Queensland Coal Subsidies: Lessons for the Budget

Last year, Six Degrees conducted research into the subsidies provided by the Queensland Government to the coal industry for the 2006-2007 budget. We found that the total amount of direct and quantifiable subsidisation was $3.8 billion per year.  The research also confirmed the impact of these subsidies in the opportunity costs of spending on the coal industry, which results in less public funds available for less carbon intensive and sunrise industries.

The current subsidy regime, which is likely to be continued in the current budget, entrenches dependence on carbon intensive industries and energy sources when clearly the focus should be on breaking this dependence.

Queensland is the biggest coal exporting state in Australia, and over 80% of the state’s stationary power generation comes from coal.

The Queensland Government has continually expressed its support for the coal industry, approving multiple expansions to coal mining and infrastructure, investing in Carbon Capture and Storage research and development, and stating that their climate change strategy is “underpinned [by a] strong commitment to the coal industry”.

The Queensland Subsidy Regime for Coal

Content analysis conducted by Six Degrees of key Government budget documents has indicated that the Queensland Government provided $3.8 billion in direct subsidies to the coal industry for infrastructure in 2006/07. These fell into three broad categories:

1. Infrastructure
2. Research and development, exploration and environmental studies
3. Public relations and other services.

The majority of quantifiable subsidies were directed towards infrastructure, though the other categories had potentially very substantial components, some of which could not be quantified. These were public services such as geological surveys, public relations campaigns, administration of infrastructure, environmental assessments and funding for research and development.

The most substantial contributions were for rail and port infrastructure. Queensland Rail (QR) spent $660 million on ‘below rail infrastructure’, that is, new tracks and $850 million on track maintenance. Both of these figures were obtained from Queensland Rail reporting on the ‘CoalRail’ network, a network of train lines within the Bowen Basin that exists for the sole purpose of hauling coal to export terminals. $856 million was spent on the expansion of these coal export terminals at Bowen, Brisbane, Gladstone and Hay Point (near Mackay).

A new rail link is planned to link more coal rail networks to the Bowen coal terminal. In 2006/07 land acquisition was underway. The amount spent on this could not be identified.

The Queensland Government also invested directly into roads that are built and maintained primarily for the coal industry. One such project was the Peak Downs highway, which is the main arterial between Mackay and the Bowen Basin towns of Moranbah and Clermont. This project was budgeted at $43.4 million over five years.

Two major water infrastructure projects have been identified as coal industry subsidies as they make water available primarily to the coal industry. These cost the Government $145 million in 2006-2007. Expenditure was also made on electricity infrastructure including the new Kogan Creek power station.

Some other infrastructure subsidies that could not be quantified were the purchase of 24 diesel locomotives, and a transmission line servicing coal mines at Blackwater. Much of this information could be protected under commercial in confidence, under the Freedom of information Act 1992. The Queensland Government can withhold information about the commercial activities of GOCs they classify as sensitive (de Maria 2001).

Findings of the Research

Some clear implications flow from the findings of this research:

• The infrastructure subsidies reduce the cost of production of coal.
• High prices received for coal can outweigh the added cost of infrastructure (through subsidy reform) and hence subsidy removal may have little effect on production.
• Services provided by the Government, such as infrastructure administration and public relations are less easily replicated by the coal industry and, if withdrawn, would have more significant impacts on production than withdrawal of infrastructure subsidies.
• Some subsidies are politically expedient and this may hinder opportunities to pursue an economically and environmentally preferred subsidy reform.
• If increased costs (of subsidy reform) are passed on to coal consumers, higher prices would, to some extent, influence them to substitute coal for alternatives thus reducing GHG emissions.
• Price elasticity of demand for coking coal is relatively inelastic, responding only weakly to changes in price, whereas demand for thermal coal responds more strongly to changes in price, therefore subsidies have a small influence on GHG emissions.

Another major finding of this research was the perverse nature of subsidies to coal infrastructure. Energy subsidies are often considered ‘perverse’, a term given to subsidies that are harmful to both the economy and the environment. Such subsidies frequently exist for historical and often political reasons but should be reformed for both environmental and economic improvement. It was found that infrastructure spending may be a perverse subsidy as the coal industry has shown willingness to finance infrastructure projects. This demands a review within government of such spending, especially in light of the Government’s $15.3 billion fund the ‘coal infrastructure program of actions’.

Entrenching Carbon Dependence

Despite the potentially low impact on GHG emissions of subsidy reform, the opportunity cost of spending on the coal industry results in less public funds available for alternative industries. One of the major barriers to renewable energy technologies is lack of Government support. The current subsidy regime entrenches dependence on carbon intensive industries and energy sources when focus should be on breaking this dependence.

As Australia moves towards a more carbon constrained economy the continued expansion of coal production supported by the State Government will hinder Queensland in the long run. This research has found that the $3.83 billion subsidies to the coal industry from the Queensland government not only increase GHG emissions, if only slightly, but also does not make sense economically. Further quantitative research into this area is needed to fully quantify coal subsidies, as is an urgent government review of spending on coal infrastructure.