No New Coal and Gas

The Greens grudgingly voted with the federal ALP government to amend the Safeguard Mechanism legislation, a key plank in the government’s 43% greenhouse gas (GHG) reduction plan (1). In so doing, they have temporarily shelved their demand that the government agree to a national No New Coal and Gas (NNC&G) policy. Despite this concession, NNC&G remains an appealing policy for many climate conscious voters who see it speeding up the transition to net zero in part by avoiding “locking in” future fossil fuel usage. So what would be the implications for Australia biting the bullet and abandoning all new coal and gas development and why has the ALP been so firm in pushing back.

IEA Support for NNC&G ?

While the Greens may have compromised on the Safeguard Mechanism they appear to still be firmly committed to NNC&G, repeatedly telling us that “you have to stop pouring petrol on the fire before you can start putting it out” and claiming support from Fatih Birol, Director of the International Energy Agency (IEA) via his statement that “if governments are serious about the climate crisis, there can be no new investments in oil, gas and coal” (2).

Using IEA to support NNC&G is actually a bit of a stretch. While IEA’s decarbonisation pathway published in 2021 (3) does call for a dramatic reduction in fossil fuel consumption, their net zero scenario not only has almost 25% of 2050 global energy supply still being based on fossil fuels but it also assumes significant growth in nuclear power and widespread use of carbon capture and storage (CCS) especially with gas. Put plainly, while the Greens like the Birol quote they oppose much of the IEA decarbonisation logic and its technology solutions.

The pipeline of Coal and Gas projects

Putting aside claims of an IEA endorsement, NNC&G remains a policy goal of the Greens as well as some of the climate sensitive independents. How, then, should we frame the implications and complexities associated with NNC&G?

In promoting NNC&G, Adam Brandt has referenced 116 potential new coal and gas projects, a figure broadly supported by data from the federal Department of Industry, Science and Resources (DISR) (4). Looking first at the coal projects, DISR commentary suggests that many of the projects were already being reconsidered as illustrated by the quote below.

“There are 33 coal projects at the feasibility stage, but many of these have been delayed. There has been a growing preference for expansions of brownfield sites over new greenfield investments, with an expanding list of lenders and investors withdrawing finance to new thermal coal projects. Some pension and equity funds are also divesting from, or reducing their exposure to, thermal coal, limiting the range of investment financing options available to thermal coal project developers”

This suggests the potential supply surge from new coal projects as well as the Green’s role in eliminating the risk may have been overstated, but this is pretty standard political manoeuvring so good luck to Mr Bandt if he can get away with it. What is more significant is the DISR recognition that investment in new coal and particularly new thermal coal is waning and the focus is shifting away from new greenfield investments to brownfield expansions of existing facilities.

Before we look at the difference between greenfield and brownfield projects it is clear from the DISR data that, unlike coal, investment interest in new gas remains strong. This brings us back to groups like the IEA and their recognition that gas, potentially with CCS, may have a role to play in a decarbonised future. The current federal ALP government appears to share the view that it is too early to call an end to domestic gas production even if it tacitly acknowledges that new domestic thermal coal supplies are probably not needed. NNC&G, in treating both gas and coal in its different forms as identical from a policy perspective, ignores the likelihood that gas and thermal coal will have very different supply and demand trajectories over the next few decades. The blanket NNC&G approach would prevent governments, should they so desire, from quietly managing down supply using existing environmental permitting regulations in a controlled and managed fashion. One imagines that the current ALP government is well aware of the constraints created by NNC&G and prefers a more flexible set of fossil fuel supply controls.

Greenfield vs Brownfield / New vs Old

NNC&G refers explicitly to “new” facilities which at first pass sounds both reasonable and simple – allow existing facilities to run to the end of their natural life (however one might define natural) while preventing new facilities from being started up. It is, however, not immediately obvious how a definition of “new”and by association “old” correlates to industry concepts such as greenfield investments in new standalone mines and gas extraction facilities, brownfield investments made to expand an existing operation and permit revisions seeking to access adjacent reserves needed to maintain production

In practice coal mines and gas wells do not have a clearly designated and defined block of coal or gas that represents the totality of the operation. A coal mine operator will have perhaps a decades worth of coal in front of the current mining front with a set of annual plans to progressively extract this coal. In parallel with active mine operations they will be doing exploratory drilling at the extremities of their current reserves to identify the future scope and direction of their mine plans. When an operating mine explores for and requests permits to move beyond current reserves it would characterise the process as seeking to maintain the life of an existing mine and definitely not starting a new mine. This would especially be the case where there is no intention to meaningfully increase output which is often constrained not by reserves but by crushing, washing and load out capacity.

Gas drilling is broadly the same except that an operating gas facility will, over time, drill lots of individual wells within a gas field to replace wells whose output is declining. One suspects the authors of NNC&G and industry participants will have markedly different definitions and criteria for “new” and judges will be asked to opine on “new” vs “extended” vs “expanded” vs “modified” vs greenfield and brownfield. It won’t be simple and whether NNC&G is seen as reasonable will probably depend on court rulings.

Domestic vs International Markets

Irrespective of how “new” is defined everyone understands that NNC&G must mean Australian coal and gas production will decline at a faster rate than without NNC&G. If this weren’t the case the policy would serve no purpose other than stopping investors losing money, presumably not a high priority for NNC&G advocates. The rationale and justification for NNC&G must be to crimp supply thereby encouraging the use of renewables and other zero carbon strategies. So if Australian coal and gas output was reduced, whose demand would be met and who would either go short or need to access alternate supplies..

A significant majority of Australia’s coal and gas production is not consumed domestically, it is sold to international customers, including government owned entities in countries such as Japan, South Korea, Taiwan, India and of course China. All of these nations have their own net zero plans so in theory are already planning to wean themselves off Australian coal and gas so perhaps they won’t mind if Australia has less available for purchase?

More likely, as Australian production declines there will be competing demands from export customers and supply into the domestic market. The recent run up in coal and gas prices has shown the political pressures created by exporting too much of “our” coal and gas and forcing local consumers to pay global market prices. Realpolitik will almost certainly ensure priority is given to domestic supply and the shortfall will be felt offshore. Despite the fact that Australia’s trading partners do have alternative supply options a NNC&G will take some explaining, especially as we will expect to continue receiving Chinese steel and Japanese consumer goods.

This opens a couple of new lines of discussion – firstly how replaceable is Australian coal and gas and second is how will Australia be perceived if it is seens as imposing climate policy on other Asian nations – some of whom are important geopolitical partners and some are potential adversaries. NNC&G advocates presumably feel they will thank us for the gentle shove in the right direction and ask if they can buy more of our lithium and rare earths. Diplomats would be concerned that they will object to Australia taking unilateral actions that disrupt long term trading arrangements and damaging their economies?

Is all coal and gas the same?

If Australia were to announce to the world that it is going to cease the supply of fossil fuels at some specified future date is it reasonable to assume our international customers could find alternative supplies if given enough notice?

That probably depends on whether one is referring to thermal coal, metallurgical coal or liquified natural gas. Thermal coal is not only the most replaceable, it is also the most likely to see reduced demand in the face of competition from wind and solar. Metallurgical coal, used in steel production, is the least replaceable. Australia is the largest producer of high grade metallurgical coal and a major exporter into the international market. Until hydrogen based green steel is fully commercialised Australian metallurgical coal will be needed to keep the blast furnaces in Japan, Korea and the rest of the world operating efficiently at full production. Gas, as discussed above, is a little harder to forecast. Climate optimists believe that green hydrogen will replace gas for industrial applications and batteries and other emerging technologies will mean it is not needed to back up wind and solar for power generation. There are, however, dissenting views that forecast meaningful quantities of gas (perhaps with CCS) will be needed well past 2050.

If in the future Australia decides to reduce the supply of its fossil fuel products it should be contemplating at least three different pathways, each with separate timetables and caveats around future technical developments.

Supply or Demand driven pathway

As we have discussed, the goal of NNC&G or similar policy initiatives is to control and limit fossil fuel supply. This strategy needs to operate in tandem with other policies aimed at encouraging the development and deployment of the zero carbon alternatives. This dual track approach needs to be tightly coordinated to simultaneously drive decarbonisation while ensuring that short term energy demand can always be satisfied. Irrespective of broad support for climate action, any meaningful energy supply shortfall, for even a modest period, will be politically disastrous and likely to not just result in severe economic dislocation but to be counterproductive from a decarbonisation perspective.

Any government which goes down the NNC&G route will be seen as making themselves directly responsible for the national energy supply, constraining existing fossil fuel sources and promoting investment in low carbon alternatives. If the average voter perceives clear personal evidence of climate related policies negatively impacting them they will lose confidence in government action and stop supporting its climate program.

Ensuring society’s energy demands are always met must therefore be at the centre of any energy policy. Climate zealots might argue in favour of pushing society to adopt lower energy consumption targets but this can only be possible over the long term through efficiency improvements and price signals, not imposing restrictions on power consumption or travel. The line between practical and reckless is clear – a tight energy supply that prompts energy conservation and penalises waste is manageable, creating an energy shortfall that meaningfully impacts a critical mass of angry voters is not.

Given an absolute requirement to meet domestic energy demand, policies aimed at deliberately crimping supply to encourage renewables or green hydrogen can only function at the margins of the energy market. It must be able to somehow identify and only inhibit the marginal unit of fossil fuel supply – the unit of supply that was 50/50 with an available low carbon alternative. Put simply, if supply constraint is too loose it wastes political capacity for no discernible impact if and it is even a bit too tight the implications will be that the government has either mismanaged the energy sector or is running a deliberate energy starvation agenda. Neither will be well received.

NNC&G advocates will not agree with this analysis. They will remain wedded to the concept that decarbonisation requires limiting the extraction of coal and gas. The logic behind this view seems to be a view that new coal and gas supply will catalyse and promote ongoing consumption. That they can hold this line while simultaneously celebrating the fact that wind and solar are now much cheaper than coal and gas generation is an unexplained contradiction. By their logic fossil fuels have some magical powers that make their use seemingly compulsory even when there are apparently cheaper and certainly more popular alternatives!

The alternative to NNC&G – focus on the alternatives

The decline of the US thermal coal industry (5) shows in very stark terms that overt government limits on the production of fossil fuels is actually not necessary. US coal has declined by over 50% in the last 15 years because of investments made in wind and solar which now outcomplete with coal. Yes, the US also had a reasonable supportive position on natural gas but no government entity formally banned supply from either new or old mines. As demand slumped, coal mines simply lost sales, went bankrupt and shut. Against this real world example, NNC&G would be extremely difficult to administer, could only make a very marginal impact on fossil fuel usage and risks exacerbating the political backlash when inevitable energy supply issues arise as low and zero carbon energy replace coal, gas and petroleum.

The recent battle between the Greens and the ALP highlights a philosophical battle between a group focussed on advocacy and being seen to make bold policy initiatives and a more pragmatic party seeking to maintain the support of a winning majority for an extended period. The further we get down the pathway to zero carbon symbolic advocacy becomes less important and clearly secondary to practical, workable policy implementation.