Discussion of climate and decarbonisation in Australia often starts and finishes with conflicting positions on coal mining.  There are strong demands calling for Australia to stop the mining, use and export of coal opposed by arguments emphasising the economic benefits the country gets from coal both in terms of national balance of trade and the jobs and economic stimulus it creates in regional centres, particularly in NSW and Queensland.  So why is coal such a big part of the Australian climate discussion and is the fixation justified?. 

Why do we use coal and why is it a problem?  Coal is a fossil fuel, just like oil and natural gas.  This means it was formed from decaying plant and animal matter laid down in prehistoric times (for a more precise explanation read a geology book).  Fossil fuels contain high levels of carbon and hydrogen, meaning they react with oxygen (ie burn) producing lots of energy. We use coal because it is (or has historically been) cheap and it produces lots of energy – something modern economies need lots of.  

The downside is that burning coal produces CO2 and as Australia produces a lot of coal both for domestic consumption and for export this makes it ground zero for decarbonisation debates.  The same applies at a global level – coal is responsible for about 30% of total greenhouse gas emissions (1) so decarbonisation is not possible without eliminating CO2 from coal entering the atmosphere.

What is coal’s global supply/demand balance and what role does Australia play?  Coal is a very abundant mineral – there is plenty of coal in lots of different countries.  Ease of extraction, transport infrastructure and economies of scale mean, however, that most of the world’s coal is now produced in a relatively small number of nations.  The table below shows that nine countries produced over 85% of the 8 billion tonnes/year of coal currently mined each year. China alone is responsible for almost 50% of the world’s production and consumption of coal.  This is the basis for claims that Australian action to influence decarbonisation will be dwarfed by whatever China does or does not do. While this argument is often presented in the context of a “do nothing approach”, it is nonetheless not an invalid observation.

Recent trends in coal production show some signs of slowing output and its use is clearly declining in Europe and the US but over the past 30 years production has doubled with all of this increase occurring in Asia.  As mentioned above, coal is a cheap source of energy and as China, India as well as nations such as Vietnam, Pakistan and Malaysia become more industrialised they are using coal to provide a significant portion of the energy they need for this transformation.

The table below also highlights, not unsurprisingly, that nations with significant coal production capacity tend to also be heavy coal users.  Some, like China and India, import additional coal to make up for supply shortfalls while others – Australia and Indonesia in particular – are net exporters.

Table 1 Global coal supply and demand balance (2)

Given the tendency for most coal to be consumed domestically, the global seaborne export market represents less than 20% of the total global supply and demand balance.  This is the market segment where Australia is a big player – the largest supplier to the seaborne market and historically the major source of coal for nations such as Japan, South Korea and Taiwan which have a high energy demand but no domestic fossil fuel availability.   One sometimes reads comments that confuse the fact that while Australia is the largest supplier of seaborne coal it is only responsible for about 6% of total global production.  

What is coal used for?  About 70% of global coal consumption is for power generation (ie making electricity) with the balance used in the conversion of iron ore into iron and steel and a range of other industrial applications requiring high levels of heat input.  Coal used for power generation and for industrial heating is called Thermal or Steam coal. The key quality parameter of thermal coal is the energy content – in Australia, high energy, low moisture and ash grades are called black coals while lower energy, high moisture reserves are known as brown coal.   About half of Australia’s exports are high energy thermal coal – historically shipped into Japan and South Korea and more recently into China and India as well

The other half of Australia’s 385 million tonnes/year of exports are Metallurgical or Coking coal grades used in blast furnaces to process iron ore into iron and steel.  In this instance the coal (after it has been converted to coke) is a chemical reactant, not just a simple heat source, and must meet a complex set of physical and chemical requirements.  This more stringent set of characteristics means only some coal deposits are suitable for this application – Queensland’s Bowen Basin coal reserves are one of the major global sources of high quality metallurgical coal.  The price for high quality Metallurgical coal is typically at least double that of common thermal grades and accordingly Australia’s metallurgical coal exports are more profitable for both miners and government than thermal coal exports. 

Australia’s position in the global coal market is underpinned by the fact that we have lots of coal, much of which is very high grade – valued both for electricity generation and also for the more complex application of smelting iron ore into iron and steel.  In terms of domestic consumption, Australia currently uses about 115 million tonnes/year – almost exclusively for domestic power production. This includes black coal in NSW, Queensland and Western Australia and Victorian brown coal. By virtue of the fact that the NSW and Queensland coal fields are relatively close to the coast and with significant investment over many years in rail and shipping infrastructure Australia has established a profitable and important (in terms of employment, royalties and balance of trade) coal export franchise – second only to that of iron ore exports from Western Australia.  This franchise is based on both thermal coal and perhaps more importantly, from a national wealth perspective, it is the leading supplier of high quality metallurgical coal supplied to steelworks around the world. Under pressure from decarbonisation, what is the prognosis for this franchise?

Can coal can be easily replaced by renewables or other low/zero carbon technologies?  Globally, coal is the largest source of energy for the generation of electricity with 40% of the world’s electricity coming from coal fired power plants.  There are, however, a range of alternate, commercially available generation technologies with lower CO2 emissions. These include nuclear, hydro, gas fired and more recently wind and solar. Despite concerns around cost, reliability and suitability of local wind and solar resources it is increasingly likely that in the future the global electricity sector will rely less on coal and more on renewables (and in some cases nuclear and natural gas).  Australia’s domestic reliance on coal for power generation has dropped from 80% to 60% in the last 20 years, with increased use of gas and renewables. This trend will continue and given high quality renewable resources and future improvements in battery technology and cost it is not inconceivable that Australia will have a substantially decarbonised power sector broadly in line with the 2050 Paris timetable. At a high level, the same forecast applies to Australia’s thermal coal export customers.  All are signatories to the Paris Convention so, in theory, they are working to decarbonise their own power sectors. One suspects the decarbonisation approach and timetable will be very different in developed nations such as Japan and South Korea relative to developing nations such as Vietnam and Malaysia. What is clear is that if Australia’s thermal coal customers act on their Paris commitments they are likely to need less coal in the future.

While the demand for thermal coal looks likely to gradually decline, this is, however, not necessarily the case for metallurgical coal and for industrial applications that need the high energy density unique to fossil fuels (3). There are no commercially available alternatives to blast furnace smelting technologies that require high quality Metallurgical coal for the conversion of iron ore into iron and steel.  The same essentially applies to some other important industrial processes. This conclusion is implicitly endorsed in the Greens End Coal policy (4) which is heavy on exiting thermal coal but has vague targets around supporting R&D to develop new iron ore smelting technology which doesn’t require metallurgical coal. This, of course, does not mean that coal free alternatives won’t be available in the future but statements implying renewables are a simple, ready now replacement for coal end use are a big stretch outside of the power sector.   

How important are Australia’s coal exports?  From an Australian perspective coal makes up  about 15% of the nation’s total export earnings ($65 billion out of a total of $480 billion) .  Metallurgical coal exports provide over two thirds of this total with a further effect seen at a state level – metallurgical coal royalties making up close to 10% of Queensland state revenues.  Coal is important to Australia and one can sense behind the coal dominated rhetoric that the current government is looking for growing revenues from LNG and Hydrogen as a hedge against coal markets but that can be a subject for a later discussion

From a global steel making perspective Australia is absolutely critical.  The seaborne metallurgical market is about 300 million tonnes/year with Australia, at just under 200 million tonnes/year, providing well over 50% of this total.  Without Australian exports Japanese and South Korean steel making would struggle, leaving China (which has a significant domestic metallurgical coal supply) in a very dominant position. It is, therefore, not too much of an exaggeration to say that global steel production relies on Queensland’s Bowen Basin.  

While Australian thermal coal exports are an important source of foreign income they are more likely to face future headwinds.  Globally, the seaborne thermal coal market is ~1 billion tonnes (out of a total market of 6.8 million tonnes). Australia supplies less than 20% of the seaborne market – an important but perhaps not critical share, especially given recent increased Russian exports.  If current trends continue the demand for thermal coal is likely to decline over the next decade (even if at a lower rate than some project) with increased use of nuclear and particularly renewable generation. 

So Australia really supplies two separate products to three different markets?  This is a little simplistic but broadly correct.  The two markets for Australian thermal coal – domestic and export based – are both dominated on the power generation sector.  These markets share some of the same headwinds but differ in terms of government policies and ambition with respect to energy sector transformation.  There are also geographical constraints (ie land to build new wind and solar facilities) in some key export nations that may slow the rate at with coal based generation.  This means Australia’s domestic and export thermal markets wont move in lock step – my guess is that the smaller domestic market will decline more rapidly. Australia has some aging coal plants that are not being well maintained, political pressures are pushing for more action and the economics of wind and solar appear continue to look attractive.  The export thermal coal market could be longer lived and indeed could see increased demand from some countries offset reduced demand in others. The Greens and climate activists more broadly will call on Australia to proactively cease thermal coal exports. This is likely to be a key debate in the next election cycle – the current government will obviously oppose this logic while the ALP appear to be still working on their fossil fuel export position.  Expect to hear statements about Australia’s moral responsibility for the fossil fuels it sells countered by arguments highlighting our obligation to support trading partners as they work through their decarbonisation programs.

All indications are that the Metallurgical coal should be the most resilient of the three markets – being required until a completely new process for steel making is commercialised, perhaps based on direct reduction using hydrogen.  Either that or steel plants are fitted with carbon capture and storage allowing CO2 emissions to be stored in underground reservoirs – an approach which is either vital or impossible depending on which pundit one reads. The ALP have already flagged that they see metallurgical coal as different to thermal coal and potentially setting them up to offer qualified support for Queensland coal communities.

The recent extreme bushfires in NSW have provided a platform for political climate discourse.  The Liberal/National party seem incapable of talking about decarbonisation and are fixated on the power prices.  Concern over power pricing is not unreasonable but they don’t seem to have got the memo telling them that renewables are now very competitive with coal.  Their position as the party of reason, pragmatism and rejection of what they describe as virtue politics will be under threat if they don’t respond to the public’s demand for action and the fact that the investment community is not interested in coal.

As mentioned above a revised ALP coal policy could recognise the difference between coal production and coal demand and potentially set the party up to have a different approach to domestic consumption and export sales. This would allow aggressive pro renewable targets for the domestic power sector while supporting continued exports, particularly for metallurgical coal for as long as demand holds.  It will be interesting to see what message they take to the next election

So is an Australian fixation on coal justified?  Given that it is a major source of greenhouse gas emissions, Australia is a major supplier to the seaborne market and because of its economical value coal will continue to be an important topic.  There is, however, more to decarbonisation than coal and the power sector. Australia needs policies and at some decisive action on electric vehicles, land use changes, the future for CO2 producing industries like aluminium and cement and methane emissions from sheep and cattle.  The Greens could have used the current bushfire focus to raise these issues but instead opted to keep the focus on coal. This decision along with Bob Brown’s visit to central Queensland during the last election could prompt some climate activists to question the Greens tactics and perhaps wonder if they have become too focussed on short term political gain.  Coal will remain a hot button topic but there is an opening to broaden the dialogue and give some other key decarbonisation topics a bit of prime time exposure.

1. https://www.epa.gov/ghgemissions/overview-greenhouse-gases

2. https://yearbook.enerdata.net/coal-lignite/coal-production-data.html

      (3) https://journeytozerocarbon.com/2019/11/09/industrial-heat-a-co2-challenge/

      (4) https://greens.org.au/campaigns/end-coal