Heavy subsidisation of the fossil fuel industry is distorting the market, increasing emissions, and impeding the growth of cleaner fuels.
This is according to a new detailed analysis report published Wednesday, and authored by the Carbon Tracker Initiative, Energy Transition Advisors (ETA), the Institute for Energy Economics & Financial Analysis (IEEFA), and Earth Track. The report, Assessing Thermal Coal Production Subsidies, concluded that significant subsidies backing the production of coal in Australia and in the Powder River Basin (PRB) in the United States are “distorting the market, driving up emissions, and acting as a barrier to entry for cleaner energy sources.”
Fossil Fuel Industry Garners “Numerous Subsidies”
“The fossil fuel industry has gamed energy market consumers with numerous subsidies evident over the long term,” said Tim Buckley, director of energy finance studies Australasia at IEEFA. “For coal, these include a series of tax breaks and deductions; a history of underpaying governments for the right to mine coal; collusive tendering practices for public assets; decades of government funding for carbon, capture and storage and ‘clean coal’ research; as well as capital and funding subsidies for coal rail and port infrastructure and coal-fired power plants. An on-going failure to fund mine site rehabilitation externalizes yet another cost of coal mining.”
“Any discussion of cost competitiveness of renewable energy and energy efficiency needs to take into account the decades of extensive subsidies evident for the coal industry that in many cases remain in place today,” Buckley added.
The Australian coal industry and Powder River Basin were chosen “as an example of the overall World Export seaborne thermal coal market.” Specifically, both countries subsidize heavily the production of coal generation (in contrast to the subsidies for fossil fuel consumption prevalent throughout the developing world):
One of the primary concerns of the report, therefore, is attempting to determine “whether some coal reserves are entering production only due to government subsidies.” Fossil fuels subsidies acting as an “enabler” is particularly apparent in terms of the investor confidence: Where a project is proposed but has no governmental subsidy backing, the investor may choose to look elsewhere for a more solid investment. Where a project is proposed with government subsidy, an investor is more likely to see this as a strong investment opportunity, as the potential returns have been “derisked” by the subsidy.
“The subsidy fundamentally altered the final investment decision,” explained the report’s authors. “It is in this context that this report frames fossil fuel subsidies, in particular production subsidies, as project and investment ‘enablers’.”
“Policy makers concerned about climate and a level playing field in energy markets should look to take coordinated action to remove the distortions to production these subsidies create,” said Luke Sussams, senior researcher at Carbon Tracker Initiative, who also pointed out that coal is the most carbon-intensive energy resource in terms of greenhouse gas emissions generated per kilowatt hour of electricity.
Scrapping Coal Subsidies
Beyond the primary conclusion that fossil fuel subsidies are negatively impacting global markets, the report also showed what would happen if fossil fuel subsidies were scrapped. Such a decision would amount to nearly $4 per tonne and $1.3 billion per year in Australia, and $8 per tonne, or $2.9 billion per year in the Powder River Basin (PRB), and “would materially reduce domestic coal demand and emissions in the United States.” In the graph below, subsidy removal results in an increase (grey line) in the break-even price of PRB coal, causing a resultant drop in production (yellow line).
The same decision in the US would create pressure on demand for Australian thermal seaborne coal exports, “where the effect on emissions would be dependent on other exporting nations taking action too.”
Australia’s coal industry was therefore chosen for the report as an example of a major exporter of coal, and the impact removing coal subsidies would have on such a market, and “underscoring the leverage that can be achieved via global rather than unilateral subsidy removal.” The United States’ PRB “demonstrates the impact subsidies can have on domestic coal markets.”
On top of that, removing these subsidies would save the Australian taxpayer approximately $1.3 billion a year, and around $2.9 billion a year in the United States. Below-market leasing rates — one of the ways in which coal production companies can receive a subsidy without having to worry about the phrase “subsidy” — is calculated to have already forced the US government to transfer some $30 billion to private coal companies, which is equivalent to a subsidy of $2.59 per tonne.
The report further calculated that removing fossil fuel production subsidies would reduce demand for PRB thermal coal by a range of between 8% to 29% through 2035, and cut US carbon dioxide emissions by between 0.7 to 2.5 gigatonnes. The figure below shows the extent to which the Powder River Basin currently impacts the US coal market, and gives a good idea of the scale of the impact reducing or scrapping coal subsidies would have on demand in the US coal industry.
The report notes that “If the US alone removes all subsidies to domestic coal (not just those flowing to the PRB basin), we expect a substantial and positive reduction in both quantity of coal consumed and the resulting carbon emissions.”
A cut in demand for Australian seaborne coal would be between 3% and 7%, though the emissions reductions would be smaller than in the US due to the fact that substitute suppliers of coal would be found. The authors of the report highlighted the need for subsidy removal to take into account the national and international contexts. “For example,” the authors write, “unilateral subsidy reform in Australia may have a significant impact on coal exports, but a much smaller effect on carbon emissions as other sources of coal move in to take the market share.” However, and importantly, “even unilateral subsidy removal can have important economic, social, and environmental benefits.” One such example is the protection such subsidies would create for environmentally sensitive areas that are being viewed for possible coal mining — such as Australia’s Great Barrier Reef.
“Thermal coal production subsidies are substantial as shown in our study of the US PRB region and the Australian seaborne market,” said Mark Fulton, head of ETA and lead author of the report. “In the context of carbon and climate targets, the impact on demand for thermal coal can be significant if subsidies are removed. In the US PRB demand can fall by 8% in the short term, to 30% or higher in the longer term as gas and renewable energy sources substitute. This is equivalent to removing the annual emissions of between 9 and 32 coal plants.”
There are a number of other concerns that are impacted by continuing subsidies for coal production, as Doug Koplow, founding partner of Earth Track, points out:
“Non-competitive leasing, below-market royalties, inadequate funding of site cleanup after mining operations end comprise some of the major subsidies to the private firms digging taxpayer-owned coal out of the PRB.
“In recent years, subsidies have neared $8 per metric tonne of coal produced in the PRB basin – even before considering the health effects of coal combustion. Eliminating coal subsidies in the PRB and throughout the world, is an obvious, no-regrets climate strategy.”
“Removing subsidies to coal extraction should be a central plank of any country’s fiscal and environmental plan,” concluded the authors of the report. This is particularly the case “as subsidies to renewable energy come under increasing pressure.” If global governments are so intent on forcing renewable energy to participate in the energy market on a level playing field, one hopes that these same governments will give up their fossil fuel subsidies and force coal production to play on the same level playing field.
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