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

(cross-posted at Core-econ)

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.

This entry was posted in Uncategorized. Bookmark the permalink.

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

  1. Pedro says:

    “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.”

    I guess you are thinking that in that far future fossil fuels won’t have been superceded by renewables and the AGW theory will have been disproved. ;-)

  2. Incurious and Unread says:

    Paul,

    Your calculations are incorrect. If Australia produces 6% of the world coal and exports half then that is 3% of world coal or 1.2% of CO2 emissions (not 2.5%). Since the non-exported coal is, presumably, burnt in Australia, that also accounts for around 1.2%.

    So, banning coal exports would, at best, be no more effective in carbon mitigation than switching domestic energy production away from coal: which is what a carbon tax, in time, will effect. In practice, an export ban is likely to be substantially less effective, since much of the withdrawn Australian exports will simply be replaced by coal production from elsewhere.

    There might be strong moral arguments for banning coal production, but I’m not sure that there are strong economic ones.

  3. wizofaus says:

    Actually Pedro there’s pretty solid reasons to think coal will still be a valuable fuel in 50-100 years time, and it’s not unreasonable to believe we’ll have worked out how to deal better with the externalities of burning it far better by then.

    Paul, while it doesn’t seem likely there’s much political chance of getting the export of coal forcibly phased out anytime soon, presumably there has been some discussion of the need for/effectiveness of applying a carbon price to coal shipped to countries that do not have one?

  4. Fyodor says:

    Paul, have you actually studied economics? Properly, I mean, not econometrics, or economics for Arts students.

    Serious question.

  5. wizofaus says:

    I&U I don’t think they’re incorrect as such – “2.5%” should have been “2.4%” yes, but he made it clear this applied to all the coal we produce, half of which we burn here and half of which we export, and that the emissions savings from stopping exports would be equivalent to what we currently produce domestically. So the question is whether we can cut our domestic emissions to 0 at a cost of less than 3% of GDP…well it may be possible in principle, but I’d suggest not with current technology.

  6. Paul Frijters says:

    wizofaus,

    yes, I believe there has been a lot of discussions behind the scenes but not much in the public sphere. One can think of whole systems of taxing coal before it is sent overseas and then to have further upstream users being able to claim back the tax when they sell it onto others again who pay into the tax. The analogy to think of is GST. However, it would be very hard to implement and of course would still amount to an export tax.

  7. Richard Tsukamasa Green says:

    I don’t feel qualified to remark on the efficacy of the approach compared to the proposed scheme, although I would note that there may be a complicating factor in the possible substitution from other sources. Were black coal exported to (say) China was replaced with brown coal mined domestically the substitution could result in higher emissions. That said, I understand that the coal exported to China is mainly coking coal that cannot be substituted with brown coal.

    I largely agree with you Paul in regards to the ethics of exporting. At the very least there’s an obligation not to actively increase production through government action, i.e by subsidizing coal loaders, infrastructure and exploration. There’s a strong case for preventing new permits and hoping that grandfathered leases run out quicker than expected.

    I grew up (and my heart still lies) in the Lower Hunter, where misgivings about coal exportation is much higher than I have seen or heard elsewhere[fn1]. Partially this is just direct exposure to other externalities. I spent great parts of my life waiting at level crossings whilst a 2km train slowly trundled past; being careful not to go near the subsided mine near my first house (something warned about constantly in public service announcements on TV); hearing the eerie wheedling noise of coal loaders at 3am near my second home. Spats between farmers, vineyards, tourism operators, horse breeders and the industry are visible in a way that is entirely absent in the metro media where coverage is dominated by share price performance.That is coupled to the fact that in 22 years I only knew two people who had a family member in the industry. exposure to the explicit costs of the industry make you more primed to accept the abstract ethical costs.
    The benefits, despite exposure, remain abstract. I guess that’s why a firm like Coal and Allied feels compelled to sponsor the NRL team – a need to market the abstract benefits to voters who are all too aware of the explicit costs. That’s also presumably why a miner like Nathan Tinkler needs to expend money buying the team in the hope that an otherwise unpopular coal loader will be approved.

    It’s a pity that this exposure (which I think is also present in the Southern Highlands) isn’t more widely available, we might have media coverage that wasn’t just stock price cheerleading.

    [fn1] There’s also polling that supports this, but the sample sizes are far too small.

  8. . says:

    Then there is the question as to whether halting coal exports would seriously hurt the Australian economy.

    Not the university sector, everywhere else, yes.

    There is a simple solution to this crap. Liberalise the nuclear industry and export uranium. Australia could earn carbon credits meant for poorer countries.

  9. Nicholas Gruen says:

    Fyodor,

    Paul is a Professor of Economics at UQ. He’s a serious person, not a blow in with more time on his hands than he knows what to do with.

  10. . says:

    He’s a serious person not a blow in with more time on his hands than he knows what to do with.

    Oh really?

    Then there is the question as to whether halting coal exports would seriously hurt the Australian economy.

  11. . says:

    The Minerals Council commissioned a report that said shutting down the coal industry would cost 200 000 jobs, $36 bn in GDP and take away 6% of Federal revenue.

    Nic are you taking the piss when you imply I’m “not a serious person” for questioning the sanity of such a lunatic decision?

  12. wizofaus says:

    “.”, are you the same person that once claimed that the “simple solution” to CO2 abatement was just planting lots of trees, by any chance?

  13. . says:

    The all up cost of a tree is 45 cents.

    You’re smart, tell me how much we can abate with the money spent on solar subsidies and direct action being spent on planting trees. Tell me how they compare on abatement per tonne on a dollar for dollar basis.

    You seem to have fallen in love with overly complicated, expensive programmes that deliver infra-marginal benefits.

  14. wizofaus says:

    I suspect you might also be the same person that once claimed that all land ownership should be private. I do wonder then where exactly we’re going to plant all these trees (and ensure they never get cut down) at 45c a pop, including ensuring that we are actually planting the right sort of tree in the right sort of soil and accurately measuring the degree to which the result is actually an effective carbon sink.

  15. . says:

    The 45c a pop costs that. It also considers that trees do get chopped down.

    Yes, land ownership should be private.

    The rest of the assumptions you can pick and choose. Just tell me if it’s more or less wasteful than ‘direct action’ or the MRET.

  16. Incurious and Unread says:

    Wizofaus,

    “So the question is whether we can cut our domestic emissions to 0 at a cost of less than 3% of GDP”

    Agreed. Now electricity generation currently represents around 1% of GDP. So its cost would need to increase by a factor of 4 to have a 3% of GDP impact.

    Furthermore, the figures are comparable only if international coal supply were perfectly inelastic. Obviously it is not. If coal supply were perfectly elastic (in the long run) then banning Aussie coal exports would have no long term effect whatsoever. The truth will lie somewhere between these two extremes.

    No serious assessment of banning coal exports can ignore this coal supply issue. Paul gets around this by waving his hands a bit and talking about slave trading.

  17. Paul Frijters says:

    Mr Unread,

    the post already talks about the elasticity issue in the last item where I say what you say in another way.

    As to your implicit suggestion that cutting off electricity in this country entirely would only have an effect equal to its current revenue: the current return to a production input is not the same as the effect of removing an input entirely (prices reflect the margin, not the average). Since electricity is a complement to other production inputs, the effects of cutting off domestic electricity will be far higher than 1%. The same is not true for coal exports since coal exports are not a clear complement to anything we do here in Australia. Rather, coal exports are substitutes for other exports, which is why I argue the long-term economic impact is much rosier than the short-term one.

    What were you saying about serious?

  18. conrad says:

    “Actually Pedro there’s pretty solid reasons to think coal will still be a valuable fuel in 50-100 years time, and it’s not unreasonable to believe we’ll have worked out how to deal better with the externalities of burning it far better by then.”

    I can’t see why that would be — to me Australia’s reliance on coal exports is one of the most risky things we do. For example, how long will it be until nuclear fusion gets here (there are already prototype reactors) or when will solars cells and other types of renewable energy become cheaper than coal? I can’t answer those questions, but given humans are fairly ingenious when it comes to making things that make large amounts of money, I can see no reason that fusion wont get here sooner rather than later and nor can I see any reason why the progress in alternative technology will stop. This of course doesn’t mean that people will stop using coal for 50 years, since power plants are very expensive after all and presumably some will just get used until long past their use-by date, but once demands starts decreasing for coal with similar production levels, it will be worth didleys.

  19. wizofaus says:

    Well sure, if fusion gets here, all bets are off. But I’d be surprised if our love affair with hydrocarbons will be quite done with by the middle of the century.

  20. Pedro says:

    “Actually Pedro there’s pretty solid reasons to think coal will still be a valuable fuel in 50-100 years time, and it’s not unreasonable to believe we’ll have worked out how to deal better with the externalities of burning it far better by then.”

    Only if you think they won’t have been superseded by the renewables nirvana Dr Brown and Mrs Milne assure us is coming. I reckon it is pretty unlikely that fossil fuels will be nearly important in 100 years irrespective of arguments about AGW.

    Conrad, we don’t “rely” on coal exports, it just happens to be valuable at the moment but it is still only a small percent of GDP. Without those exports we’d be less wealthy. I guess you might not much mind that, but I reckon it is ordinary to wish it on other people to satisfy your ideas of a moral world.

    But lets get back to the original moral argument, because that is what we are having when all agree that the reduction in Oz exports or the introduction of the new tax won’t actually affect the climate. Paul’s suggestion is that we keep using coal ourselves but we make others pure by not selling them any. At least, I assume our use continues. I doubt Paul thinks that particular 6% of GDP can be cancelled without a lot more than a recession.

    Electricity might be a relatively small part of GDP, but it has big effects on the rest if you turn it off. The GDP contribution from my office would immediately vanish.

  21. conrad says:

    “I guess you might not much mind that, but I reckon it is ordinary to wish it on other people to satisfy your ideas of a moral world”

    Did I say anything about that are you just assuming a bipolar libertarian vs. others world here? My point is that it’s a risky reliance — here one day and gone the next. In addition, things like Paul’s arguments above have nothing to do with morals.

  22. Incurious and Unread says:

    Pedro,

    “Electricity might be a relatively small part of GDP, but it has big effects on the rest if you turn it off. The GDP contribution from my office would immediately vanish.”

    To be clear, I wasn’t suggesting turning the electricity off, but over time replacing coal-fired generation, as the ETS is designed to do. I don’t think anyone but Paul is suggesting that we might switch off coal exports or coal-fired generation tomorrow.

    Cold turkey might work for drug use, but it is a pretty unhelpful way to manage an economy.

  23. wizofaus says:

    Paul did make a moral argument though, and I think Pedro’s cricitism is correct -it would certainly be immoral for us to continue using coal at the same rate while insisting the rest of the world would have to find (more expensive) alternatives.
    But it seems to me that whatever steps we take towards decarbonising our own electricity supply have to go hand-in-hand with a gradual phase out of shipping coal to countries that are burning it with no attempt to account for the externalities.

  24. . says:

    The only moral alternative is to liberalise nuclear then, and use and export uranium and thorium.

  25. wizofaus says:

    I’d hardly say it was the *only* moral alternative, but yes, if we’re talking morals, it’s hard to see how anybody could argue that coal power is anything other than a less moral alternative than nuclear. But it would be equally immoral to ignore lessons learnt from incidents such as Fukushima and allow nuclear plants to be built that were susceptible to rare but potentially devastating catastrophes (the inevitable consequence of a completely liberalised nuclear industry, not that anybody is going to take such a suggestion seriously anyway).

  26. KB Keynes says:

    why exempt coal exports?

    Pretty easy. exports have an effect where?

    coal exports will fall over time as other countries eventually reduce their demand unless some way can be found to ‘clean it up’.

    There are some very good reasons why the nuclear industry is so regulated. I can’t see that being changed in any democracy anywhere.

    It aint the regulations that is hampering nuclear power but the price in the market at present.
    This will be changing quite soon in Asutralia.

  27. . says:

    Yeah right, regulation doesn’t affect prices?

  28. Pedro says:

    Conrad, apologies for seeming snarky. But the moral tone is common in this debate and I admit to getting a bit sick of holier than thou prescriptions for other people’s lives. Closing down coal exports or use of whatever will have big effects for lots of people, not least me, and I’m not into pointless sacrifices.

    I wasn’t thinking of you so much I and U, just the whole concept of easily ditching the particular few percent of GDP.

    Good news Homer, so far there’s no sign of other countries eventually reducing their use of coal. I predict technology will drive the change, not AGW. GE recently predicted a big drop in solar generation costs. I stopped looking into getting some panels cause I’d rather wait for the cheap ones.

  29. conrad says:

    No problems — At least from my reading of the article, I was thinking more of the short vs. long term tradeoffs of coal exports and whether it’s true short term pain = long term gain (which I won’t call Dutch Disease here :) — what do the Dutch call it anyway?), and ways to price price of externalities. As for predictions, I’ll predict that both technology and AGW will drive change, especially if you consider worldwide changes — I assume many people in Asia, for example, would rather pay a bit more for energy than inhale smog from coal all day, which is a problem we don’t have here.

  30. Paul Frijters says:

    conrad,

    the Dutch call it Dutch Disease. Since I am now an Australian i will call it the Gregory Thesis. :-)

  31. KB Keynes says:

    actualy it was the Economist magazine not the Dutch that coined that term

  32. Fyodor says:

    Nic are you taking the piss when you imply I’m “not a serious person” for questioning the sanity of such a lunatic decision?

    ABL, I think Nicholas was referring to me as the unserious “blow in with more time on his hands than he knows what to do with”, which is far more accurate a description of me than you. If anything you’re far too serious. I should be more serious, and write worthy gumph on government 2.0 or similar nonsense, but I can’t take it seriously. Problem in a nutshell.

    Paul is a Professor of Economics at UQ. He’s a serious person…

    Doesn’t answer the question, though, does it?

    Obviously you’re a little miffed that I’ve questioned your co-blogger’s expertise, but I’m not being disingenuous. I fail to see how anyone with a reasonable grounding in micro and macro could commit the gross analytical errors that Paul has.

    Paul argues that Australia should cease coal export for the greater good, but acknowledges that Australian exports would simply be replaced by those of competing producers. His argument then falls back on a lazy and repugnant moral equivalence between selling coal and trading slaves. The moral turpitude of digging stuff up out of the ground is assumed, not substantiated.

    Moreover, he totally ignores the economic argument against such brain-dead sanctimony. Australia exports coal because we have a lot of it and most of it is easy to get at and export, i.e. we can supply it more cheaply, even though it has to be shipped great distances to reach end-customers in Asia. If production shifts to ethical reprobates who don’t share Paul Frijter’s moral superiority, there will be a material deadweight loss (remember that term, folks?) from the replacement of Australian exports by higher cost producers and the higher prices consequently paid by consumers. Because coal consumers don’t have a substitute for steaming or coking coal, they will simply pay up for alternative supply, and Australia will sacrifice a considerable chunk of national income for negligible environmental benefit. Whether this sizeable economic loss will outweigh Frijter’s colossal feel-good factor is unknown, but I for one am fairly certain it will, based on my assessment that Frijter’s sanctimony isn’t worth a lump of the brown stuff.

    The other problem, of course, is his assumption that the Australian economy carries on, tickety-boo, after sacrificing A$40+bn a year in coal exports, our second largest export after iron ore. That, somehow, the economy simply adapts to a massive decline in net exports, a blowout in our current account and the consequent impact on the value of the AUD, inflation and the RBA’s monetary response. What he’s suggesting is that Australia as a nation takes a massive income and wealth shock just so that the minority of Australians who are overcome with guilt over their trivial impact on the world’s environment can feel good about themselves. It’s economically illiterate lunacy on a Brownian scale.

    We’d be better off exporting Greens voters to China as slave labourers in its famously efficient, clean and safe coal mines, where they might actually contribute something useful. It’s a win-win – you know it makes sense.

  33. Pingback: Club Troppo » Symbolic Climate Policies, part III: how do produce climate public goods?

  34. Pingback: Symbolic Climate Policies, part III: how do produce climate public goods? : Core Economics

Comments are closed.