As has been widely expected, the UK Labour government has finally given in to its heartland conscience and announced state aid of £100 million for the troubled UK coal sector. What was not expected was the announcement that its gas ‘moratorium’, which was originally introduced in order to assist coal’s competitive position against gas, will be removed in October.

While the removal of the gas ‘moratorium’ is seen as an attempt to pacify the gas industry over state aid for coal, it seems counterproductive if the government is keen to assist coal’s competitive position in the UK market.

The state aid, which had been requested by RJB Mining, the UK’s largest coal mining company, is dependent on receiving EU approval and, to a lesser extent, on the market conditions that apply over the next two years. Under current EU regulations on state aid, countries are prevented from increasing subsidy levels in successive years. As the UK provided no subsidy last year, its provision of a subsidy this year should, at least in theory, be revoked by the EU. UK government lawyers will argue the case to the EU, whose initial comment was that it is, as yet, far too early for the European Commission to have an offical position on this issue.

But the real issue is not about whether the EU will approve the subsidy, but whether or not the subsidy will be able to make a long-term impact on the competitiveness of the UK coal industry. The short-term benefit is that pit closures will be avoided, but some observers believe that without regular state aid, the issues of non-competitiveness will continue to emerge.

Stephen Byers, the UK Trade and Industry Secretary, commented that the UK coal industry was highly efficient, but that it was handicapped by the fact that coal producers in Germany, France and Spain enjoyed government subsidies. However, this appears to be in stark contrast with another statement that he made: “the government’s policy remains that it is for the coal industry to find its own place in a competitive energy market.” In addition, Byers said that he “recognised that the ending of the stricter consents policy will create a new market and new challenges for coal.” However, the reality of the situation is that coal prices in Germany, France and Spain have minimal impact on the UK coal industry, since the UK does not import any coal from these nations. The bulk of the UK’s coal imports comes from South Africa, with the only European coal imports coming from Poland. As for the comment that was made by Byers on coal and a competitive energy market, this appears to be at best a case of timely public relations, and at worst a realisation that the government does not have an objective, consistent energy policy, and that it is instead being driven by its troubled, traditional Labour heartland conscience.

Central to the issue of the competitiveness of coal-fired power generation is new technology. Coal-fired generation has an efficiency of approximately 35 per cent, while gas-fired generation has an efficiency of approximately 50 per cent. The US Department of Energy has recently announced the development of a new hybrid fuel cell turbine – which will increase generation efficiency to 55 per cent and further reduce emissions. This, in turn, will further weaken the position of coal-fired generation, which, in addition to its low efficiency, is also a higher emitter of pollutants than gas.

The most telling comment that was made by Stephen Byers on the government subsidy was that it “will enable the industry to be able to manage the period of change.” Quite clearly, the change in the coal market is a strong move towards introducing a fully competitive marketplace, which the government has strongly endorsed for both the gas and electricity industries.

The gas and electricity markets have been able to partly manage this change by the introduction of risk management instruments into trading policy. Coal, when viewed as a commodity, is no different from either gas or electricity. Hedging instruments exist for coal and, if these are applied, could transfer some of the price risk in the competitive market. As with the gas and electricity markets, the government can best enable the coal industry to manage the period of change by encouraging the use of management and derivative instruments.

Trading emissions

Theoretically, there are two broad incentives that can be used to encourage companies to reduce the level of emissions that they produce. These incentives are either the levying of a tax on emissions, or the introduction of an emissions trading programme. Although some governments believe that an emissions tax is the best approach, of which the UK government being a prime example, there is consistent and growing support for a trading solution.

Outside of the USA, which has been busily trading in emissions for several years, other market regions have now started actively researching various emissions trading methodologies. For example, the Paris Borse has been able to successfully simulate emissions trading in 1999, and it expects to complete its second simulation later this summer. In the UK, the Emissions Trading Group (ETG) has been formed in order to be able to develop a trading programme that will run in parallel with the government’s Climate Change Levy as from April 2001.

The EU itself has endorsed trading as being the best solution to the reduction of emissions levels. Those people who argue strongly against emission trading and in favour of taxation are missing the point. Emissions trading is a proactive response to reducing emissions; while taxation is a reactive response. If companies really have a strong, vested interest in the reduction of emission levels, then they will support trading initiatives.

The announcement that the World Bank Prototype Carbon Fund has attracted more interest than had been originally anticipated clearly supports a trading solution. Its success is particularly welcome because of the diversity of the contributing companies and countries. Emissions are a global problem and, as such, they require a global solution. Trading is the best solution to that problem.