Demand for Coal Increases as do Environmental Concerns

Stephen DeAngelis

April 7, 2008

There has been an upsurge the past couple of years in the attention being paid to climate change and its possible causes. Despite a hard core group of skeptics, most people are coming to believe that man’s use of fossil fuels is one of the leading culprits affecting the environment. Environmentalists are particularly keen at pointing the finger at coal-burning power plants. As a result, debates rage in many developed countries about whether new coal-powered plants should be built. Globally, however, these debates seem to be making little impact. The demand for coal has never been higher according [“Coal Can’t Fill World’s Burning Appetite,” by Steven Mufson and Blaine Harden, Washington Post, 20 March 2008].

“Long considered an abundant, reliable and relatively cheap source of energy, coal is suddenly in short supply and high demand worldwide. An untimely confluence of bad weather, flawed energy policies, low stockpiles and voracious growth in Asia’s appetite has driven international spot prices of coal up by 50 percent or more in the past five months, surpassing the escalation in oil prices.”

Unlike oil prices, however, not all economies are equally affected by this spike in the price of coal. France, for example, is one of the world’s largest nuclear power producers (in fact, per capita, France is the largest producer of nuclear power in the world). As a result, France’s economy is basically unaffected by the sharp rise in coal prices. Other countries in Europe are benefiting from France’s nuclear power generation since France is the largest net exporter of electricity in the European Union. It’s reliance on nuclear power also means that the French economy has one of the lowest carbon-intensive economies in the Organization of Economic Cooperation and Development (OECD). France’s decision to “go nuclear” was based in large measure on the fact that it has limited fossil resources. In fact, France stopped producing coal in 2005. Much of the increased demand for coal comes from Asian countries.

“The signs of a coal crisis have been showing up from mine mouths to factory gates and living rooms: As many as 45 ships were stacked up in Australian ports waiting for coal deliveries slowed by torrential rains. China and Vietnam which have thrived by sending goods abroad, abruptly banned coal exports, while India’s import demands are up. Factory hours have been shortened in parts of China, and blackouts have rippled across South Africa and Indonesia’s most populous island, Java. Meanwhile mining companies are enjoying a windfall. Freight cars in Appalachia are brimming with coal for export, and old coal mines in Japan have been reopened or expanded. European and Japanese coal buyers, worried about future supplies, have begun locking in long-term contracts at high prices, and world steel and concrete prices have risen already, fueling inflation.”

The high price of coal is not good news for environmentalists because it has encouraged the increased production of coal. As I noted in an earlier post about coal [The Search for Clean Coal], coal reserves remain abundant — the U.S., Russia, China, India, and Australia have the world’s largest coal reserves. While the increased export of coal at high prices is good for the U.S. trade deficit, higher prices also means that domestic electricity costs are going to rise. While coal producers hope the high prices and increased demand are here to stay, environmentalists are hoping that green movements curtail the use of coal-fired power plants.

“Big swings in the prices of coal and other commodities are common. But while the price of coal has slipped slightly in recent weeks, many analysts and companies are wondering whether high prices are here to stay. As increasing numbers of the world’s poor join the middle classes, hooking up to electricity grids and buying up more manufactured goods, demand for coal grows. World consumption of coal has grown 30 percent in the past six years, twice as much as any other energy source. About two-thirds of the fuel supplies electricity plants, and just under a third heads to industrial users, mostly steel and concrete makers. Meeting rising demand will prove difficult. To maintain its role as the world’s producer of last resort, the United States will need to make major investments in mines, railways and ports. ‘We think the current world markets have legs,’ said Thomas F. Hoffman, senior vice president of external affairs at Consol Energy, one of the biggest U.S. coal producers. Consol is trying to decide whether to expand output at its Appalachian mines and to add capacity in Baltimore’s harbor. ‘We’re at a point where we’re running through the capacity,’ said David Khani, a coal analyst at Friedman, Billings, Ramsey Group. He compares the coal market to the oil market. For coal, he added, ‘it is unprecedented.’ If high prices last, that would raise the cost of U.S. electricity, half of which is generated by coal-fired powered plants.”

Having provided the good economic news, Mufson and Harden then discuss the darker side of increased production and use of coal.

“Expensive or not, coal is almost always dirtier to burn than are other fossil fuels. Although its use accounts for a quarter of world energy consumption, it generates 39 percent of energy-related carbon dioxide emissions. Climate change concerns could lead to legislation in many countries imposing higher costs on those who burn coal, forcing utilities and factories to become more efficient and curtail its use. Climatologists warn that without technology to capture and store carbon dioxide emissions, burning more coal would be disastrous. China, the world’s largest consumer of coal, is burning through more than the United States, European Union and Japan combined. And its consumption is increasing by about 10 percent a year. In 2006, it installed power plants with more capacity than all of Britain. … China has done little to contain demand. Indeed, the government has limited electricity rate increases for years, encouraging greater use. Concerned about climbing inflation, Beijing on Jan. 10 turned once again to Communist-style measures, freezing electricity prices even as coal and oil prices soared. ‘The current price policy encourages people and companies to consume electricity because electricity is so cheap. There’s no pressure for them to use energy resources efficiently,’ said Ping Xinqiao, a professor of economics at Beijing University. Strong coal demand has created incentives for small illegal coal mine operations that are extremely dangerous and highly polluting. The government has shut down 11,155 such mines since 2005, further crimping supplies.”

The article goes on to report that the situation is not much better in India, one of the other big producers and consumers of coal.

“India also relies on outdated energy policies while trying to keep pace with booming demand. The economy is growing at 8 to 9 percent a year, and by 2012 India expects to add 76,000 megawatts of power, according to Upendra Kumar, a member of the mining committee at the Confederation of Indian Industries. But 94 percent of India’s coal mining is in the hands of government-owned companies. The biggest, Coal India, produces four-fifths of the country’s coal. Because the government is worried about social unrest, the prices for coal and electricity are kept low. ‘Today our coal prices are about 40 percent lower than international coal prices,’ said K. Ranganath, Coal India’s director of marketing. And, he notes, the ‘lower the prices, the higher the demand.’ That discourages investment, too. Although India’s coal reserves are vast, they haven’t been fully developed. The government hopes to boost coal
production by 50 percent by 2012 and quadruple it by 2030. Yet that would require massive investment. Experts note that India’s coal deposits are deep and difficult to mine. The dilapidated rail infrastructure is another obstacle; India’s coal has to travel an average of 435 miles to reach plant and industrial users. … As a result, India expects to import 51 million tons by 2012, nearly as much as U.S. export[ed] last year. By 2022, imports could climb to 136 million tons.”

Although India’s economy would benefit greatly from a massive investment in infrastructure, building infrastructure on the back of coal mining isn’t the best way to ensure that India’s economy develops in an environmentally friendly way. The post I mentioned earlier does discuss one method of building new and cleaner coal-burning plants, but the technology has yet to penetrate the utility sector. That means that new plants as well as those currently on the books will remain relatively big polluters. It’s not just the utility sector, however, that is being affected by higher coal prices.

“The consequences of tight supplies are being felt throughout the [Asian] region and are not limited to developing countries. Rising coal prices are squeezing Japan and South Korea, which depend largely on imports for energy. Hardest hit, so far, are steel companies. It takes about 1.5 tons of coking coal to make a ton of steel. Steel makers, in turn, are raising prices for carmakers and other manufacturers, who at some point will pass some of the costs on to customers.”

With some scientists asserting that the world needs to adopt immediate zero-carbon emission policies, the rising demand for coal is not a good sign. Higher coal prices should encourage research into alternative sources of energy since such alternatives become more cost effective as cheap energy supplies become more costly. The question is how much damage is going to be caused before clean ways to burn coal are found and implemented or alternative energy sources are widely adapted.