A coal tax to help the climate and the resource owners

The Conversation

A tax on coal would increase the price, reducing demand but benefiting exporting countries such as Australia. Shuttershock

Most of the world’s remaining coal will need to stay in the ground if we are to avoid the risk of severe climate change: it is unburnable. Coal exporting countries could buffer the transition by taxing coal production or exports. This would raise revenue for coal producing countries, raise coal prices and reduce global carbon emissions.

Last week the Australia Institute launched a campaign for No new coal mines, including an open letter. In response both Prime Minister Malcolm Turnbull and and opposition leader Bill Shorten rejected a moratorium on new mines.

In global climate policy, overwhelming emphasis has been on interventions to dampen coal demand: emissions trading schemes, carbon taxes, support for renewables, mandated energy efficiency and so forth. All of these are important.

Many countries are already raising the cost of using coal through taxes, emissions trading schemes, and direct regulation such as coal quality standards in China or the planned carbon dioxide emissions standards under the US clean power plan.

But so-called supply-side climate policy can also be part of the mix: limiting production or ramping up fossil fuel supply prices.

Ban new mines?

Banning new coal mines would be an intuitive but in many ways crude approach. The argument is simple: we need to phase out coal, so let’s not open more mines.

A big disadvantage of a moratorium on mines is that it would not allow efficient economic adjustments within a shrinking coal sector.

Carbon policies also shift demand within the coal sector, away from brown coal and low quality black coal towards higher quality black coal.

So while in general there will not be great prospects for opening new coal mines, in some circumstances expansion of high-quality coal mining could be part of an efficient transition. For any new mines there is of course the danger of inefficiently locking in high carbon infrastructure, such as new railroads and port facilities, which could become “stranded assets”.

There’s also the distinction between thermal (or steam) coal used to produce power, and coking coal for steel production. Thermal coal can be readily replaced with renewables, nuclear or gas. Coking coal by contrast has no direct substitute.

Further, a ban on new mines gives no incentive to cut back on production in existing mines – in fact their operators will work their mines even harder because there is less competition.

And for the ban to have its full effect, most countries with untapped coal reserves would need to join. This could be very difficult to achieve. Countries with significant coal expansion opportunities would feel disadvantaged in comparison to countries with large established mining operations that continue mining unimpeded.

Tax coal

The economically neat approach is to make coal more expensive in a way that does not differentiate between the source of the coal, and in proportion to its carbon intensity.

The straightforward way of doing so from the supply side is to put a tax on coal exports, or ideally a tax on all coal production which is then also reflected in coal export prices, in proportion to carbon content.

The global coal price then goes up, and energy users switch to lower-carbon alternatives which saves carbon dioxide emissions. Levying the tax on the supply side means that exporting countries get the revenue, offsetting reduced profits for coal miners.

In our paper “Market power rents and climate change mitigation: a rationale for coal taxes?” we modelled a coal export tax levied by the four largest steam coal exporters: Indonesia, Australia, South Africa and Colombia.

We find that a moderate coal export tax levied by those four countries would bring a net benefit to Australia. And global carbon dioxide emissions would be lower.

The import price for traded coal rises, coal consumption falls. And the revenue for Australia could be in the tens of billions of dollars per year.

The money could be used to support the structural transition in coal mining regions, to support R&D into the zero-carbon energy industries of the future, or simply to cut other taxes.

The outcome is improved if other countries join, for example the United States. The larger the coalition, the less “leakage” to countries that do not place a tax on their coal.

The efficiency of the policy is improved if the coal tax does not just cover exports but all coal production in a country. This levels the playing field and avoids an implicit subsidy on domestic coal use.

It is not about Australia going it alone

It is customary in Australia to assume that the country is too small to make a difference and other countries won’t join.

For example, in response to the no new mines campaign Prime Minister Turnbull said: “If Australia stopped exporting coal, the countries to which we export it would buy it from somewhere else […] it would not reduce global emissions one iota.”

This is not true. Any constraint on supply results in higher prices and less coal use and therefore lower emissions. Our modelling shows that even if Australia went it alone with an Australia coal tax it would have some effect, especially in the short term. But it is true that most of the effect on an Australia-only coal tax would be eroded by increased exports from other countries.

Any supply-side policy works properly only if the major players join forces. For coal this might not be so unachievable. There are only a few large exporters, and Australia is the second largest. They would all gain from tax revenue. And let’s not forget, the world is favourably disposed towards efforts to cut emissions.

Finally, what about the “moral case” for coal as set out by Energy Minister Frydenberg?

Indeed, electrification is essential for development. But it is electricity that helps the poor, not coal. And the poor typically bear the brunt of health impacts from coal-based air pollution, and may also suffer most from climate change. Solar electrification will often be the better option.

The future belongs to zero-carbon energy, and in particular renewables. Coal producing countries need to face up to this, and be pro-active about managing the transition. A coal tax is not around the corner but we should understand the options.

Source: The Conversation. Reproduced with permission.