1.6. Concluding Remarks and Outlook
could remove quantities from the spot market and reduce liquidity. A smaller and more illiquid market is more prone to strategic behavior. However, the main concerns regard-ing the use of steam coal are the environmental externalities. This thesis shows that second-best climate policies on a regional level have to take into account the reactions of the energy markets, even the most straightforward supply and demand effects.
This thesis provides the foundation for future work in several areas. The methodolog-ical part in Chapter 3 that proposes alternative models of oligopolies with a competitive fringe can also be applied to other energy and resource markets such as the global crude oil market. The crude oil market is characterized by an even more complex market struc-ture and the methodology from Chapter 3 can shed some light on the functioning of this market. Data availability, for example with respect to reserves and production costs, has been a major challenge for my modeling endeavor. Aguilera (2008) proposes a methodol-ogy to assess petroleum reserves (crude oil, natural gas liquids) and Aguilera et al. (2009) assess petroleum production costs in a bottom-up approach. This work should be ap-plied to coal resources. Furthermore, understanding the interactions between fossil fuels markets and climate policies is at the top of the future research agenda. In Hirschhausen et al. (2012a) we identified that the absorption capacity of carbon dioxide in the atmo-sphere is a tighter resource than the fossil fuels available in the ground. Thus, one could imagine to apply a “reverse Hotelling model” to this limited resource with the result of steadily increasing carbon dioxide prices. Last but not least, the detailed numerical mod-eling approach developed in this thesis can be extended to cover all fossil fuel markets (coal, natural gas and oil), including strategic behavior by the resource owners as well as demand-side reactions. Such a model would help to better understand and assess the whole range of possible interactions between fossil fuel markets and climate policies.
Chapter 2
Modeling and Analysis of the
International Steam Coal Trade: Is the Market Competitive?
2.1 Introduction
This chapter analyzes the trade flows and prices on the international market for steam coal17 by simulating the market for the years 2005 and 2006 using the complementarity modeling technique.18 We develop two models: first, a trade model which is quantity-based and thus treats steam coal as a homogeneous good, and second, a model extension that includes energy values and accounts for the energy contents of different coal qualities.
Both models can simulate a competitive market game or an oligopolistic market game with imperfect competition à la Cournot. The models include capacity restrictions for production and export activities and account for the spatial character of the market with distance-based transport costs. Our major finding is that for both models the simulation of perfect competition better fits the observed real market flows and prices in 2005 and 2006. We note, however, that it is necessary to use both energy and quantity values to appropriately model coal markets.
The structure of international coal markets and the related supply security issues have not been subject to much analysis recently despite the increased importance of coal as a primary energy source. In fact, amid concerns about global warming and CO2
emission reductions, coal is currently experiencing a renaissance due to its abundance and relatively low price compared to oil and natural gas. Electricity production based on steam coal is receiving increasing attention due to the advent of clean-coal technologies that target significant reductions in greenhouse gas emissions. Such technologies may extend the viability of coal-based electricity generation despite the present climate change
17Hard coal is distinguished by steam (thermal) and coking (metallurgic) coal, depending on its calorific value and use. Steam coal, the subject of this analysis, is almost exclusively used for electricity produc-tion.
18This chapter largely corresponds to the article published as Haftendorn and Holz (2010).
Table 2.1: Share of imports in total consumption and share of imported steam coal in total electricity generation of major steam coal consuming countries 2006
Import dependency rate Share of imported steam coal in electricity production
Japan 99.50% 24.38%
South Korea 95.40% 33.49%
Taiwan 100% 52.80%
UK 63.40% 21.37%
Germany 69.20% 14.26%
USA 1.80% 0.86%
China 11% 8.62%
Spain 71% 16.69%
Italy 99.50% 14.33%
Source: IEA (2007a,b)
concerns.
Globally, the use of coal has increased, mainly due to high energy demand in China and India (IEA, 2007c). Most large coal consumers satisfy a significant share of their demand on the world market, often because while domestic reserves have declined, a certain industry structure has remained “locked in” with coal use (e.g., Germany, the UK). For these consumers imported steam coal becomes more attractive than exploiting their own high cost reserves. In the last decades the global coal markets have provided a relatively cheap supply which also attracted new consumers like China and more recently India.
Table 2.1 reports the import share of total consumption for the major consumers of steam coal. Several European countries rely on imports for about 70% of their steam coal consumption, while for some resource-poor East Asian countries (Japan, Taiwan, South Korea) this rate goes up to 100%. Table 2.1 also shows the contribution of imported steam coal to total electricity generation. In the European countries this share ranges from 15%
to 20 % and in Asia, from 20% to more than 50% (Taiwan). Given this importance of the international market for steam coal, we would like to better understand its supply structure.
Virtually all major exporters can be considered as “safe” countries in geopolitical terms and the supply risks on political grounds are low.19 Short-term supply disruptions may occur due to natural disasters or social tensions leading to strikes. However, efficient supply management with stock-keeping and supply diversification reduces the risk of disruption for coal importers. Nevertheless, it is helpful to examine whether the few exporters on the world market are able to exert market power vis-à-vis their customers, many of whom depend heavily on imports. In fact, it is not clear whether steam coal’s price increase since 2002 is due only to a demand shift (in particular in India and China) or to the greater concentration on the supply side.
19Major exporters are Australia, South Africa, Indonesia, USA, Russia, China and Colombia.
2.2. State of the Literature