Costing of The Greens’ Economic Policies: Mining (Report)

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Costing of The Greens’ Economic Policies: Mining is a report commissioned by the Minerals Council of Australia and authored by Sinclair Davidson and Ashton de Silva.

Key points

• "We estimate the direct consequence of that policy would be to reduce GDP by between $29 billion and $36 billion per year. Then there are the indirect costs to consider. For each job lost in the coal mining industry 6.5 jobs will be lost in the economy has a whole. The employment consequences of the coal industry closing would be almost 200,000 jobs across the economy. The loss of corporate income tax and increase in welfare payments would constitute a negative $6 billion impact on the federal budget. For every $1 of income lost in the coal mining industry, $3.92 of income will be lost in the economy as a whole. At present any replacement industries are unspecified – so it is not clear what the net cost to the economy would be."

• "Most troubling we find that Australian comparative advantage in coal exports has eroded in the past ten years. This we attribute to poor policy developments within Australia. It is clear that policy makers have little regard for mining and this has encouraged poor policy making. Coal mining performs well despite the poor policy environment ... We argue that given the competitive nature of the world coal market that the costs of those policies will be incurred in Australia and will give rise to few, if any, global environmental benefits."

• "The argument that renewable energy could easily replace coal powered energy is fanciful. Australia has little installed capacity in renewable energy compared to coal powered energy. In addition renewable energy is very expensive and technologically uncertain."

• Page 1, cites Chris Uhlamn interview with Bob Brown, ABC TV, May 17, 2011.

• "According to data drawn from the International Energy Agency Australia is the world’s single largest exporter of hard coal. Australia, however, is no means the world’s largest producer. In 2008Australia produced 5.62 percent of the world’s total hard coal production compared to the People’s Republic of China’s production of 47.19 percent."

• "Over the period since 2000 the top ten producers have increased their production share from just less than 95 percent of world production to just over 97 percent. World production has increased by 60.5 percent since 2000, with the top ten producers increasing their output by 64 percent. The increase in Australia’s output, however, has not kept pace with the overall world increase. Australian output is up a mere 36 percent, while Chinese output is up 122 percent, Columbian output up 92 percent and Indonesian output up 274 percent. Canada and Poland have experienced declines in output."

• "In a competitive market it is unlikely that any one participant would enjoy any market power ... We interpret this result as indicating that while Australia may be large producer and the single largest exporter in the world Australia does not enjoy any market power and cannot dictate terms and conditions to the world through its relative size in the world coal market."

• "While there might be some short‐run dislocation in the market where Australia to unilaterally cease producing and exporting coal, it is unlikely that there would be a long‐run impact on the world economy. Prices might be slightly higher for every level of coal consumption but the overall amount of coal being consumed would not change. The demand for coal is such that until viable substitutes are found people will continue to consume it and the departure of any one exporter will only impact the market until alternate supplies are brought to the market. From an environmental perspective it is those economies with lower environmental standards that are likely to expand production – the Former Soviet Union countries and Indonesia."

• "Perceptions of Australian performance have deteriorated in many of the factors that the Fraser Institute has identified in its surveys as being important. For example, in the areas of environmental regulation and uncertainty about parks and wilderness areas, the perceptions of miners are now much more adverse than they were ten years ago. Similarly in the areas of taxation and labour regulation perceptions are much more adverse now than they were ten years ago. One area of improvement is in native title yet this is one area where The Greens policy would be likely to introduce greater uncertainty. Overall the Mineral Potential Assuming Current Regulation for Australia has deteriorated. This measure rates regional attractiveness based on geological potential and regulatory regime. Given the deterioration of the policy environment it is not surprising that Australia has fritted [sic - ed] away its comparative advantage in mining. Policies that The Greens would introduce would only add to the decline in attractiveness."

• "We estimate that mining contributes 9 percent of GDP. Of that amount we estimate that the coal industry contributes between 25 percent and 31 percent."

• "To further investigate that point we examined the impact of coal exports on Australian GDP on the assumption that coal exports ceased and was not replaced by any other export earning industry. In the short‐run this is a reasonable assumption – it takes time for dedicated assets to be reorganised to their next best use. In the long‐run it is unlikely that alternative exports could match coals export earnings."

• "According to economic theory it is likely that these workers would have higher marginal propensities to consume than workers in lower paid sectors such as finance and retail trade. The effect of substituting high income employment for lower income employment is likely to have adverse effects on the economy."

• "The multipliers consistently demonstrate that the (coal) mining sectors are integral to Australia’s economic performance. Therefore, any restrictions/retardation of this sector will significantly retard Australian economic performance."

• "ABS data indicates that at the end of 2007/08 the coal industry effectively employed 29,393.3 full‐time people (ABS Catalogue 5209.0.55.001, Table 20). Therefore if the coal industry closed down we estimate that 191,056 (equivalent) full time jobs would be lost.

This would inevitably lead to increased pressure on tax payers, in the form of:

• Government Revenue – Tax revenue would significantly deteriorate. According to the Australian Taxation Office the coal industry paid $3.6 billion in net corporate income tax in 2008/09.
• Government Expenditure – Increased demand for welfare assistance. Assuming the job seeker allowance is $500 per fortnight and the average duration of employment is 12 months, the cost to the Australian government would be approximately $2.5 bn. This does not include additional welfare assistance that would be required – i.e., subsidised health care, retraining and re‐location etc.

The immediate cost to the budget, excluding any consideration of personal income tax revenue loss, would be $6.1 billion."

• "What we have not considered is that a reduction in coal will have a significant impact on regional Australia and our major trading partners. Importantly many (coal) mines are located in regional Australia and are an integral part of the local community. Therefore, any reduction in output would significantly affect local communities. What makes this problem particularly acute is that governments, both state and federal, are actively pursuing policies that promote regional population growth. A key aspect of this policy must be economic viability. We believe that a phasing out of coal production would significantly inhibit good policy outcomes. It is conceivable that a reduction in the coal sector would place greater strains on metropolitan resources as people from regional areas migrate to cities seeking employment."

• "Furthermore, in terms of time and money a reduction in coal output would cause a significant burden to Government resources and tax payers, leading to an increase in the likelihood of future budget deficits. This of course is in addition to placing further pressure on (public) housing and transport in metropolitan areas."

• "Another important implication for the Australia economy is that imports are likely to become more expensive. It is important to note, that the countries Australia exports coal to are the same countries that Australia imports goods from. For example, goods from Japan include electronic equipment and motor vehicles. A reduction in bilateral trade is likely to have significant adverse effects on all our trading partners – at least until substitutes for Australian coal is located."

• "The important question, however, is whether or not it is viable to substitute away from coal and towards more renewable sources of energy (on the assumption that nuclear energy is not a politically or socially acceptable energy source). The argument usually posited is that wind power would substitute for coal power. ABARE, for example, has forecast Australian energy use out to 2029/30."

• "It is not clear, however, that a large scale substitution from fossil energy to wind‐powered energy is economically or socially viable. The US based Electric Power Research Institute has created a Generation Technology Reference Card that compares the number of different power plants using different generation technology would be needed to power an American city with 1 million homes (assuming an annual household consumption of 12,000 kilowatt hours).28 It argues that two coal powered plants could provide the electricity demand for such a city but that 2,000 wind turbines would be required to meet that same demand.'

• "In the first instance the sheer number of turbines necessary to replace coal powered plants is very high. The second problem is that local communities are becoming increasingly unhappy with the locations decisions of turbines."

• "The Electric Power Research Institute has estimated levelised costs of electricity for Australia and the results of that exercise suggest alternatives to coal powered electricity would be very expensive.32 We have summarised some of its results in table 10. We show results with and without carbon capture and storage (CCS) – the Electric Power Research Institute assumes that this technology will the viable and deployed by 2020." They estimated that the costs of supply options are, in $/MWh 78 ‐ 91 for coal without carbon capture and storage, 167 ‐ 191 for coal with CCS, 97 for gas without CCS, 153 for gas with CCS, wind 154-214 for gas with CCS, 327 ‐ 473 for solar and 173 for nuclear.

• "We are particularly concerned by the erosion of Australia’s comparative advantage in coal over the past decade. It is our view that Australia performs well in world coal markets despite domestic public policy and not because of that policy. The emergence of competitors in the former Soviet Union countries and Indonesia indicates that any action to eliminate coal mining in Australia will impose costs on the Australian economy without providing global environmental benefits."

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