In addition to the development in steam coal demand, the future international trade with steam coal depends on the development in domestic production in importing regions. In Western Europe, domestic production accounts for some 35% of steam coal consumption. Most of the domestically produced coal is produced in heavily subsidised mines. Subsidies are on their way down, and one possible scenario is that reductions in coal demand will more or less be offset by a reduction in domestic production. In that case, international coal trade will be less affected by climate policies in Europe. In Japan, on the other hand, where domestic coal production is negligible, the development in the import demand can be inferred more or less directly from the consumption forecasts. The importance of domestic production for the import demand from Western Europe is discussed in greater detail below.
5.1. Kyoto targets and steam coal demand scenarios
According to the Kyoto Protocol, Japan is going to reduce its emission of six greenhouse gases, including CO2, to 94% of the 1990 emission level. Western European countries have varying emission targets, but in this section we will stick to the EU emission target of 92% of 1990 emissions.
Emissions in the EU remained fairly stable from 1990 to 2000, while there was a significant increase in emission levels in Japan. Based on data from WEO (2002) and IEA (2001b) and
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IPCC (2000) we estimate that emissions in Japan have increased by about 15% in the period.
Hence, current emission levels must be reduced by some 18% percent in 2010.
One way of achieving these emission reductions would be to reduce emissions from all sources, including coal, by 8% in the EU and 18% in Japan. However, there are reasons to believe that the reduction in coal demand will be even larger. First, the power sector, where most of the coal is used, must most likely reduce its emissions more than other sectors. The main reason is that the possibilities to substitute to cleaner fuels are greater in this sector than elsewhere in the economy. Moreover, the transport sector, which accounts for the bulk of oil consumption, turns out to be steadily growing, and the costs of significant emission reductions in this sector are probably high. In many industry sectors, energy conservation measures have already been implemented. The scope for further emission reductions is therefore typically smaller than in the power sector here as well.
Second, emission reductions in the power sector are going to affect coal disproportionally.
This follows from the fact that emission reductions in the power sector are going to take place through substitution from coal to cleaner fuels. Alternatively, some emission reductions could come from decrease in electricity output, but that is not a likely outcome since electricity demand is known to be fairly irresponsive to price changes.
Söderholm and Strömberg (2003) have estimated the reduction in coal consumption needed in order to achieve certain emission reduction targets in the EU power sector under the assumptions that electricity output is kept constant and coal-fired capacity is replaced by a gas-fired combined cycle plant with efficiency of 55%. Their results are reported in table 5.1.
By taking into account that the emission reductions in the power sector in Europe are going to be larger than 8% and by realising that the power sector accounts for 83% of total steam coal consumption, it does not seem unlikely that coal consumption in this region must fall by 25-50%.
Table 5.1. Emissions reductions and coal demand in EU power sector (%) Change in CO2 emissions Change in coal demand
-10 -27 -15 -40 -20 -54
Source: Söderholm and Strömberg (2003)
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We do not have a comparable study on Japanese data. But since the share of coal in electricity supply is roughly the same as in Europe (Figure 4.1), the restructuring of the power sector for a given reduction in CO2 emissions may be of the same magnitude as in Europe. A higher share of oil in electricity production at the outset does however increase the possibilities to substitute gas for oil rather than for coal. On the other hand, emission reductions in Japan are going to be higher than in EU due to higher growth in emissions since 1990. A reduction in coal demand of 25-50% does therefore not seem unrealistic in the Japanese case either.
An important caveat is that these calculations assume that compliance with the Kyoto Protocol is achieved solely through domestic actions. If emission permits are bought from other countries, domestic emissions might increase, thus offsetting the negative impact on coal demand in Western Europe and Japan. Simulations of the international permit markets show that Russia is going to be the main permit-exporting region.13 Since Russia is not important for seaborne coal trade, changes in Russian abatement levels will only have minor impacts on the international coal trade. International permit trade is thus going to have a positive impact on seaborne coal trade.
Figure 5.1. A scenario for European fossil fuel demand under the Kyoto agreement.
13 See e.g. Weyant (1999).
0 200 400 600 800 1000 1200 1400 1600 1800
Coal Oil Gas
2000 BAU 2010 Kyoto scenario
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Figure 5.1 presents one possible scenario of the development in demand for fossil fuels in EU towards 2010. The assumptions made are as follows:
• Oil consumption is reduced to 10% below the business as usual (BAU) emission level, as calculated by WEO (2002).
• Emissions of the two other important greenhouse gases (CH4 and N2O) are reduced to 10% below BAU level
• Emission permit import corresponds to 10% of the Kyoto emission target
• Gas consumption exceeds the BAU level by 20% in order to maintain supply of electricity
Under these assumptions, coal demand in the EU will be reduced by 39% in 2010 relative to the 2000 level.