US coal companies see little prospect for growth in the US. This is not because of an abundant deployment of renewables or a carbon price, but because natural gas prices have fallen considerably as domestic gas reserves increased with the accessibility of shale gas. (More on that trend here and here.) So what are US coal companies to do? Well they can try to increase exports to China and India to take advantage of the “long-term supercycle for coal” that is happening there. Indeed one of the biggest energy infrastructure transactions of the past year was China financing and selling coal boilers to India, not solar panels.
The long-term supercycle for coal is strengthening with each passing day,” Peabody CEO Gregory H. Boyce said.
Pittsburgh Tribune-Review – Peabody predicted in its earnings report that growing consumption in China, India and other nations put the world “in the early stages of a long-term supercycle for coal.” Energy needs in emerging Asian countries will require 1.2 billion tons of coal annually, and global steel production will require 300 million tons of metallurgical coal every year.
While the rush of coal companies to Asia was not brought about by a carbon price, it still represents better than any other example the danger inherent in leakage. While the primary concern with leakage is the shifting of emissions from one country to another, the larger harm is that if there is leakage at scale then the market signal is ineffective at forcing meaningful change.
For example, the capital for financing energy products is not limitless and therefore capital that continues to finance coal is not available to finance cleaner forms of energy. Additionally, so long as markets remain for existing technologies that spend very little on R&D there is little incentive to invest in R&D in search of new cleaner sources of energy.
But is the international trade in coal really bad? US coal companies will claim that US coal is lower in sulfur and can have a higher BTU value, thus making it cleaner than the Chinese coal that would get burnt anyways. But on the other hand, it would not be hard to make the claim that the public harm attributable to the international trade of coal and oil is at least equivalent to that of illicit drugs, which are banned.
Clearly, a ban on internationally traded coal is not likely or enforceable, just look at the drug trade. So would an international carbon price be more effective at curbing coal use? For any carbon price to be effective it must be enforceable, and that would likely require some form of border adjustment tariffs. But if the world’s largest markets for coal are not bound by a carbon price, then investment and R&D money will still flow to dirty fuels and further delay a global transition to a low-carbon economy, which will just increase the costs of mitigation and adaptation. (IEA says delays related to failure at Copenhagen cost $1 trillion).
How should the international community view the international trade of coal or oil? Is facilitating the cheaper use of fossil fuels really a public good?
Are the key international institutions up to the challenge of dealing with this issue? Steve Charnovtiz has described the differences between the UNFCCC regime and the WTO as follows:
Steve Charnovitz 2003 – The climate regime is driven by the need to correct market failure. Therefore, governments want maximum flexibility at the national level in using economic instruments to influence individual behavior. By contrast, the trade regime is not a response to market failure; it is a response to government failure, that is, the distortions of policy fomented by mercantilism and protectionism. Thus, the trading system often seeks to disable economic instruments at the national level. Unlike the climate regime, the trading system does not aspire to change the behavioral incentives for individual economic actors. Another difference between the two regimes is cultural. In the climate regime, science plays a central role in measuring the problem, and in evaluating policy responses. In the trading system, science plays no role in rulemaking.
Mr. Charnovitz notes that the WTO aims to correct “government failure,” but the notion that governments always fail by not fully liberalizing trade policy is controversial. Top economists have noted that many of the world’s successful economies, including the US, S. Korea, and China, achieved their dominance by protecting key economic sectors. (See Ha-Joon Chang and Dani Rodrick).
Charnovitz also highlights that science plays no role in WTO rule-making. But is this actually the case? It might depend on the definition of rule-making, but science in conjunction with the precautionary principal has played a role in disputes between the US and EU involving GMOs, beef hormones, and chemicals. But perhaps what Charnovitz is referring to is that the WTO is essentially a political body, which would mean that the WTO pursues policies based on unscientific beliefs, i.e., free trade in and of itself is a public good, or that as a political body its decisions are not likely to be in optimal accord with the science.
But is the UNFCCC that much different? Science should inform policy within the UNFCCC, but negotiations within the UNFCCC are inherently political, at least as much as WTO negotiations are.
Of course an optimal outcome would be for international institutions to remedy the market failure surrounding carbon-intensive development and increase free-trade for low-carbon environmental goods (EGs). The WTO has been negotiating for 10 years in an effort to designate a special category for EGs and lower trade barriers with slow if any progress. And the UNFCCC… well you know. Here is hoping the future does not look like the past.
China Environmental Governance 