Some Economics of the Great Coal Game

On the other hand, I have not dealt with thermal (or steam) coal in the classroom for many years. As many energy professionals probably know, thermal coal is a source of energy that, despite its widespread use in electricity generation, has not received much notice in the 'learned' literature, and comparatively little on the blogosphere, despite its ubiquity in the provision of heat, light, transport, and as an intermediate good in producing other forms of energy. I once tried to write a 'neutral' book on coal (1987), but as things turned out its neutrality was brought into question when a Dutch gentleman accused me of plagiarism. Under normal circumstances I would have responded to that charge with at least a show of offence, but at the time I was in Australia, and fully occupied lecturing on the coking coal used in steel making.

In that book I predicted a coal price of less than fifty dollars per tonne (=$50/t) for high quality steam coal at the present time. The average global price for coal just now is about $100/t. What has happened of course is an explosion in the demand for coal by China and -- to a lesser extent -- India. China consumes about 40% of global production, or 2.6 billion tonnes. China is a major producers, but demand is larger than supply, and the gap is certain to increase. As compared to these two countries, Japan is a large consumer, but with essentially no production. South Korea and the UK are also sizable consumers (and importers). On the other hand the major coal exporting countries are Australia, Indonesia, the Russian Federation, South Africa and Colombia.

I often use the term "game" when talking about coal, because I feel certain that more of that commodity coal is going to be burned than commonly believed, or for that matter desired by many; and despite assurances to the contrary by well-meaning (or slightly confused) decision makers, most of that coal will not be 'cleaned'. (See for example the articles of Victor and Cullenward (2007 and Victor and Rai (2009.) Thus, on one level or another a game is in progress, which in the context of the present exposition means a medley of competitive situations in which strategic considerations (bluffing, disinformation, and exploiting the options provided by prevailing political routines and attitudes) have a key significance, which is NOT the case in the Econ 101 and 201 literature. Moreover, if the cost of cleaning larger quantities of coal is for one reason or another associated with a substantial increase in average energy costs and/or prices, then the tolerance of dirty coal is going to be much higher. One reason is that pollution-wise, the great coal game features a play now-pay later format, with the likelihood that later -- assuming that water begins to rise on Canal Street or the Reeperbahn -- could be very much later. For example. about the time when the music starts at the 'end-of-century' parties on December 31st , 2099.

With all due respect, I have come to believe that energy economics has been taught so poorly, that the next time I present a course on any branch of this topic at any institution of higher or lower education, students will be held responsible for the information below, regardless of what else they absorb about coal.

• As pointed out by Joe Hung (2010), coal is the most rapidly growing fuel source in the world. It is also broadly distributed, and Hung states that the energy in it exceeds that of all other fossil fuels combined. This can be easily shown by multiplying the (average) BTU (British Thermal Unit) content of a fossil fuel by proved reserves, as demonstrated in my energy economics textbooks (2007, 2000). Readers who want to extend this operation can also examine the total BTU content of proved uranium and thorium reserves. If these reserves are used in the next generation of nuclear reactors (Gen 4), assuming that those reactors deliver as expected, then the energy they can supply is greater than that in all proved or hypothetical fossil fuel reserves, as well as the energy that can likely be economically obtained from the exploitation of renewables during at least the first half of the present century.

In the U.S. Department of Energy, and also in the U.S. Congress, educated men and women are attempting to make the impossible possible by accepting various ill-considered departures. Without going into details, I would like to claim that it would be better if they attempted to assimilate the rhythms and logic of mainstream economic theory, instead of latching on to crank concepts proposed by itinerant delegates at international conferences.

References

Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory Textbook. London, and Singapore: World Scientific.

_____.(2000) 'Energy Economics: A Modern Introduction' Kluwer Academics New York.

______ (1985), The Political Economy of Coal. Boston: Lexington Books. Dales, H.H. (1968). Pollution, Property and Prices. Toronto: University of Toronto Press.

Harlinger, Hildegard (1975). 'Neue modelle für die zukunft der menshheit' IFO Institut für Wirtschaftsforschung (Munich).

Hilsenrath, Jon (2009). 'Cap-and-trade's unlikely critics: its creators'. Wall Street Journal (August 13).

Hung, Joe (2010). 'Coal: the contrarian investment'. 321 Energy (April 10).

Montgomery, David. (1972). 'Markets in licenses, and efficient pollution control Programs'. Journal of Economic Theory (No. 5).

Rose, Johanna (2010). 'Drömmen om rentkol'. Forskning & Framsteg (March).

Victor, David G. and Danny Cullenward (2007). 'Making carbon markets work'.Scientific American (2007).

______. and Varun Rai (2009). 'Dirty coal is winning'. Newsweek.