Oz Blog News Commentary

Now is the perfect time to increase coal royalties to fund Australia’s energy transition

June 21, 2022 - 15:10 -- Admin

The usual trade-off between maximising revenue while protecting industry’s long-term future no longer applies

That’s the headline and standfirst for my latest piece in The Guardian, looking at revenue options for the coming Queensland Budget. It’s over the fold

After dealing with multiple natural disasters, and facing the need for huge investment in an overloaded electricity system, it’s not surprising the Queensland government is in search of extra revenue ahead of next week’s budget. The obvious source, already flagged by the treasurer, Cameron Dick, is an increase in royalty rates for coal.

These rates, set on a sliding scale according to the price of coal, have been frozen for the last 10 years, as promised by the Newman LNP government after a small increase in 2012. With the 10-year freeze now expired, resources groups are lobbying intensely for no changes to the existing regime. But there is a logical case for increasing royalties on coal, which is currently trading at spectacularly high prices.

For most commodities, the high prices we are now observing would be a signal of favourable prospects. For coal, it’s the opposite. World coal consumption peaked in 2014, and is predicted to decline steadily over the next decade. Many countries have already ended the use of coal to generate electricity, or will do so in the next few years. Metallurgical coal, used in making steel, will last a bit longer. But the coal-based blast furnace technology is already facing the prospect of replacement by coal-free techniques using renewable hydrogen.

While coal demand has flattened out, new investment in coalmines has dropped far more rapidly. Investors can see that there is no long-term future in coal. Witness BHP’s inability to sell its Mt Arthur coal mine, which it announced on Thursday would close in 2030. Meanwhile, global financial institutions have abandoned the industry, pledging not to finance or support new coalmine projects.

In these circumstances, there is only limited supply response available to meet temporary increases in demand, like those arising from the strong economic recovery after Covid, followed by sanctions imposed on Russia. The result is the sharp increase in prices we have seen recently.

Coal is on the way out, but a good deal of money can be made in the meantime, while high prices last. Most major corporations, with a long-term future in mind, have abandoned the industry. Those that remain need to reap profits fast, which is why they are more determined than ever to resist any increase in taxation.

But the same analysis applies to royalties, the price paid by miners to the public as owners of the coal resource. Usually there is a trade-off in setting royalty rates, between maximising revenue while protecting the long-term future of the industry. However, this no longer applies. Investment in new coalmines is in long-term decline, whether or not royalty rates are increased.

Queensland’s focus must be on gaining additional revenue while export demand remains strong and using it to transform our energy system. The transition to a carbon-free energy system will require big capital expenditures. In particular, public investment in carbon-free energy through CleanCo needs to be greatly expanded.

As well as decarbonising our own electricity grid, the government needs to plan for the future of regions which currently rely on coal exports as a major source of employment. Many of these are well suited to produce solar, wind and hydrogen.

From the government’s viewpoint, the impending decline of coal is both a challenge and an opportunity. The challenge is the need for a transition to a future beyond coal, both as a source of energy in Australia and as a major export commodity. The opportunity is to use the current period of high coal prices to finance the transition to a decarbonised economy