporter with the coal to collect the proposed branding premium, or more likely separated and sold on some global carbon trading market. This is valid since it is above and beyond our mooted ETS and as Kyoto signatories we can trade on global carbon trading markets. There will not be the apocalyse you predict. The scheme does not require them to suffer any loss. Despite their overwhelming and unprecedented profits and great capacity to withstand significant impost they completely avoid any impost with this proposal.

Secondly we know that at 60% by 2050 Garnaut’s ETS is aiming too low. As such it is mandatory (meaning we have no choice but) to find a mechanism to do more to reduce emissions than the ETS. The scheme we are discussing related to exported coal seems perfect for the job of getting us the rest of the way while incurring no extra pain on the disadvantaged amongst us.

Thirdly, (on your final point) the mechanism you propose of government not funding building national infrastructure is a radical experiment. All precedent is to the contrary. All national infrastructure has historically been initially funded either completely or in majority by governments. This applies globally. The idea that for this most vital challenge we have ever faced we can throw away the only model (i.e. total government backing) that has ever succeeded seems very risky. The first lesson in risk management is only take one serious risk at a time. It looks like you are suggesting we take two big risks at once and I don’t think that is good policy.

I don’t suggest the government owns the infrastructure in the end. It merely provides enough seed funding (likely 50%) to ensure the project risk is low enough to get private funding for the remainder. The global credit crisis has seriously curbed the availability of project capital and so it will seriously hamper the availability of funds for these new and daring projects. It will be impossible to fund this without significant government underwriting. Those who tell you different are the ones who are dreaming.

Greens generally come across as fairly anti-corporate. This is understandable since corporate liability limiting has left a record of outrageous and destructive short sighted corporate behaviour. This makes it unusual that the Greens would be hands off and rely on corporates to follow the rules and get this right. Alarmingly at times they simply do not follow the rules. This is too critical a challenge to simply assume from here on the evidence of the past does not apply. Something about your final point just doesn’t sit right.

This can be overcome by government underwriting projects with actual funds, where the drawdown of those funds is contingent upon demonstrating proof of meeting target milestones. A loan guarantee fails to provide this progress mechanism. A loan guarantee is almost certainly a far more risky approach (with less control) for government than a fixed dollar commitment. Loan guarantees are nasty, nasty things.

Much research is being done on this at the moment, but you must create the charcoal by burning it. I’ve been playing with parabolic solar biochar machines with varying degrees of success. Basically a black pipe with concentrated solar energy on it, any plant waste as feed stock in one end, and biochar out the other. Sounds simple but getting the material to move through the pipe at the right speed, drive off the steam and char the material is proving problematic. I’m sure with a better budget, a few sensors and a responsive program, it is doable.

Anyway biochar has the potential to sequester millions of tons of carbon, and do it without limit. Exciting? Yes! Will it be done? Not without some political intestinal fortitude.

“… the spot price for thermal coal has surged to close to US$130 a tonne from around US$50 a tonne, delivering huge profits to the sector. Prices for coking coal, used in steel making, have risen even further, jumping from about US$80 a tonne to more than US$300 a tonne.”

Suppose for arguments sake we placed a levy of US$12 on a tonne of coal, this would be equivalent impact on profits to a price for thermal coal of US$108 a tonne and a price for coking coal of US$288 a tonne. The Australian Coal Association has a breakdown of Australia’s coal exports at:
http://www.australiancoal.com.au/exports0607.htm

According to the ACA figures, 245 Mt Australia exported of coal, of which 114 Mt was thermal coal and 134 Mt of metallurgical coal (which I guess is the same as, or similar to, coking coal). The ACA figures for the average prices are somewhat than the AFR figures. In any case, a $12 surcharge will lead to a small loss of profit, and possibly also small losses of competitiveness and reductions in supply especially of thermal coal (which is the idea of imposing a carbon price). How much a reduction in coal production you get will depend on the price-elasticity of coal supply.

What it will not lead to is our competitiveness flying out the window and the industry crashing. If the world coal price goes down, the $12 surcharge will have a greater impact on production, but the cost to the economy will be lower, because the coal will be worth less anyway. I suspect the coal industry will say that the industry will crash, but this is just the usual rent-seeking that you get from greenhouse gas intensive industries.

$12 per tonne is likely to be very low compared to a carbon price in a domestic ETS (if it is making anything like the reductions that we need to). We could reduce coal exports by imposing a price, or a cap-and-trade approach (where export permits would be auctioned, tradeable, but not interchangeable with with permits in the domestic ETS or anything else). A price (tax) would be simpler and probably preferable. The export permit price should eventually approach something similar to the domestic ETS price.

But your figures leave out an important number - the current price of thermal coal on inflated global markets is around $130. There is no way in the world the coal sector will wear a 10% levy on their exports. Just as you say the tax cuts are off limits as it ain’t gonna happen, I say to you you are dreaming if you think a levy of more than $1 a tonne (2% of the recent and more realistic long-term global price of $50) will fly.

If you whack a 10% surcharge on Australian coal, our competitiveness will fly out the window and the industry will crash nastily. We’d be better advised to close it down over time with regulation, which is what we feel is the appropriate method.

Estimates I’ve seen (I’ll try to find them), suggest if the cap is stringent enough, and 100% of permits auctioned, revenue from emissions could be well over $20 billion a year and rising as the cap gets tighter.

Finally, I’ve had this discussion with you and others on this blog before, but I simply don’t believe in the government having to step in and build the new infrastructure. If you’re talking about raising sums in the order of $100 billion, that can only be for literally rebuilding our infrastructure. I don’t think that’s good policy. far better to get the policy settings right to make it happen - through R&D&D, feed-ins, loan guarantees, pre-permitting, etc.

We export around 220 million tonnes per annum and rising. A levy “possibly even up in the hundred millions” suggest you have a levy of possibly $1 per tonne assuming you only meant to apply it to exported coal.

Each tonne of coal produces near enough to 3 tonnes CO2e. So this suggests the levy is a cost of 33 cents per tonne of CO2e. Thats not a realistic number for something intended to offset emissions.

If we accept a prevailing CO2e price of say $40/tonne then the coal levy would need to be $120/tonne to be equivalent. This wouldn’t fly obviously as it would be too shocking since its 100% of the prevailing price of metallurgical coal.

However 10% of this wouldn’t be unbearably shocking so we could start at $12/tonne coal in 2009. And we could increase this by $1/tonne per year, so by 2020 we are at $23/tonne levy. It is still woefully small to be funding the $40 per tonne CO2e offset but its a compromise.

Coal mining volumes will almost certainly increase as export bottlenecks disappear, indeed the industry projects a 50% increase in volumes by 2020. NSW is planning to double its export rate in very near term. But lets calculate on no volume increase for this purpose.

The total levy between 2009 and 2020 (i.e. 12 years) on this basis would be $46 billion all to be used for decarbonisation.

Put this together dollar for dollar with industry money for projects to building solar thermal plants and you have $92B sloshing about.

Now we are talking, this could really help to decarbonise our electricity generation by 2020 and allow more ETS revenues to be used for helping the disadvantaged by giving them free efficient fridges, lightbulbs, insulation and such.

This levy will have zero justifiable impact on domestic electricity prices, since it only applies to exported coal.

Rudds $31B tax in cuts you mention is specifically off limits for decarbonisation so sadly it can’t be counted, so I’m not sure why you included that. The $20B surplus is not available, its going to be conserved so it doesn’t count either. Personally I think that this is appalling and feel both should be applied to decarbonisation, but wishing is not reality. Its also exceedingly doubtful (since global warming predicts destabilisation) that military spending will be cut for the benefit of decarbonisation.

It’s also not fair to compare (as you appeared to) $31B tax cuts over several years to levy for one year, but I’ll let that slide.

I’m not up to speed, over what time period does the ETS generate tens of billions for decarbonisation?

The conception of a levy related to offsets is very different to a social levy. The above conception picks up a huge amount of cash from the coal exports not available from an ETS.

have you looked into biochar? Google it and give me your thoughts.

Thanks,
Tim

Re your latter point:

A reluctance to use a coal levy to fund implementation of renewables implies a surprising level of confidence that decarbonisation will be easy

It implies nothing of the sort, Gilbert. How did you come to that conclusion?

A levy on coal is likely to raise a goodly sum of money - possibly even up in the hundreds of millions. But, really, that is a drop in the ocean next to the tens of billions that will be raised by an effective emissions trading scheme, or next to the $31 billion earmarked for tax cuts, or next to the suggested $20 billion or so that may be surplus in the upcoming Budget. Or, indeed, next to the billions that could be found by cutting fossil fuel subsidies, cutting military spending, etc.

Saying that a coal levy could be used to fund Just Transitions as an elegant solution in no way suggests that we limit the sum of money being allocated to decarbonisation. Indeed, quite the opposite. It allocates the smallest source of funding to that aspect while the much much larger sources go to decarbonisation.

Further, along those lines, a coal levy as I see it would not be intended as a way to close down the coal sector. There is no way a levy would be an appropriate way of doing that. The levy would be a way of getting the corporations to contribute to Just Transitions (note, this is not wefare as it would come straight out of the companies’ pockets, not taxpayer funds) while regulation is used to progressively close off the industry and replace it with sustainable alternatives.

My mind boggled just a little at the comment. There are many unfilled vacancies in the mining industry and people are being pulled from other sectors and generously trained by the hiring mining companies. A coal miner would have a far superior resume as compared with other non-miners who are being brought in. Options are not limited, opportuny abounds.

We also have a massive skills shortage in the city based trades generally and one would expect the skills exercised in mining means miners would be able to move into those trades fairly easily and there are ample training schemes and encouragements for people to take up trades. Again options with existing schemes to support them.

The only basis I can imagine for them not leaving the industry is it may involve moving to another place to work. Thats a pretty thin excuse. Plenty of other Green ideas have a lot to say about where people should live and work for a sustainable future and coal miners should have no special status that says we’ll change the world just to suit them.

With the greatest respect the Greens party shouldn’t be advocating social welfare for high income coal miners.

And even if you offered them some new avenue where they didn’t need to move from home then it is an absolute certainty that the booming coal demand would ensure new workers immediately filled their places. In that case the “just transitions” scheme would have been premature and achieved nothing other than shifting deckchairs and subsidising a new industry with dubious optimisations (being coal miners dwelling preferences) at taxpayers expense. A dubious optimisation is millstone around the neck of an industry radically increasing its risk of failure.

A large coal levy would result in no sackings of coal miners. This is for the simple reason that the price of coal today minus the price of coal 2 years ago (when their job still existed) would be larger than the levy.

Given the coal boom I can’t see any link between a coal levy and job risk for miners for at least a decade. Pay to transition one, out and another will coal miner appear, like the head of Medusa.

A reluctance to use a coal levy to fund implementation of renewables implies a surprising level of confidence that decarbonisation will be easy. Tim, you don’t sound nearly worried enough about the scale of the challenge :)