Is the coal industry economically worthless?

Posted on May 7th, by SOSLP in Coal, Media. No Comments

By David Shearman on 1 May 2013
Renew Economy

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.