Australian-Japanese Coal 'Partnership' and Why Global Coal is Here to Stay

Large coal stocks await loading for export at Port Waratah Coal Services on April 12, 2007 in Newcastle, Australia.

Recently, the Australian Prime Minister Tony Abbott warned at the opening of the Caval Ridge coal mine in Queensland against the “demonization of coal.” According to the Sydney Morning Herald, PM Abbott stressed that “coal is good for humanity, coal is good for prosperity, coal is an essential part of our economic future, here in Australia, and right around the world.” He then went on to praise “a great partnership with Japan in the coal industry.” PM Abbott’s remarks come on the heels of China’s Ministry of Finance announcement “that import tariffs for anthracite coal and coking [i.e. met] coal will return to 3 per cent, while non-coking [i.e. thermal] coal will have an import tax of 6 per cent.”

These new tariffs on coal imports seem to have come at a critical juncture in negotiations between Australia and China. Jenni Ryall of Mashable notes that this action “falls just a month before the China-Australia Free Trade Agreement (…) expected to be signed at the G20 Summit in Brisbane” on November 15-16. In this respect, it is important to understand that prior to this move, existing free trade agreements (FTAs) â€" see, for example, Indonesia’s FTA with China â€" are able to shield countries from the above import levy.

Consequently, the Australian government will have to hone in on the coal import tax issue during the final stretch of bilateral negotiations. For Australia, this also significantly ups the Chinese-FTA ante and explains PM Abbott’s vocal domestic coal industry support. The coal import tax implications are likely behind Abbot’s praise for Japan and could be viewed as nothing short of a dig at China, as well as a bargaining ploy. He will have to engage in political horse-trading â€" most likely as it relates to agricultural trade between the two countries. Bloomberg quotes PM Abbott as saying: “This is the kind of hiccup in our biggest and most important trading relationship that we just don’t want or need. We’ll work with the Chinese to get to the bottom of what seems to have happened.”

While it is certainly true that the Abbott government errs more on the side of the mining industry vis-à-vis the environmental impact from climate change across various Australian industrial sectors, it should not come as a surprise and other countries are well advised to reserve judgment. In the case of Australia, coal is â€" in the words of PM Abbott â€" “an essential part of [Australia’s] economic future.” Note, not only is coal globally alive and well but demand is expected to grow in the future. Moreover, as long as there is demand for coal, the mining of coal resources in producer countries will continue.

Australia is naturally trying to benefit from its resource endowment and keep good mining jobs in Australia while the US, in turn, is attempting to destroy US coal miners’ livelihoods and perversely â€" given US domestic abundance â€" incentivizes coal imports from countries such as Russia, Columbia, Venezuela, and even Indonesia. Platts cites Paul Rosengren, a spokesman for PSEG, who sheds some light on US utilities’ rationale by explaining that “importing coal from Indonesia is slightly more expensive than what it could find in the domestic market, but that the company imports the coal in order to comply with environmental considerations.”

Clearly, climate change needs to be addressed but as long as there is not one respectable study showing that â€" at least in the US â€" coal will decrease to ZERO in the US energy mix, environmental considerations and accompanying domestic regulations should not appear to be punitive towards one specific industrial sector. The Obama administration should have an interest in a thriving and viable domestic coal industry and perhaps consider a ‘Chinese-like’ coal import tax on foreign producers in tandem with the currently pursued policy of spurring a speedy transition to a higher percentage of renewables within the US energy mix. Remember, climate change requires global action and policies should not help other countries to free-ride and reap the benefits of a zero-sum game within the coal export market with severe domestic ramifications for employment in coal producing countries, which have literally chosen to ‘self-destruct’ their coal industry.

In this respect, Australian PM Abbott’s thinking seems to more reflect the above simple reality while doing what he has been elected to do â€" working on behalf of the Australian people and its industry to keep the country prospering into the future. The following interesting graphic shows both major Australian export markets for coal and climate policy measures in those demand centers along a continuum rating respective climate-mitigating efforts from ‘no effort’ to ‘strong effort’.

 Source: Carbon Tracker Initiative via The Climate Institute 

Paradoxically though it may seem, the graphic shows that Japan pursuing ‘strong’ climate policy measures is one of the largest importers of Australian coal. Indeed, Japan remains Australia’s largest coal export market â€" for use in both power generation and steel production. Thus, environmental considerations â€" thereby acknowledging the dangers of climate change to humanity â€" and the benefits of relatively cheap electricity for its crucial industrial base as well as its citizens can go together. In this context, Cameron Atfield of the Brisbane Times and Sun-Herald quotes Minerals Council of Australia Executive Director for Coal, Greg Evans, as saying:

“There has been a shift back to coal. The Japanese are constantly investing into technology and especially the latest ultra-supercritical power stations that produce more energy per tonne of coal. (…) They’re conscious of the need to reduce CO2 emissions and they’re doing that through technology.”

This interesting fact in conjunction with the overall argument above is the primary reason why foreign governments and officials should reserve judgment and refrain from calling PM Abbott’s championing of the Australian coal industry an economic “suicide strategy”. The latter phrase has been used by Hans Joachim Schellnhuber, a lead adviser to German Chancellor Angela Merkel on climate policy, as reported by Lisa Cox writing for the Sydney Morning Herald. In spite of Germany’s admirable transition to renewable energy sources â€" which offers important lessons for other countries  - Germany cannot really be regarded as ‘coal-free’ nor can it apparently afford to wean itself off coal and nuclear energy at the same time. For energy security reasons, all countries may be better off keeping coal in their respective energy portfolios. Therefore, follow Japan’s example and make it work.

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Roman Kilisek

Roman Kilisek is a Global Energy & Natural Resources Analyst and a contributor at Breaking Energy. His writing and research focuses on global energy policy, energy infrastructure and trade, commodities, mining, global political risk and macroeconomics. He likes to draw on scenario development and analysis. He has a Master of Arts degree in international relations and diplomacy from Seton Hall ...

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