Some Economics of the Great Coal Game
Professor Ferdinand E. Banks
July 15th, 2010
Several years ago I politely asked every student in my course on oil and gas economics at the Asian Institute of Technology (AIT) to master some important materials dealing with the availability of oil. By "master" I meant learn perfectly, assuming that they preferred a passing to a failing grade.
On the other hand, I have not dealt with thermal (or steam)
coal in the classroom for many years. As many energy professionals probably know, thermal coal is a source of energy that, despite its widespread use in electricity generation, has not received much notice in the 'learned' literature, and comparatively little on the blogosphere, despite its ubiquity in the provision of heat, light, transport, and as an intermediate good in producing other forms of energy. I once tried to write a 'neutral' book on coal (1987), but as things turned out its neutrality was brought into question when a Dutch gentleman accused me of plagiarism. Under normal circumstances I would have responded to that charge with at least a show of offence, but at the time I was in Australia, and fully occupied lecturing on the coking coal
used in steel making.
In that book I predicted a coal price of less than fifty dollars per tonne (=$50/t) for high quality steam coal at the present time. The average global price for coal just now is about $100/t. What has happened of course is an explosion in the demand for coal by China and - to a lesser extent - India. China consumes about 40% of global production, or 2.6 billion tonnes. China is a major producers, but demand is larger than supply, and the gap is certain to increase. As compared to these two countries, Japan is a large consumer, but with essentially no production. South Korea and the UK are also sizable consumers (and importers). On the other hand the major coal exporting countries are Australia, Indonesia, the Russian Federation, South Africa and Colombia.
I often use the term "game" when talking about coal, because I feel certain that more of that commodity coal is going to be burned than commonly believed, or for that matter desired by many; and despite assurances to the contrary by well-meaning (or slightly confused) decision makers, most of that coal will not be 'cleaned'. (See for example the articles of Victor and Cullenward (2007 and Victor and Rai (2009.) Thus, on one level or another a game
is in progress, which in the context of the present exposition means a medley of competitive situations in which strategic considerations (bluffing, disinformation, and exploiting the options provided by prevailing political routines and attitudes) have a key significance, which is NOT the case in the Econ 101 and 201 literature. Moreover, if the cost of cleaning larger quantities of coal is for one reason or another associated with a substantial increase in average energy costs and/or prices, then the tolerance of dirty coal is going to be much higher. One reason is that pollution-wise,
the great coal game features a play now-pay later format, with the likelihood that later - assuming that water begins to rise on Canal Street or the Reeperbahn - could be very much later. For example. about the time when the music starts at the 'end-of-century' parties on December 31st , 2099.
With all due respect, I have come to believe that energy economics has been taught so poorly, that the next time I present a course on any branch of this topic at any institution of higher or lower education, students will be held responsible for the information below, regardless of what else they absorb about coal.
- As pointed out by Joe Hung (2010), coal is the most rapidly growing fuel source in the world. It is also broadly distributed, and Hung states that the energy in it exceeds that of all other fossil fuels combined. This can be easily shown by multiplying the (average) BTU (British Thermal Unit) content of a fossil fuel by proved reserves, as demonstrated in my energy economics textbooks (2007, 2000). Readers who want to extend this operation can also examine the total BTU content of proved uranium and thorium reserves. If these reserves are used in the next generation of nuclear reactors (Gen 4), assuming that those reactors deliver as expected, then the energy they can supply is greater than that in all proved or hypothetical fossil fuel reserves, as well as the energy that can likely be economically obtained from the exploitation of renewables during at least the first half of the present century.
- Where electricity generation is concerned, in the U.S. coal accounts for 48%, gas 20%, nuclear 20%, hydro 7% and others - mostly renewables - for 5%. These numbers are highly suggestive where most industrial countries are concerned, however China consumes almost half of the annual world coal output, and together with India - which also is a very large coal consumer - they are on a febrile hunt for more suppliers of that resource.
- Johanna Rose (2010) claims that China opens a new coal based electricity generating plant every week, however on an annual basis this is probably slightly in error. Regardless, the Chinese, Indian, and U.S. consumption of coal will ensure that carbon dioxide (CO2) emissions into the atmosphere overwhelm any technological countermeasures, or cap-and-trade foolishness, for at least the foreseeable future.
- Knock on any door these days and you might be informed of the beauty of reducing carbon dioxide (CO2) emissions by turning coal into a gas and burning it in an ultra-efficient turbine, or burning it in pure oxygen without gasification, and then pumping the waste into the ground. (The latter is termed carbon capture and storage, or CCS.) I seem to remember saying a great deal about this process over the years, but I first heard of it during my tour as visiting professor at Nanyang Technological University in Singapore about 20 years ago. More recently though I have read or heard a great deal about this issue in Denmark, Germany and Norway. Jeffrey Michel, an MIT graduate and one of the most important commentators on German energy matters, has referred to CCS as a "thermodynamic travesty", however economic travesty is a characterization that appeals to my taste. In any event, utilizing either of these pollution reduction options could double or triple the cost of a full-scale power plant - which admittedly is not of interest to Norwegians, since in some respects Norway is the richest country in the world, and its governments (and perhaps citizens) are always eager to flaunt their environmentalist credentials (when discussing their production and use of natural gas). However the so-called zero-emission plant that the Swedish utility Vattenfall has constructed at Schwarze Pumpe (in eastern Germany) is only a pilot operation, which I prefer to think of as a publicity stunt rather than a serious attempt to solve a weighty problem. To get some idea of the expense that will be involved, CO2 might have to be transported more than 300 kilometers, and then pumped into empty caverns 3 kilometers below the surface of the earth.
- Cap-and-trade is the method favoured in the U.S. for combating CO2 emissions, largely because it has a capitalist aura, and it is believed that it has succeeded in Europe, where it is called The European Union's Emissions Trading Scheme (or EUETS). In fact, as opposed to fiction, the EUETS has failed or is failing, and is predicted to fail in Europe by almost everyone who does not have something to gain in financial or career terms. The essential thing that needs to be recognized and repeated whenever possible is that the economists who initially proposed this scheme have now declared it hopeless. For example the Wall Street Journal (Aug. 13, 2009) reported that the 'inventor' of this concept, Professor Thomas Crocker, has denied its utility, and in California an important energy and environmental executive openly referred to cap-and trade as a scam. (See Jon Hilsenrath (2009).) Similarly, despite their seminal work on the topic, the late Professor John Dales, and Professor W. David Montgomery, have said that it was inapplicable in the real world. By way of contrast, a U.S. government confidant and expert, Joseph Aldy, once rejected the judgments of the above scholars, and insisted that cap-and-trade arrangements display a flexibility that make them a useful policy device. But what else could he say if he wanted to continue strutting his stuff in various White House meetings and social occasions.
In the U.S. Department of Energy, and also in the U.S. Congress, educated men and women are attempting to make the impossible possible by accepting various ill-considered departures. Without going into details, I would like to claim that it would be better if they attempted to assimilate the rhythms and logic of mainstream economic theory, instead of latching on to crank concepts proposed by itinerant delegates at international conferences.
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_____.(2000) 'Energy Economics: A Modern Introduction' Kluwer Academics
______ (1985), The Political Economy of Coal
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Dales, H.H. (1968). Pollution, Property and Prices
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Harlinger, Hildegard (1975). 'Neue modelle für die zukunft der menshheit' IFO
Institut für Wirtschaftsforschung (Munich).
Hilsenrath, Jon (2009). 'Cap-and-trade's unlikely critics: its creators'. Wall
Hung, Joe (2010). 'Coal: the contrarian investment'. 321 Energy
Montgomery, David. (1972). 'Markets in licenses, and efficient pollution control
Programs'. Journal of Economic Theory
Rose, Johanna (2010). 'Drömmen om rentkol'. Forskning & Framsteg
Victor, David G. and Danny Cullenward (2007). 'Making carbon markets
______. and Varun Rai (2009). 'Dirty coal is winning'. Newsweek.
Professor Ferdinand E. Banks
July 15th, 2010