A Framework for Assessing Thermal Coal Production Subsidies

Attributed Authors: Mark Fulton, Tim Buckley, Doug Koplow, Luke Sussams, and Andrew Grant Published: Sep 2015

There has been much discussion of fossil fuel subsidies as both an inefficient use of public tax dollars and a barrier to the scaling up of low- and no-carbon energy sources. As "green" incentives are reduced, the phase-out of fossil fuel subsidies becomes even more urgent in order to reduce market distortions and ensure a level playing field in energy markets. Developing-world subsidies to fossil fuel consumption have attracted the most attention to date. However, fossil fuels also benefit from production subsidies in both developed and developing countries. These production subsidies are significant in our view, and an initial framework developed here to evaluate their impact demonstrates the importance of addressing them.

Focusing on thermal coal production that receives important subsidies around the world, we assess whether some coal reserves are entering production only due to government subsidies; and whether without the subsidies, this coal would instead remain in the ground. The question is an important one because coal is one of the most carbon-intensive energy resources in terms of greenhouse gas emissions per kWh of electricity produced. Coal production and combustion also have significant human health and environmental impacts beyond their carbon impact, though we do not examine them here.

We found:

  • Production subsidies summing up to: nearly US$8 per tonne in the US Powder River Basin ($2.9b/year); and nearly US$4 per tonne ($1.3b/year) in Australia.
  • The removal of these subsidies would result in an 8%-29 % reduction in demand for US PRB coal, with associated cumulative reductions of 0.7 to 2.5 GtCO2 to 2035, equivalent to 9 to 32 coal plants; and a 3%‐7% reduction in demand for Australian Seaborne coal, though with unknown carbon reductions due to substitution of coal from other (often also-subsidized) producers.

While the extraction of some existing reserves may already be "locked in" due to long-term take-or-pay contracts with power plants and leasing subsidies, subsidy reform can play an important role in the direction of future investment.  Particularly with regards to federally‐owned coal in the US, even purely administrative changes could make a positive difference.  Modifications include enforcing royalties on all lease terms; ensuring competitive auctions; and requiring real funding of mine closure liabilities, with contributions held outside of the company.

Removing subsidies to coal extraction should be a central plank of any country's fiscal and environmental plan. Particularly as subsidies to renewable energy come under increasing pressure, subsidies to the mature coal sector should not be ignored.  A broader geographic range for coal subsidy elimination will boost the carbon benefits, as the ability for coal supplies to move in from other subsidized markets will boost the carbon benefits, as the ability for coal supplies to move in from other subsidized markets will boost the carbon benefits, as the ability for coal supplies to move in from other subsidized markets will be constrained. 

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Tags: post-closure liabilities resource auctions coal leasing scandals Powder River Basin coal subsidies