You are here: Coal industry update | Energy policy

Coal remains indispensable – abandoning coal production would be a mistake

The following paper by Wolfgang Reichel, Executive Chairman of the German Hard Coal Association, was published in the August edition of "Internationale Politik" (No. 8, Issue 59):

Shearer loader

 In Germany coal has always been a political issue. Its future is a subject of some controversy. On closer analysis, however, the arguments put forward by those who want to see aid to the coal industry phased-out as quickly as possible and the country abandon its access to the largest indigenous reserve of energy and raw materials simply do not stand up. In view of global developments and the current European movement towards deregulation the use of words like “obsolete” appears to be very strange indeed.

In reality the much maligned mining industry, like the German steel, chemicals and energy production sectors, is a technically innovative business and more modern than many other activities so favoured by the politically-correct token policy makers.

The current agreement between Government and mining industry, which dates back to 1997, provides for aid to disposals and closures to be reduced by 50% over the period 1996 to 2005. This leaves some € 2.7 bn available for 2005. At the same time production capacity will be halved to 26 million tonnes. It has been stated that a “viable mining industry” will remain and that the unavoidable process of downsizing will be carried out “without large-scale redundancies”.

After its election in 1998 the current German Government accepted this contractually and legally binding agreement and prepared a follow-up regulation for the period post-2006. On a European level, with the expiry of the ECSC Treaty in 2002, the coal industry has now been brought into line with the regulations on aid laid down in the EC Treaty. The Council has approved a new Regulation of state aid to the coal industry, which will initially run until 2010. The annual permits required for this process have also been agreed up to and including the year 2004.

Under Chancellor Gerhard Schröder’s leadership a new political agreement was therefore been put in place in 2003. A new financial framework was agreed for the period up to 2012 that from 2006 provides for a further scaling-down of the annual funding limit to € 1.83 bn in 2012. RAG’s “own contribution” would also increase to some € 170 million. This represents a further one-third reduction in aid compared with the 2005 figure. Production targets will also see annual output scaled-back by an equivalent amount to 16 million tonnes in 2012 under the proviso of socially-acceptable restructuring.

The German coal mining industry has already been engaged in a process of extensive structural adjustment for many years and the reduction in aid in this sector since 1997 has been without parallel anywhere else in Germany.

Nevertheless, as North Rhine-Westphalia Minister President Peer Steinbrück has stated, what we have is “not an industry on its way out – but a viable core production base”. And in its decision on the provision of support to the coal industry for the period 2006-2012 the Federal Government has clearly set out the remit of such a core mining sector: “An efficient and viable coal industry safeguards access to our largest national energy reserve and keeps this supply option open for future generations… In the light of our high and growing reliance on imported energy resources continuing access to indigenous coal deposits remains a key element in our strategy for security of supply. What is more, our domestic mining industry serves as a test bed for the development of mining machinery and coal utilisation technologies. German suppliers are now world-market leaders in both mining equipment and power station plant. We must be careful not to endanger what has been achieved here any more than to risk losing all the jobs that depend on the success of this sector.”

The opinion of influential representatives of the mining industry and the IG BCE, namely that reducing the industry to just five pits and a workforce of some 20,000 by 2012 could well be going too far, seems to have been borne out from an unexpected quarter in the form of the coke crisis presently affecting the world markets. Germany hardly produces coke any more, even though millions of tonnes of coking coal are lying beneath our feet. A similar crisis in the steam-coal sector would have even more-serious consequences for our economy and would also prove to be much more expensive than any appropriate contingency measures based on indigenous production. There is no disputing the fact that because of its difficult geological conditions and other locational factors coal mining is a more expensive business in Germany than overseas and that with shipping prices at a low level the domestic industry has long been reliant on state aid for its survival. Yet for the long term the sensible approach is to have a mix of cheap imported coal, which already meets 60% of the demands of the German coal market, and a reliable core supply based on indigenous production. The world’s coal deposits are certainly spread far and wide. And even in the case of oil and gas the global stocks, in mathematical terms, will be sufficient to meet our needs for many years to come. The decisive question, however, is whether these global energy reserves will be available to us as and when we need them. And this is where the real doubts come in. Apart from the fact that the world coal market is not immune from international political crises and conflicts, only about 15% of the world’s coal is actually traded on the global markets; in other words, most coal mined is used by the producer country itself. And global competition for what is left is now hotting-up in the international marketplace. Recent developments in the coking-coal and coke sector, where prices have jumped as much as tenfold, have shown what can happen when demand-driven competition meets supply concentration. The four major players in the global coal business already control one third of the world market, and in fact now dominate supplies from those exporters that are so important for the western European market, namely South Africa and Colombia – a situation that some German coal consumers are already referring to as a “coal OPEC”. In regional terms two-thirds of Germany’s imported coal is sourced from just four supplier countries. The longer-term perspective is that three-quarters of world coal production and about 60% of the world’s reserves will be in the hands of major powers like the USA, China, Russia and India.

Against such a background, and given the much more obvious price and supply risks associated with gas imports from third countries, it is easy to see why the European Council, in its Regulation on state aid to the coal industry, explicitly includes “strengthening… energy security” alongside the social and regional aspects and refers to the maintenance of a “minimum quantity of indigenous coal production (approved) to guarantee access to reserves”. – The largest coal deposits in the European Union lie beneath German soil.

The criticism directed at coal industry aid – and in some cases this is no more than a reflex designed to attract popular attention – is that it is not the result of a macroeconomic cost-benefit analysis. In Germany renewable energies, for example, are now more intensively state funded and given higher levels of support than coal – even though they only make half the contribution towards national energy supplies. Unlike coal, this sector is able to pay substantial private returns. From a resources viewpoint renewables will in the long term initially be needed as a replacement for the dwindling supplies of oil normally used by the heat economy and transport sector – and not as a substitute for coal based electricity. The much vaunted argument of increased employment only applies insofar as the renewables are not driving out even more jobs in other sectors.

Irrespective of what we really know about climate change and regardless of the energy-sector relationships that have to be taken into account and of whether the economic resources would not be better spent solving other global problems (as the economists of the “Copenhagen Consensus” believe), the climate-change argument cannot at the end of the day be used against German-mined coal. Imported fuel with similar emission levels would simply take its place. When burning coal the important thing in this respect is not the origin of the fuel but the availability of efficient, clean-burning coal technology. Germany is one of the leaders in this field and research and development work is already under way on the low-CO₂ and even on the CO₂-free power station. Modern coal technologies in many respects offer the most economically favourable possibilities for achieving CO₂ reductions. And that is extremely significant for global climate protection, for coal remains the number-one fuel for electricity generation worldwide. Even those who wish to bring climate protection into line with market requirements would do well not to abandon coal production in Germany if they really want to make the most of the global opportunities.