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Coal exports may still be viable post Paris

Australia can still have a viable coal export business after the world agreed to slow and then reduce global carbon dioxide emissions in Paris two weeks ago, the expert who modelled the effects of the deal for the federal government says.

Australian National University economist Warwick McKibbin projected in a report for the government in August that Australian coal exports would be 7.8 per cent lower by 2030 if nations agreed to strong measures to curb global warming than if they took no new steps. Total output would be 8.3 per cent lower.

"Even though exports fall a lot relative to where they would have been, they're still in our baseline rising quite significantly, so the actual coal industry itself from today doesn't shrink from today's scale," said Professor McKibbin, a fellow of the Washington think tank the Brookings Institution and a former Reserve Bank of Australia board member.

"It just doesn't expand as much as it would have between now and 2030. So we're not closing the coal industry. We're just pretty much not letting it expand as quickly as it would have."

That is consistent with the views of the International Energy Agency and the coal industry itself, which welcomed the Paris agreement as a good thing because, it argued, Australia's thermal coal – high in energy, low in pollutants  – would still be needed if Asian nations installed more of the latest clean coal-fired power plants in response.
Second largest export

The future of coal demand is important to Australia despite the global campaign against it because it is our second-largest export, powering two-fifths of the world's electricity, and is still a fuel of choice for poor countries building out their grids.

In Paris nearly 200 nations agreed to aim for a "global peaking of greenhouse gas emissions" as soon as possible in order to limit the increase in global temperatures from pre-industrial times to below 2 degrees. They also pledged to "pursue efforts" to stop warming beyond 1.5 degrees. 

The International Energy Agency (IEA) said in its annual coal outlook that growth in demand for the carbon-intensive fuel would slow from an annual rate of just over 4 per cent in the last decade to about 4 per cent over the next five years – an annual rate of just 0.8 per cent.

Virtually all that growth would come from India and south-east Asia as rich countries cut back and China moderated its use, the IEA said. Because of increased domestic consumption for power generation in Indonesia, that country's exports would shrink.

Australia would regain the title of world's largest coal shipper, expanding thermal exports by nearly a third to 223 million tonnes by 2020 and holding steel-making coal exports at just above175-178 million tonnes.

But that comforting view depends on Asia's large coal producing nations  – Indonesia, India and China  – accepting the argument of Australia's coal exporters that they will need high-quality Aussie coals to fuel the latest HELE (high efficiency, low emissions) coal plant.

This is far from a sure bet, says Melbourne University economist Ross Garnaut, who advised the Rudd Labor government on climate change policy. Professor Garnaut argues that China and India will increase their domestic production of coal and wind and solar energy and slash their reliance on coal imports. He says the IEA has been too slow to pare back its coal projections.

"There is more coal production capacity in the world today than will be needed a few decades hence, and so restoration of remunerative prices in the coal industry depends on the shutting of production capacity somewhere," he said.
Domestic closure unlikely

"A coal producer in Australia would be an optimist to think that Chinese, Indian and Indonesian governments will systematically favour closure of domestic coal plants over closure of foreign coal plants."

Professor Mckibbin said the energy mix in 2030 would also depend on whether the coal industry could commercialise lower emissions technologies such as carbon capture and storage.

"If you ask someone from the renewable energy industry or people who have interests in that they're going to say coal is dead," he said.

"But this is a competition between coal with carbon emissions reduced versus renewables and all the problems you have in renewables." He cited South Australia, where electricity futures prices for 2016 and beyond are twice the Victorian price because of the unpredictability of wind energy output.

One silver lining for coal producers is that their market value can't fall much further.

"Pure coal assets have lost most of their value in the last four years so any additional loss is simply an increment on that. The really big change has been going on for some time," Professor Garnaut said.

"The Paris outcome simply consolidates these strong tendencies and reduces the chance of backsliding from them."

source: http://www.afr.com