Inside Story

Opportunity knocks, at a cost

Regardless of what happens next, the economic logic of the Rocky Hill decision will eventually prevail

John Quiggin 13 February 2019 1101 words

Too soon to celebrate? Gloucester residents react to last Friday’s decision by the NSW Land and Environment Court to reject the proposed Rocky Hill coalmine. Peter Rae/AAP Image

Last week’s decision by the NSW Land and Environment Court to take account of coal-burning emissions in refusing approval for the Rocky Hill mine is obviously a big deal. How big depends on what happens next.

At worst, chief judge Brian Preston’s decision will be overturned by a higher court on the basis of a legal error. At best, the miners, Gloucester Resources Limited and Yancoal, will appeal and lose. The second-best outcome is if the decision simply stands, setting an example (though not, as I understand it, a binding precedent) for other courts.

There’s one other possibility: that the NSW government will use its powers to override the decision without invalidating the judicial reasoning behind it. That used to be par for the course, but even the NSW Liberals are waking up to the political risks of climate denialism.

If the proposal does go back to court, there’s a strong case for using “opportunity cost,” a key concept in economics, to show why it shouldn’t proceed. Put simply, the opportunity cost of something is what you must give up so that you can have it. If you spend $50 eating out, that’s $50 you will no longer be able to spend on something else.

So how should we think about the opportunity cost of carbon dioxide emissions? The best way is to assess it in terms of carbon budgets.

The Land and Environment Court heard evidence from ANU professor Will Steffen about how much more carbon dioxide and other greenhouse gases the world can afford to emit while keeping the probability of dangerous climate change (more than 2°C warming) reasonably low (less than 33 per cent). The Intergovernmental Panel on Climate Change’s “baseline budget” of greenhouse gases is equivalent to one trillion tonnes of carbon, of which 575 billion tonnes had already been emitted by 2017. Assuming total emissions of other greenhouse gases are equivalent to 210 billion tonnes, that leaves only 215 billion tonnes of carbon, or about twenty years of emissions at current rates.

Within the carbon budget, any additional tonne of carbon dioxide emitted by one source requires a tonne’s reduction somewhere else. It is the cost of this offsetting reduction that determines the opportunity cost of the additional emissions.

In any plausible strategy to stay within our carbon budget, coal-fired electricity generation must be among the first activities to be phased out. Even before the climate effects are taken into account, the health costs of pollution from burning coal are so great as to outweigh any cost advantages over alternative generation technologies such as renewables, gas and even nuclear power.

It follows that any new coalmines must be offsett by a reduction in the emissions budget available to existing mines. That’s the opportunity cost. In simple terms, it means closing more of these mines while they still have substantial coal reserves available to be mined. Economically, this will hardly ever make sense. The construction costs of the existing mines, including the environmental damage caused by their construction, can’t be recovered, and opening new mines would require all that spending to take place again.

Except in the unlikely case of a previously unexploited site with very low extraction costs, exploitable with little or no local environmental impact, it makes no sense to open a new mine at the cost of closing an existing one. As was made clear in Justice Preston’s decision, the Rocky Hill mine is no such case. Over and above its effects on the global climate, this mine would deliver marginal returns while substantially damaging the local community and environment.

Opportunity-cost reasoning is a powerful tool, but it needs to be translated into dollar values if it is to be used in the kind of benefit–cost analysis that informs legal decisions. In this case, the crucial question is this: how much damage will be caused if emissions of carbon dioxide exceed the trillion tonnes remaining in the global carbon budget? It will be at least as great as the value of the carbon-emitting activities that are allowed inside the budget. And that means that the damage will be at least as great, in dollar terms, as a carbon price high enough to keep us inside the budget.

No one can estimate this value with certainty, but we can get a general idea. When I examined the topic some years ago, I concluded that the necessary price was around US$50 per tonne. The US Environmental Protection Agency came up with a slightly lower estimate of US$42 per tonne for 2020. Either cost would be sufficient to ensure that the cost associated with opening a new coalmine would exceed the economic value of the mine, even before other environmental and social costs are added to the tally.

The counter-argument presented by the coalminers is what economists call a free-rider argument. The miners say that NSW courts have no business worrying about the global costs of climate change; they should only be concerned with the damage caused by climate change within the state. Further, any individual mine should only be held responsible for its share of total emissions, which is tiny.

This claim is absurd in any case, but particularly so when it is made by a company like Yancoal, which has operations in many countries, each of them contributing to damaging climate change. On Yancoal’s reasoning, each of its mines around the world should be assessed only for the damage caused by that mine’s share of global emissions, and only for the jurisdiction within which the mine is located. So, Yancoal’s Queensland mines get a free pass for damage caused in New South Wales and vice versa, not to mention the harm done everywhere else in the world.

It remains to be seen whether the higher courts will find this exercise in intellectual and moral gymnastics sufficiently convincing to overturn Justice Preston’s carefully reasoned decision. Sadly, the High Court has shown an appetite for this kind of obscurantism in the recent past. But perhaps it will get this one right.

Regardless of the outcome of this case, the logic of the Rocky Hill decision will ultimately prevail. Not only will the legal obstacles for coalmines become increasingly steep, but miners will sooner or later face demands for compensation for the damage caused by climate change.

The strongest case will be against mines that have commenced operation after the need to leave remaining reserves in the ground was already clear. Anyone considering investing in, lending to or insuring such mines should be prepared for more decisions like Rocky Hill. •