Tuesday, January 22, 2013

Bringing 21st Century coal to Newcastle. I mean, to China.

To the Point had a discussion of the effort to take American coal, which is currently having trouble competing with natural gas, and export it to China.  Stanford's Frank Wolack says that it may not be so bad from a climate perspective.  His argument is that China is so hungry for power that bringing new coal to there will not really change its carbon emission patterns but will have a beneficial effect of raising the cost of coal in the US market and therefore assist the transition away from coal.  Opponents cite University of Montana's Thomas Power to argue that China's coal usage is very price-responsive and their energy usage is very inefficient.

So, dueling profs, and what to do.  I've attempted Eli's sneaky trick to RTFA with only partial success.  Power's work is here:
....One recent study found that a 10 percent reduction in coal cost would result in a 12 percent increase in coal consumption. Another found that over half of the gain in China’s “energy intensity” improvement during the 1990s was a response to prices. In other words, coal exports will mean cheaper coal in Asia, and cheaper coal means more coal will be burned than would otherwise be the case.... Lower coal costs will encourage investments in new coal-burning facilities in Asia—which in turn create a 30- to 50-year demand for coal.... 
Energy usage per unit of GDP across the Chinese economy is almost four times that in the United States and almost eight times that in Japan. The Chinese government and the large state-owned enterprises that produce, distribute, and use larger amounts of energy are well aware of the burden that high and rising energy cost can impose on the economy. The energy policies embodied in the last several five-year plans have focused heavily on improving overall energy efficiency in order to effectively control energy costs. Lowering coal costs to China would undermine these valuable energy efficiency efforts....


Wolack's technical work eluded me, although there's plenty of mainstream press about it.  I didn't find it on his academic website or elsewhere, but maybe it's out there.  The gist seems to be that China is so power-hungry that its coal demand is relatively inelastic to price, while the US demand is elastic.  Prof. Power obviously disagrees, and I doubt I have the econ chops to sort through it rigorously.

That won't stop me though from first pontificating, and then maybe adding two possibly useful points.  Pontificatingly, I accept the premise that a fast-growing economy is going to have a desperate and therefore more inelastic demand for energy, but not all other things are equal.  In a far poorer society, energy input is a much greater relative cost than in a richer, expensive-labor economy, so its price will drive decisions more in the poorer economy.  Furthermore, the choice of what energy source you use to construct brand new power sources under conditions of growing demand (China) is much more elastic than the choice of whether you will walk away from a recently-constructed coal plant and use a different energy source (America).  Both of these factors weigh in favor greater price elasticity in China.

Possibly-useful point #1:  in the radio podcast, Wolack says opening up US coal to the international market isn't a large enough new supply to reduce overall coal prices and increase consumption.  The problem with this is the choice of scope compared to impact.  Lawyers do this - if they want an environmental impact to look small, they increase the overall area of comparison.  My choice of buying an SUV or an electric vehicle, for example, isn't by itself going to significantly affect the overall vehicle market, but it does matter in the context of many other decisions.  The same is true with a much bigger economic impact of putting more coal on the international market.

My other point is political.  Wolack says "China's increased [coal] imports have almost no impact on how much coal China uses (and thus its emissions from coal) – only on where it comes from."  I dispute that - in the long run.  Humanity's future depends in large part on how much coal is still in the ground 50 and 100 years from now.  As a political matter I think it will be easier to keep a lump of American coal in the ground than it will to be keep of lump of Chinese coal down under.  So, if I have a choice, I'd prefer to take the action right now that keeps more American coal in the ground. This could also be relevant to price elasticity - China's demand growth will eventually slow down, and anything that reduces locked-in preferences to coal could be helpful in the future.

So count me as someone who needs more persuasion on this idea.