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Is the coal industry economically worthless?

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A report released on April 24 by the Australian coal industry, Adding value to the Australian Economy,  unsurprisingly documents only one side of the ledger. It is perhaps more surprising that this one-sided report has some academic imprimatur, when review of the international literature reveals a very different picture.

The complete picture shows coal is expensive. The cost of legacy coal assets may appear cheap to the consumer but the community pays the true cost in many other ways; this article details the health costs.

Coal mining and combustion have harmful impacts on land, water and air quality all of which can be costed. There is evidence from renowned economists that these costs, particularly those of air pollution, render the net value of the industry as neutral or negative.

A study on the true cost of coal by William Nordhaus, one of the most respected economists in the US, was the principle paper in American Economic Review (2011), a leading economics publication, and the findings have not been contested by any other economists.

The study presents a framework to include air pollution into a system of national accounts – i.e. calculations of gross domestic product and other macroeconomic statistics. It estimates the value of air pollution damage created by several industries in the United States.

The impacts of six pollutants – sulphur dioxide,  nitrous oxide, volatile organic compounds, ammonia and particles (PM2.5 and, PM10) – were estimated on human health, agricultural yield, visibility, accelerated depreciation and human recreation. Air pollution concentrations were related to human illness and death and the economic loss estimated.

The study found that several industries cause damages greater than their “value added” – i.e. difference between the value of the inputs they take in and the value of the output they produce. Coal fired power generation was found to produce damages from 0.8 to 5.6 times its value added. In other words, the damage caused is worth at best 80 per cent of the net value of the industry and at worst 5.6 times greater.

Costs of coal have been calculated for other continents. In Europe, the cost of cardio-respiratory disease and reduced life expectancy due to coal was approximately €42 billion per annum. Additional studies are listed in a paper from Doctors for the Environment Australia.

In Australia we have failed to study these externalities in any detail, but we know that the same coal-related diseases – asthma, bronchitis, cancer of the lung, heart and vascular disease – occur with higher frequency in the coal mining and combustion regions. Costs in Australia are less than for the US, but are likely to be the same as in Europe.

In the report Natural Capital at Risk, prepared by Trucost on behalf of The Economics of Ecosystems and Biodiversity program sponsored by United Nations Environmental Program, it is apparent that business activity is costing trillions of dollars to the economy through environmental and social damage. As was the case with the Nordhaus study, coal was not profitable when externalities were accounted for.

Fortunately, the pollution costs of coal are remediable for there are alternative sources of energy. Indeed a CSIRO analysis details expectations that solar thermal with storage will compete with coal as early as 2016.  It may be competitive now if coal’s externalities were accounted for.

Nowhere is spurious accounting so damaging as in the Environmental Impact Statements (EIS) prepared for many resource projects. An EIS should be the documentation of all positive and negative impacts of a development on the local and national community; the balance of these should determine the outcome. Commonly the income, royalties, jobs and local economic benefit are documented with impressive conclusions; negative factors are rarely accounted for.

In an independent economic assessment of six coal projects and one gas project in NSW, not only were health costs ignored but economic benefits were overstated, environmental costs downplayed, employment benefits overstated and costs to other industries ignored

In Queensland the New Acland Coal mine probably falls into the category of non-viability. In an opinion article in The Australian, referring to their ACA report, the authors ignore academic rigour and write as spokespersons of the coal industry. “Phasing out coal mining means turning off the lights, while phasing out coal exports means turning off other people’s lights and economic growth”.

There is a large body of scientific and economic literature – much of it from such august organisations as the International Energy Agency, the IMF and the World Bank – which indicates the climate change imperative to act to reduce greenhouse emissions quickly. Renewable energy development is crucial. It is government’s role to plan the transition and ensure maintenance of jobs in the new industries. There is also an equally important imperative – health. So turning off the domestic lights would signal incompetence. The presence of a heavily subsidised product with extensive externalities in a free market economy signifies only the leverage of the fossil fuel industries; there is no other logical explanation for the inefficiency.

As for turning off other people’s lights, I suggest the authors read the EIS for each of the Galilee and Bowen Basin coal and unconventional gas developments intended for export, and apply their economic skills and risk assessment to both sides of the ledger. I don’t have the answer; the problem is that government doesn’t either and probably doesn’t want to consider it. But we do know the lights are turned off in some Chinese cities to reduce coal pollution and ill health.  

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  • Dr George

    At what point will the penny drop for Govt and Super funds? At the moment they seem happy with their industry agitated Ostrich approach, but it just can’t last and when confidence starts to evaporate, the term stranded assets is likely to become very familiar and unpopular indeed.

  • There has to be the push to convert to natural gas. Natural gas can be consumed to near 100% energy efficiency.

    The heat energy can be recovered from the waste exhaust gases with the technology of Condensing flue gas heat recovery, making this recovered heat energy usable to be used in the building or facility where the natural gas was combusted or piped over to to a neighboring facility or buildings to be used efficiently.

    Instead of Hot exhaust being blown out of the chimney into the atmosphere COOL exhaust will be vented into the atmosphere.

    Increased natural gas energy efficiency = Reduced utility bills = Profit
    Increased natural gas energy efficiency = Reduced global warming

    Increased natural gas energy efficiency = Reduced CO2 emissions
    Increased natural gas energy efficiency = Water conservation

    What natural gas is not wasted today, will be there to be used another day.

    • thin_king

      Of course you have no personal economic interest in gas or gas companies Sid? You just love it because it’s intrinsically harmless, cuddly and the answer to humanities woes, right? And you just cut and pasted your own comment from another recent post because it’s a perfect argument and you just don’t mess with perfection, right?

  • Colin

    Nice to see the progression of accounting for externalities is having some political impact. Can somebody please provide the correct link to the Nordhaus article?

  • David, there’s a different school of thought emerging on the future value of in-ground carbon assets like coal.

    Hydrocarbon sources are used for many more purposes than simply burning them, and we’re likely to need those uses into the future.