Climate Change and a Proposed Coal Mine

A proposed new coal mine in Cumbria, England has prompted vehement arguments for and against.  The underlying problems are a flawed policy framework with insufficient international coordination.

To its supporters it’s a no-brainer.  The mine will produce coking coal, an essential input in the production of steel from iron ore.  And a modern economy needs steel for a myriad of purposes, not least in the construction of wind turbines to reduce dependence on fossil fuels.  What’s more, it will reduce Europe’s imports of coking coal from the US, saving more than 20,000 tonnes of CO2 equivalent per annum in emissions from shipping fuel.  It will also create jobs in a relatively poor region of the UK.

Its opponents are equally adamant.  To address climate change and meet the widely-accepted target of  net zero carbon emissions by 2050, the use of coking coal needs to be phased out because, like all coal, it emits CO2 when burnt.  Already, nearly 30% of world steel production uses no coking coal.  Allowing a new coal mine would undermine the UK’s credibility as host of the next  UN Climate Change Conference (Glasgow, November 2021).  

The circumstances have been widely reported in the UK, but for readers elsewhere here is a summary.  West Cumbria Mining Ltd (“WCM”) is a company formed to exploit coal reserves in the Cumbria region of north-west England.  Before it can develop and operate a mine it requires planning permission from Cumbria County Council (“the Council”).  Environmental campaigners asked the UK government to intervene, using reserve powers under which the  Secretary of State for Housing, Communities and Local Government can “call in” a matter considered to be nationally significant and impose his own decision whether or not to grant permission. The Secretary of State has so far declined to exercise that power in this case, and in October 2020 the Council resolved to grant permission.  However, the Council informed WCM on 9 February 2021 that it would reconsider its decision.  At the time of writing the outcome of the Council’s reconsideration is awaited and WCM is preparing to take legal action against it (1)

[Update 13 March 2021. The Secretary of State has now, after all, decided to “call in” the planning application by WCM. This means there will now be a public inquiry, which may take many months, with the Secretary of State rather than the Council making the final decision.]

In my view both sides overstate their case.  Let’s start with the saving of emissions from shipping fuel.  20,000 tonnes of CO2 equivalent may seem a lot, but it’s a tiny fraction of the emissions from use of the coal the mine would supply.  WCM estimate annual supply from the mine at 3 million tonnes.  Its use in steel production will yield almost 9 million tonnes of CO2 emissions (2).  That’s more than 400 times the saving on emissions from shipping fuel.  What we should be considering is the net increase in emissions if the mine goes ahead.  But that’s hard to estimate because it depends on the extent to which the supply from the mine adds to total world use of coking coal.

Economic analysis can help here.  Total world use of coking coal will depend on the market equilibrium point where its supply and demand curves intersect.  The extra coking coal from the Cumbria mine will shift the supply curve to the right in the standard price-quantity diagram (see Box 1).  How this affects the equilibrium quantity depends on the elasticity of supply (ES)and elasticity of demand (ED), the relevant formula being (see Box 1):

\frac{\text{Net increase in equilibrium quantity}}{\text{Quantitative shift in supply curve}}=\frac{-E_D}{E_S-E_D}

There are two ways in which we can try to make very rough estimates of the elasticities so as to estimate the value of the above fraction.  One is to apply what economists know to be true for the elasticities of supply and demand for most goods.  It is rare for demand to be either perfectly elastic (ED = minus infinity) or completely inelastic (ED = 0).  Elasticities of demand for broadly defined goods (not for example particular brands) are typically within the range -0.2 to -2.0 (3).  In the case of elasticity of supply, it is especially important to consider the time scale over which changes are being considered. If an industry is already producing at full capacity, it will take time to increase its output since extra equipment will need to be installed and additional workers recruited and trained.  For many goods, therefore, supply is inelastic in the short term (ES < 1) but more elastic in the longer term (ES > 1).  For our purposes, it is long-term elasticity which is relevant, since the mine is expected to have a long operating life. 

The other way to try to estimate the elasticities is via a literature search for empirical estimates of the elasticities of supply and demand for coking coal.  Unfortunately, there seem to have been few relevant studies, and some of those are quite old.  Truby (2012) cited a study by Ball & Loncar (1991) estimating elasticity of demand for Western Europe in the range -0.3 to -0.5, and also a study by Graham, Thorpe & Hogan (1999) estimating elasticity of demand at -0.3 (4).  Lorenczik & Panke (2015) estimated elasticity of demand in the international market at between -0.3 and -0.5 (5).  For elasticity of supply, Lawrence & Nehring (2015) estimated 0.30 for Australia and 0.73 for the US in 2013 (6): the specification of a particular year suggests that these estimates are of short-term elasticity. 

Taking all the above into account, it might be reasonable to estimate elasticity of demand at   -0.4 and elasticity of supply at 2.0.  Putting these values into the above formula yields a fraction of 0.17.  That would imply that the extra 3M tonnes per annum from the Cumbria mine would increase world use of coking coal by 510,000 tonnes. The net increase in CO2 emissions, allowing for the savings on shipping from the US, would be 1,476,000 tonnes annually (7).  I offer that as one plausible scenario, not a prediction.  The more fundamental point is that the fraction is certainly not going to be zero.  That would require either zero elasticity of demand (completely inelastic demand) or infinite elasticity of supply (perfectly elastic supply).  Neither of those are remotely plausible.  Even if the fraction were just 0.01, an implausibly low figure, world use of coking coal would increase by 30,000 tonnes per annum, increasing net emissions by 68,000 tonnes (8). 

Turning to the opponents’ case, it would certainly help towards the target of net zero carbon emissions by 2050 if the use of coking coal in steel production could be phased out.  Whether that is feasible at reasonable cost, however, is far from certain.  The main reason why 30% of current production uses no coking coal is that its input material is not iron ore but recycled scrap steel which can be processed into new steel in an electric arc furnace (9).  The use of recycled steel can probably be increased, but in a growing economy demand for new steel is always likely to exceed the supply of recycled scrap. 

The main hope for ending the use of coking coal is therefore the development of new technologies for producing steel from iron ore.  One promising approach is to use hydrogen to produce direct reduced iron (DRI, also known as sponge iron) which can then, like scrap steel, be processed into new steel in an electric arc furnace (10). If the hydrogen is “green hydrogen”, produced by electrolysis of water using electricity from a renewable source, and if the electricity powering the furnace is also from such a source, then the whole process is emissions-free.  McKinsey reports that all main European steelmakers are currently building or testing hydrogen-based production processes (11).  Development appears to be most advanced in Sweden, where steelmaker SSAB has a joint venture with iron ore producer LKAB and energy company Vattenfall to produce steel using a technology known as HYBRIT (12), and the H2GS (H2 Green Steel) consortium plans a large steel plant using a similar technology (13). 

Another approach to steel production without coking coal involves reducing iron ore to iron by means of electrolysis.  Again, if all the electricity is from a renewable source then the whole process will be emissions-free.  Steelmaker ArcelorMittal is leading a project which has proved the potential of the technology (14), and Boston Metal is offering to tailor what it calls Molten Oxide Electrolysis (MOE) for customers producing steel and other metals (15).

However, phasing out the use of coking coal is not the only way in which carbon emissions from steel production might be reduced to zero or very low levels.  The alternative is to continue using coking coal but with carbon capture, utilisation and storage (CCUS), and around the world there are a number of CCUS initiatives relating to the steel industry. Al Reyadah, a joint venture between Abu Dhabi National Oil Company and clean energy company Masdar, captures CO2 from an Emirates Steel plant and injects it into nearby oil fields for enhanced oil recovery (16).  Steelmaker Thyssenkrupp has a project called Carbon2Chem which uses CO2 from steel production as a raw material in the production of fuels and fertilisers (17).  Another possibility, although apparently only at the proposal stage, is the retrofitting of conventional steel plants to permit a process known as calcium-looping which uses CO2 to react with limestone and produce lime fertiliser: Tian et al (2018) make the remarkable claim that this could allow decarbonised steel production at relatively low cost as early as 2030 (18).

Which of these various technologies will prove successful is difficult to predict.  It is noteworthy that some large producers, including Thyssenkrupp and Tata Steel, are hedging their bets by exploring both hydrogen-based and CCUS approaches (19).  This uncertainty in turn creates a problem for producers of coking coal.  If technologies based on hydrogen or electrolysis come to dominate the steel industry, then demand for coking coal will eventually fall to zero.  The speed of the fall will partly depend on how climate change policies and other considerations influence firms’ decisions on whether to continue operating existing conventional steel plants for their full working life.  It seems possible that demand for coking coal will fall gradually over several decades, with lower-cost mines continuing to find buyers as others cease production. If however CCUS approaches become dominant, then the outlook for coking coal producers will be much brighter.  It’s also possible that more than one technology will be successful, resulting in some ongoing demand for coking coal.  I conclude that the opponents’ main argument against the mine – that the use of coking coal needs to be phased out to address climate change – is not proven.

A company like WCM which chooses to make a substantial investment in a new coking coal mine is taking a big risk.  To make a worthwhile return on its investment it will need to be able to sell its coal at a good price for many years, but if demand for coking coal rapidly declines due to technological change in the steel industry, then it will not be able to do so.  So investors have to make a judgment as to whether they can accept their perceived risk-return pattern.  The key issue then is the policy context within which they make that judgment.

It is appropriate that the mine should require approval by the Council in respect of what might be termed “normal planning matters” such as effects on the local economy, possible disturbance to residents, impacts on the local environment, and restoration and after-care when the mine reaches the end of its operational life.  Any approval would very likely be conditional on measures to limit local impacts.  It is also appropriate that the Council should have regard to climate change policy in making decisions on its own activities, such as the heating of its schools and offices.  What is more dubious is a local government body accountable primarily to its local electors being left to take a decision which has national and international implications because of the extra carbon emissions the coal produced in the mine would generate.  It is a flawed policy framework which places this burden (or opportunity, depending on one’s point of view) on the Council.

A better way to ensure that the decision whether to proceed with the mine has due regard to its climate change implications would be to ensure that WCM will bear the full social cost of its coal production. In economic jargon, there is a market failure in the form of an externality: the emissions from use of its coal would have a cost to society which it would not bear.  The standard economic prescription to correct such a market failure is to internalize the externality.  That could be achieved by pricing CO2 emissions via either a carbon tax or an emissions trading system.  The direct effect on WCM would be small as the emissions from the mine itself would not be large. Much more important would be the indirect effect arising from making steel producers bear the full social cost of their operations.  Unless their steel was produced in an emissions-free way, the carbon price would add to their costs and lower the price they could afford to pay for their inputs including coking coal.  Thus the potential returns from the mine would be reduced, and the risk of loss would be increased.

If the mine is made to bear its full social cost in this way, so that its private costs and benefits are aligned with its costs and benefits to society, then a commercial decision by WCM as to whether investment in the mine would be worthwhile will also reach the correct decision from society’s point of view.  In that case there would be no need for the Council or the UK government to become involved in assessing the climate change implications of the mine.  With the market failure corrected, the matter could be left to the market (subject to planning approval in respect of genuinely local considerations). 

Although the EU and the UK have emissions trading systems (20), this does not mean that the mine will bear all of its social costs.  One reason is that WCM plans to export coal to the EU and beyond (21).  Countries just beyond the EU with sizeable steel industries include Turkey (34Mt), Iran (26Mt) and Ukraine (21Mt) (22).  Of these, Ukraine is considering an emissions trading scheme, but prior to legislating on such a scheme has just began a three year period in which large industrial installations are required to collect data on emissions (23).  Turkey is reported to be considering an emissions trading scheme, but without recent developments.  There appear to be no significant moves towards an emissions trading scheme (or carbon tax) in Iran.  Thus there is a significant chance that, for the next few years and perhaps beyond, some of WCM’s coal would be exported to countries with no carbon price at all.

A second reason is that, although steel production is within the scope of the EU emissions trading system, it is likely to continue to receive some of its carbon allowances for free until 2030 at least (24).  The EU’s understandable concern is that, since many steel products can readily be traded internationally, there is a risk that a stricter emissions regime could lead producers to transfer their operations to countries with laxer policies.  Nevertheless, free allocation of allowances means that the steel industry, and the mines which supply its coking coal, are not bearing all their social costs. 

A third reason is that it is questionable whether the market price of carbon allowances within the EU trading system is and will be high enough.  The EU sets an annual cap on the number of allowances, the number being slightly reduced each year, and the caps have a major influence on the market price of allowances.  Arguably they should be lower so that the market price will be higher.  Admittedly the price has risen in recent years, from very low levels during 2012-2018 to around €20 in 2019 and almost €40 in early 2021 (25).  Whether the price will remain at around that level remains to be seen.  The High Level Commission on Carbon Pricing (2017) concluded that, to achieve the 2015 Paris Agreement’s aim of limiting global average temperature to well below 2°C above pre-industrial levels, the carbon price should be at least US$ 40-80 by 2020 (26).  The current €40 (equivalent to $48) is towards the lower end of that range.

Each of those reasons underlines the need for international coordination on climate change and therefore the importance of the coming Glasgow Conference.  A successful conference could put pressure on countries which have not established a carbon price to move towards setting one, or accelerate existing initiatives.  An expectation that carbon pricing will become more widespread would weaken the argument that free allowances are needed to avoid the risk of producers relocating abroad.  And a successful conference could agree tighter national caps on emissions leading to higher market prices for emissions allowances.

Notes and references

  1. West Cumbria Mining Statement 5/4/2021
  2. Coking coal is used in steel production both to reduce iron ore to iron and as fuel, but both processes generate CO2.  The atomic mass of carbon is 12 and that of oxygen 16, so 1 tonne of carbon yields (12 + (2×16))/12 = 44/12 tonnes CO2.  If the coal is 80% carbon, then 3M tonnes coal yields 3M x 0.8 x 44/12 = 8.8M tonnes CO2.
  3. Wikipedia – Price elasticity of demand – Selected price elasticities
  4. Truby J (2012) Strategic behaviour in international metallurgical coal markets  EWI Working Paper No. 12/12  p 13
  5. Lorenczik S & Panke T (2015) Assessing market structures in resource markets – An empirical analysis of the market for metallurgical coal using various equilibrium models  EWI Working Paper No. 15/02  p 14
  6. Lawrence K & Nehring M (2015) Market structure differences impacting Australian iron ore and metallurgical coal industries  Minerals Vol 5 p 483
  7. 510,000 tonnes x 0.8 x 44/12 (as per Note 2 above) = 1,496,000 tonnes, less 20,000 tonnes shipping fuel.
  8. 30,000 tonnes x 0.8 x 44/12 (as per Npte 2 above) = 88,000 tonnes, less 20,000 tonnes shipping fuel.
  9. World Steel Association – Raw materials
  10. Wikipedia – Direct reduced iron
  11. Hoffmann C, Van Hoey M & Zeumer B (3/6/2020) Decarbonization challenge for steel  McKinsey & Company  p 5
  12. SSAB
  13. H2GS
  14. Siderwin
  15. Boston Metal Boston Metal | A world with no pollution from metals production
  16. Carbon Sequestration Leadership Forum
  17. Thyssenkrupp
  18. Tian S, Jiang J, Zhang Z & Manovic V (2018) Inherent potential of steelmaking to contribute to decarbonisation targets via industrial carbon capture and storage  Nature Communications 9, Article No. 4422/2018
  19. Thyssenkrupp; Tata Steel
  20. The UK used to belong to the EU Emissions Trading System, but following Brexit it now has its own system: Wikipedia
  21. West Cumbria Mining Ltd – How will materials be transported  The statement about “EU and beyond” is at the bottom of the factsheet.
  22. World Steel Association – Steel statistical yearbook 2020 concise version  Table 1 pp 1-2
  23. World Bank Carbon Pricing Dashboard (Use the dropdown box under “Information on carbon pricing initiatives selected” to look for details re individual countries.)
  24. Metal Bulletin
  25. Ember – Daily EU ETS carbon market price (euros)
  26. Carbon Pricing Leadership Coalition – Report of the High Level Commission on Carbon Prices  p 3

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