Freeman Spogli Institute for International Studies Program on Energy and Sustainable Development Stanford University




Global Coal Markets

Platform
Ongoing

Coal is the fastest growing source of fossil fuel in the world, adding more to absolute world energy supply in the last decade than almost all other forms of energy combined.  As the developing world industrializes and struggles to meet seemingly insatiable demand for power, coal has become the fuel of choice.  An expanding seaborne trade in coal has started to connect previously isolated regional markets.  The emergence of coal derivatives markets further reflects the internationalization and commoditization of the coal market, in a transformation reminiscent of that of the oil market in the 1970s and 1980s.

PESD is engaged in a major research project aimed at better understanding the global coal market-how industrial organization and political economy shape patterns of coal production, use, and trade at the country level as well as how international trade links together markets in different countries.  This study, which to our knowledge is the first academic endeavor of its kind aimed at the coal market, includes case studies of major coal producer/consumers like China, India, the US, and the EU, and key exporters such as Indonesia, Australia, South Africa, and Colombia.  It also involves the development of quantitative models, both of the global coal trade and of China's coal import behavior in particular. 

As in several of our other research platforms, the Chinese case is given substantial attention.  China's coal industry dwarfs that of any other country, significantly affecting the global coal trade and contributing to global greenhouse gas emissions on a massive scale.  Moreover, China's approach to managing its largest energy resource provides significant insights into the country's decision making in energy more generally. 

Our research reveals the central role of the coal-to-electricity value chain in shaping coal market dynamics in China as well as in other countries.  PESD visiting scholar Wuyuan Peng studied the intertwined evolution of China's coal industry and power sector since the founding of the PRC in 1949.  Starting in the 1980s, coal production was progressively liberalized and devolved from the central to the local level in an effort to boost production that had stalled at the large state mines.  At the same time, electricity production remained in the hands of a small number of state enterprises, with power prices strictly capped by the central government to encourage economic growth and keep inflation in check.  The resulting coal-to-power value chain is thus a characteristically Chinese hybrid of market forces and central planning deployed to serve government goals.  Also characteristic are the inevitable distortions that result-for example the massive losses taken by state power companies in 2008 when coal prices spiked but power prices could not be increased accordingly-and the continuous process of ad hoc policy adjustment in response.  One current government approach to managing the coal-power conflict is to push for vertical integration; a PESD report on this topic is in progress. 

Our deep focus on Chinese coal has given us a unique perspective on the prospects for carbon capture and storage (CCS) to dramatically reduce the carbon intensity of coal use in China.  We argued in a recent report that widespread expectations that China might lead the charge on CCS are the result of a fundamental misunderstanding of China's motivations for pursuing initial demonstration projects.  Unlike other energy technologies being aggressively pursued by China, including wind, solar, and nuclear power, CCS by itself contributes little to the country's overriding goal of energy security.  In fact, applying CCS at scale to coal power plants in China would likely have a deleterious effect on the country's energy security.  The 20-30% energy penalty associated with CCS would effectively require that much more coal production, further stretching a coal supply chain that is already overburdened.  Moreover, constrained power tariffs would make it very difficult for China to recover the enormous costs imposed by CCS in the power sector; as we have seen, generators could not even recover coal input costs in 2008.  The CCS demonstration efforts that are moving forward in China are notable for their potential to contribute positively to energy security-for example through production of liquid fuel from coal, enhanced extraction of hydrocarbons using captured CO2, or development of higher-efficiency coal-fired power plants-rather than for their greenhouse gas emissions reductions as such.

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