Symbolic Climate Policies, part II: why exempt coal exports?

by

Whilst it is fairly clear that the current climate change policies of Australia and other countries will do next to nothing to avert climate change (see here for a latest update on the debate), there is a key element particular to Australia that has so far managed to stay off the political battleground: our coal exports.

Australia is the biggest coal exporter in the world, responsible for about a quarter of the world’s total coal exports. Australia’s coal production accounts for 6% of the world’s total coal production. We export roughly half of our production. Since coal is responsible for about 40% of the world’s total greenhouse gas emissions, Australia’s contribution to total greenhouse gasses is 2.5% just via coal alone, twice as much as the proportion of Australia’s total GDP to world GDP. Put simply, our coal exports alone account for about the same proportion of the World’s greenhouse gasses as the whole of the domestic economy accounts for world GDP. Yet coal exports account for no more than 3% of Australian GDP. By giving up 3% of our GDP we could thus `re-coup’ our whole domestic economy’s worth in terms of global production and global emissions. That puts the paltry 5% we have promised to reduce our own domestic emissions by into the shades (a target we are furthermore almost certain to fail).

The key question is why both Australia’s political parties have exempted coal from their discussions about climate change? Australia could at a stroke achieve far more world greenhouse gas reductions by halting its coal exports overnight than it could do with trying to become more energy efficient in the domestic economy.

There are several lines of defense that coal interests can and do use to keep it out of the debates. One is the economic theoretical argument that in an ideal world, one would want to punish the users of something that is bad, not the producers. Another is the argument that it would do much damage to our own economy, and there is finally the argument that if we wouldn’t dig up the coal and export it, then someone else would just dig theirs up faster. Let us take each of those arguments in turn.

In an ideal world where one can perfectly monitor and control everyone, it is almost immediate that one would not want to prevent production and export of coal, but rather tax or punish the person burning it since it is the person who burns it that receives the final benefit of the use of coal, not the producer.

Yet, we do not live in an ideal world. We cannot force the importers of coal to abide by the taxes we have in mind for them, nor can we even somewhat accurately monitor what they do with their coal if they would put their minds to the task of hiding it from us.

The situation one is then in, is rather like that of the production and use of cocaine. One can similarly argue that it is the user of cocaine who should be punished, but in reality this is too hard so the legal system punishes those it can somewhat more easily lay its hand on: the producers and traders in cocaine. Just as the drugs dealer can hide behind the excuse that it is ultimately his clients’ problem, so too can the coal producer hide behind the same argument. And in both cases, the reality is that we should put the enforcement effort on the person who produces the stuff for the simple reason that we can more easily punish the producer than the consumer. Australia in this regard is a bit like a rich drugs dealer who hides behind idealised economic theory to say it is not his problem if his clients are addicted to coal and he shouldn’t have to change his ways.

Then there is the question as to whether halting coal exports would seriously hurt the Australian economy. Here, the essential distinction is between short-run and long-run. There is no doubt that to halt 3% of our GDP constitutes a medium sized recession there and then. A political poisoned pill. The pain can be spread out over a few years, but a 3% reduction in GDP is painful in the short-run, no doubt about that.

In the long-run, probably the opposite is true: halting coal exports is most likely a long-term blessing. The main reason is that high mineral exports are hurting all the other sectors of our economy (including the export of education!) via an inflated exchange rate. The mining boom in the last few years has nearly doubled the value of the Australian dollar relative to the American dollar, and this is seriously hurting our manufacturing and service export industries. Australia’s future as a high-technology and high-skilled economy would be much safer if we weened ourselves off our mining incomes than if we remained dependent on it.

Moreover, choosing not to dig up the coal now doesn’t mean it cannot be dug up in some far future. We are thus essentially swapping income now for income in the far future, and probably at a much better price too since the price of fossil fuels can only be expected to rise rapidly in the coming decades. Hence, leaving the coal into the ground should be seen as a kind of Future Fund for next generations: we leave wealth in the ground that accumulates in value.

Then the question of whether others will take over from us in the export market for coal if we halt our own exports. Whilst there of course is the real possibility that other coal producers will get a short-term benefit if we leave market share to them (probably with an associate price increase too), the main point to make here is that we shouldn’t care about this. For one, it underscores the short-run versus long-run argument. More importantly, to be afraid that others step in should surely not be a reason in itself not to halt coal exports. To argue that we should pollute the planet because others would do it if we don’t, is like saying one should keep slave trading because others would if we don’t. If we feel it is truly morally just to do something, independent of what others do, then it should be irrelevant what others do. And of course, the world only has so much coal so if we don’t dig ours up there is less for the world as a whole to burn off.

Hence making a concerted effort to reduce our coal exports as a means of making an actual difference to the level of Greenhouse gas emissions in this world is sound from a second-best economic point of view, a long-term wealth point of view, and is impervious to trade equilibrium arguments. But it would mean short-run political pain so it won’t happen and we will be stuck with the symbolic policies we have at present. Nor do I personally think that any policies oriented around reducing our own energy use, or indirect energy use, are going to really do much to change the world’s climate. The only realistic options are to either adapt to the forecast climate changes or else embrace far more radical geo-engineering options.

14 Responses to "Symbolic Climate Policies, part II: why exempt coal exports?"
  1. Your argument is basically sound. Coal exports should be halted. Any ideas on how this might be achieved politically? It doesn’t necessarily follow “that any policies oriented around reducing our own energy use, or indirect energy use, are going to really do much to change the world’s climate”. I don’t know why you are willing to believe that geo-engineering will be less problematic or likely than adapting to lower energy use. As I have said before, energy for the past couple of decades has been so cheap that even rudimentary efficiencies based on existing technology haven’t been applied or even understood. The fact that I can hear burn-outs being done at 4am attests to how absurdly cheap energy is. We really haven’t even begun to pick the low hanging fruit.

  2. “We cannot force the importers of coal to abide by the taxes we have in mind for them”

    We could come pretty close by charging a higher price to countries that do not have an ETS or carbon tax in place. Sure, the countries that we charge the high price to might stop buying from us, but then your arguments 2 and 3 apply.
    I would think that implementing a two part pricing scheme in this manner would come close to implementing the first-best solution.

  3. There are many reasons not to tax coal on the production side –
    1. The consumer may not be emitting CO2. They might be turning the coal into, I dunno, plastic. Or they could be sequestering the emissions.
    2. The destination country may have its own taxes. That would result in double taxation.
    3. The recipient may be part of a cap and trade regime, and be well under their cap.
    That all means tracking downstream use and taxing accordingly, which is big administrative burden.
     
    In the long run I’m all in favour of taxing coal exports – or at least threatening to, but only as part of a concerted global effort to force trading partners to price carbon. Let’s get our own carbon pricing in place first.
     
    As for the argument that coal left in the ground becomes more valuable, that assumes the world-wide price of CO2 emissions doesn’t increase significantly. You’d be making a multi-billion dollar bet on a very shaky assumption.

  4. Michael,
    I fear coal is far too powerful politically to have much chance of being truly frustrated. One could start small with applying a special carbon tax on them (which would be a good idea on many other grounds too as it would be similar to the resource rent tax).
    The reason I bang on about geo-engineering is that one can have an effect as a group of countries without the consent or cooperation of other countries. That is crucial because with policies that need a world coalition the incentives to free-ride are just overwhelming. i will agree though that geo-engineering wouldnt be an easy sell within a country either, but one can start small and have study-groups on such matters with other countries. Essentially, I see hope in geo-engineering.
     
    Matt,
    most of your objections seem rather theoretical to me. Who sequesters their emission from coal? Coal is already the most beautiful sequestered form of carbon. One can almost define digging up coal as de-sequestration of carbon. Similarly, who has their own program? Even if they do, you can let the upstream countries react to this rather than take account of it yourself.
    You are of course right that there is uncertainty about future prices.
     
    Evan,
    yes, one could tax it. One could either not worry about what the receiving country does, or one could agree on some reciprocal arrangement whereby they would get a rebate if they can prove they tax it themselves.

  5. You need to read some of the basic literature on climate change Paul. It’s good to be novel but occasionally it is also worthwhile to show at least some element of basic understanding.

    Australia’s competition in the coal export market does not charge production-based carbon taxes. The effect of Australia doing so internationally would be to wipe out the Australian coal industry but to have almost zero effects on international emissions since there are many other suppliers.

    There would be a terms of trade effect that might reduce foreign coal consumption but this small effect would be offset at least in part by increases in supply of coal.

    When other countries all levy carbon taxes then we can switch to a production based tax. Until then doing so would be pointless And it is obviously better to tax consumption of carbon emissions.

    You are a bright guy Paul – why are you being so silly on this issue of climate policy? It’s fun being a contrarian but not if you are consistently wrong and misinformed.

  6. Harry,

    your points are all covered in the last paragraph of the blog, i.e. the equilibrium effects. All your possibilities, including full compensation by others are covered there. One of the main points to make even if world supply in the short-run is fully elastic (which it is of course not: the coal price has varied a lot the last 5 years) is that Australia has a lot of coal, which is hence taken out of the pool of possible emissions if we dont dig it up, whatever the competitors do.

    I have had more or less the same opinion about this stuff the last 4 years Harry, and blogged on it and the many scientific reports others have written. What I find odd is that people like yourself seem to have convinced themselves that obviously symbolic policies are going to make a difference. Its a raindance, Harry! What I do in the blog above is to scan the possibilities of things that would make more of a difference and the reasons we come up for not doing that. 

  7. I like your article Paul but you lost me at the last point about others just increasing their supply to offset our reduction.  You start by saying that:
    By giving up 3% of our GDP we could thus `re-coup’ our whole domestic economy’s worth in terms of global production and global emissions.
    But in noting that this might not change world coal production if others simply ramp up production in response to the higher price caused by Australia pulling out of the market, you say:
    More importantly, to be afraid that others step in should surely not be a reason in itself not to halt coal exports…If we feel it is truly morally just to do something, independent of what others do, then it should be irrelevant what others do
    In this case cutting coal exports would have little impact on global emissions but you say it can be justified on moral grounds.  But if we’re going to cut all of our exports then wouldn’t we want it to be more than a symbolic ‘moral’ stance that you argue against in the comment above?
    It seems to be an empirical question.  I would support your stance if cutting exports really did reduce world production, but wouldn’t if it didn’t.  The purely moral argument doesn’t cut it since there are ways (like carbon pricing) in which we can actually cut emissions as well as take the moral stance of taking action.

  8. Good to see the elephant’s presence in the room acknowledged. And thanks for some very useful statistics.
     
    Somewhat confused point of view though: ‘It’s morally wrong to export coal for global warming reasons and we should stop’. But you think the mitigation battle is lost, so we might as well go on doing it.
     
    You may be right eventually given the continuing lack of global political will, due to the fossil fuel industry’s power over politics and economics.
     
    But that’s not what the climate scientists are saying, nor what’s possible by migrating to renewable energy (including nuclear in some countries).
     
    We could decide to keep our coal in the ground, but only if the other coal exporting countries agree AND it’s done without disrupting electricity supply on which every major economy depends.
     
    I suggest that this elephant is going to be dealt with progressively as we build renewable energy power stations instead of coal fired ones. A process I would guess will take around 20 years at least.
     
    Let’s just hope that time lag doesn’t serve to fulfill your expectation.

  9. <blockquote>Moreover, choosing not to dig up the coal now doesn’t mean it cannot be dug up in some far future. We are thus essentially swapping income now for income in the far future, and probably at a much better price too since the price of fossil fuels can only be expected to rise rapidly in the coming decades. Hence, leaving the coal into the ground should be seen as a kind of Future Fund for next generations: we leave wealth in the ground that accumulates in value.</blockquote>
    Huh?  You are projecting that the net present value of leaving coal in the ground is higher than digging it up and selling it [i]at record high coal prices][/i]?
    Might I suggest that the market isn’t exactly convinced of that hypothesis.
    And, yes, as others have pointed out you’re essentially arguing that we should replace one “symbolic” gesture – a domestic carbon price – with a far more costly and even less useful one.
    Finally, the rest of the world that has acted substantially on CO2 emissions – Europe, California etc – has decided that consumption rather than production of fossil fuels is the best place to do the pricing.  Either, theoretically, will work.  So why should Australia unilaterally choose the other option, and make it harder to coordinate with the other jurisdictions that are attempting to act?
    And frankly, Australia doesn’t have or produce a lot of coal compared to the big producers – the USA, India, and China.  It’s just that, unlike those countries, we are big net exporters of coal. 

  10. RG,
     
    world coal supply elasticity is tricky. In the long-run the reaction to whatever we do has to be almost zero because there is a fixed amount of coal and hence no-one can dig ours up for us. In the medium term, estimates are between 0.4 and 2 (eg. Kohlstat and Rutherford 1999). Since you want the long-run supply reaction for this problem, the real question is not really what the international market does, but rather whether we would simply burn the coal ourselves that we don’t send abroad. That is entirely up to internal politics, i.e. under our control.
    you are right that I am indeed making the symbolic argument when saying that the reaction of others and what we do to ‘sho we care’ are disjoint, and you indeed right that I dont think that symbolism is actually worth anything in the climate debates. So i am arguing there from the point of view of those who say that we must do something that substantially reduces the emissions that arise from our decisions in the short-run (though if we indeed can promise we wont burn it until we found a way to do it without harm, then it does have a long-run impact too). I am hence arguing from a point of view of somewhat desperate to do something and then seeing whether the counter-arguments are valid, which they seem not. The agenda is to make the rain dancers realise what the formidable forces arrayed against them are and hence why the current climate change policies are indeed rain dances.
     
    Chris,
    I agree with you that I switch perspectives and that that can be confusing, i.e. I argue from a point of view I dont actually share in order to be able to ferret out what forces are aligned against that point of view.
    I will also agree that one can envisage a gradual switch from coal-fired to renewable (though we need many technological breakthroughs for that to be feasible, i.e. we need to work out how to efficiently store a whole lot of energy for when there is no sun or wind. Thats a very old problem). I cannot myself see it happen at the world level though: the incentives for some countries to free-ride on such efforts and simply use the cheapest energy available are just too overwhelming.
    Which brings us back to the question of what actually could make a difference….

  11. Couple of thoughts.

    Coal mining electorates are not necessarily marginal, but would become single issue over this.  Don’t think labor wants to hand over half a dozen or more seats that will be gone for the next generation.

    Not sure about the total emissions saving you estimate from the burning of our coal overseas.  I think your number is a bit high.  However by stopping mining you stop the fugitive emissions 1-2% of our national total and you also reduce electricity demand substantially and get the subsequent saving, probably another 2% of national emissions from the coal burned to provide the power to dig up more coal for other countries to burn….Quite a lot of the forecast demand growth is regional queensland is for coal mining expansion.

  12. Hi m,
     
    I was making the point that the 3% of world production that is made up of our exports would translate to 1.2% of world emissions under the stated estimate that coal is responsible for 40% of total global emissions (which I understand to include not just the emissions from burning the stuff but also the processes involved in it). 1.2% is also roughly the share of Australian GDP in world GDP. If there are better estimates around for the 3% and 40% then I will switch to those. They were the latest I could find.

  13. A basic error being made here.  Paul assumes that if Oz stops (taxes out of existence) that the consumers it was intended for will reduce their consumption by a like amount.  What bull****!. More Ozzy coal is shipped than from other sources because its the cheapest and also the closet to specific markets – attractive on 2 essential grounds.
    If we stop, the consumers will simply source from other suppliers, because the consumption is by a facility that takes decades to create, represents multi-billions in investment and cannot be tuned off overnight or even in year.  It may cost them more, but they won’t – if the customer nations are to achieve their own targets, cannot – stop, and the ultimate damage is to us, not the environment.
    Hypocracy is a mild description of this line of argument

%d bloggers like this:
PageLines