UPDATE ON COAL PORTS II

NOTE: Just in the nick of time Fred Thompson is back with a two-part long-form blog piece on coal ports in the Northwest.  Today (Thursday) is part two and part one posted yesterday (Wednesday)

UPDATE ON COAL PORTS II

At the beginning of this semester, one of the teams in my cost benefit class took on the assignment of looking at Oregon's coal terminal projects. I asked them to think about the following arguments reported in The Oregonian:

PRO

* The projects would create hundreds of Northwest jobs, boost tax revenues and preserve U.S. mining jobs.

*Exports would increase Asia's supply of "clean coal" and, thereby, improve their quality of life; Powder River Basin coal, like coal from Indonesia, is relatively low in sulfur and mercury and high in BTU content.

* China's newer fleet of coal-fired power plants is more efficient than America's, but its mining is far more hazardous, particularly at the marginal mines likely to be displaced by U.S. exports.

CON

* Exports would increase Northwest diesel and coal dust pollution, especially near marine terminals, squeeze rail and barge routes, and split communities with long and loud coal trains.

* Powder River Basin coal from Montana and Wyoming would help Asia add electricity A reliable U.S. supply would encourage more Asian coal plants. That would reduce prospects for clean power, and boost pollution and global warming.

My students turned in their final report last Thursday, but we have talked about the topic for an hour or so each week throughout the term and shared sources. So my thinking has been influenced by theirs and vice versa.

To address the first PRO claim, we did quick and dirty analyses of the regional economic effects of the two Oregon projects using IMPLAN Pro^TM input-output data and software. Both indicted substantial gains, but it is our assessment that the net benefits deriving from those gains are largely contingent on the state of the economy overall. With Oregon unemployment rates still over 8 percent, it is reasonable to count the full simulative effect of these infrastructure projects, which is to say the local multipliers from building and operating these projects are currently >2. Hence, the boost to state product from the Morrow-Pacific project alone would be nearly .5 percent.

In the long run, as we approach full employment, multipliers will fall. Indeed, at full-employment, the net economic benefits from these projects will be approximately equal to their net increases in incomes and tax payments, both direct and indirect. In other words they will promote economic development only if they replace less productive jobs with more productive jobs. By regional standards the expected average wage associated with these projects, about $60,000 ($50-$80 thousand) per annum looks pretty good

We largely discounted the next two PRO claims. We subsumed the second under our discussion of the effect of the projects on pollution and global warming. The third was simply too distant to influence the decisions contemplated here.

On the first CON point, we concluded that these issues are not relevant. If the projects fail to mitigate these problems adequately, they will simply not be permitted to proceed. The Morrow Pacific project has done so. The Kinder Morgan project has not, but that is not to say that it cannot.

The second CON claim is the crux of the matter. The effect of the projects on pollution and global warming will depend on the quantity Powder River coal to the Far East shipped and the effect of those shipments on the total quantity of coal consumed. If all four plants were to be completed shipments would probably be about 100 million metric tons. As I have indicated, at this point, there is little chance that all four of the remaining terminal projects will be completed, so there is considerable uncertainty about the quantity of shipments.

The CON claim presumes that there would be no substitution of Powder River coal for local supplies whatsoever, so that Asian coal consumption would increase by the full amount of shipments and none of the potential benefits from substituting clean coal for dirtier coal would be realized. That is the most pessimistic scenario. In contrast, proponents of these projects imply that shipments would have no effect on Asian consumption (consumption would remain the same) and all of the potential benefits from substituting clean coal for dirtier coal would be realized. This is the rosy scenario. I think the most likely scenario would involve some increase in Asian coal consumption, primarily because the availability of cleaner coal might delay the transition to cleaner sources of energy. However, it is also likely that this increase would be largely offset by the benefits from substituting clean coal for dirtier coal. I also think that the rosy scenario is at least as likely as pessimistic one, although IMHO both are highly unlikely.

In any case, this issue should be put in context. The success or failure of efforts to fight greenhouse gases does not depend upon the success or failure of these projects. There are plenty of sources of low-cost coal available to Asia. South and East Asia consumes 6 billion metric tons of coal per annum. China alone, for example, used approximately 4.5 billion tons of coal last year, increasing at more than 10 percent per annum. The Morrow Pacific project proposes to ship 4.4 million tons a year, perhaps increasing to 8.8 million tons. Adding up all the proposed US projects, Kinder Morgan’s Port Westward project, the Millennium Bulk Terminal in Longview, Washington, and the Gateway Pacific Terminal project in Cherry Point, Washington, on Puget Sound near Bellingham, would add about 100 million tons to that total (1.7 percent), this is less than ¼ the annual increase in Chinese consumption alone. The fight against greenhouse gases depends up the enactment of measures such as carbon taxes, the payoff to investments in technology, and, to a lesser extent, trade policy. At best, this is a sideshow.

Nevertheless, it should be acknowledged that there is evidence that increased shipments of US coal to Europe (or, perhaps, more correctly the availability of reliable supplies of low cost thermal coal) have delayed its transition to cleaner sources of energy and may have, therefore, increased future ambient greenhouse gas stocks. Would selling Powder River Coal to Asia have a similar effect?

If US coal can penetrate Asian markets only by reducing prices, the answer is probably yes. But I am not persuaded that is the case. While it is true that increased reliance on natural gas in the US has led to substantial reductions in domestic coal prices, making US coal potentially more attractive to East Asian importers, once transportation costs are taken into account, the price of US coal, especially cleaner coal from the Great Basin, is often higher than the price of locally mined coal in East Asia. Evidently the reason that US coal is preferred in East Asia to local coal is that it is cleaner. Compared to the lignite mined in China, for example, burning western coal from the US generates less CO2, Carbon monoxide, and nitrogen oxides per unit of energy, 30-60 percent less sulfur dioxide and particulate matter, and one-tenth the oxides of mercury. Burning imported cleaner coal in Chinese coal-fired power plants could, therefore, reduce global greenhouse emissions, and will reduce most other kinds of air pollution.

Would that slow the transition to alternative, cleaner energy sources? Right now, East Asia wants Powder River Basin coal, because it is cleaner than its local coal. However, Asians are much less constrained than Europeans with respect to energy access and likely to be a lot less fussy about using alternatives to coal like nuclear power, methane hydrates, algal biofuel, or natural gas from fracking. Many of Asia’s newer coal-fired power plants could be converted to natural gas. China, for example, has more shale gas than the United States or so we are given to understand. It is not unlikely that Asians will increasingly pursue these options, to the extent that they can afford them. That is really the only hope we have that their greenhouse gas emissions will be abated, but it is not I think entirely a vain hope.

In the long run the greenhouse gases produced in the Far East will depend not on the availability of coal, but on the rate of transition to green technologies, which will depend on the willingness and ability of the East Asians to pay to make the transition. The richer they are, the more environmental quality they will want to buy. Environmental quality is a superior good. So we should do everything in our power to make them (and us) richer.