The coal habit is hard to kick

Much has been made of the fact that growth in coal use around the world is stalling, but coal will not disappear anytime soon. While a wave of firms is exiting the coal-fired electricity sector across the global, coal is still poised to contribute to the fuel mix for a long time to come. This means that careful management of its remaining uses is more important than ever. Coal will remain important for two reasons.

First, it is still in high demand. The International Energy Agency projects that coal in power generation may drop to 36 percent by 2021, down from 41 percent in 2014, largely due to renewables and energy efficiency in China and the United States. However, this amounts to at best a flatlining, not a reduction, in demand. Second, coal has a role outside the power sector, in industrial and household demand. In developing countries, power and heat account for only 50 percent of coal use. The other 50 percent is directly burned by households or industries.

{mosads}Statistics from the World Coal Association paint a clear picture of coal’s role in industrial activities, especially in construction industries that support infrastructure development. According to that group, the cement industry uses 200 kilograms of coal to produce one ton of cement, with 300 kilograms to 400 kilograms of cement needed to produce one cubic meter of concrete. Coal is also used in as an input to production of 70 percent of the world’s steel, as a raw material to make chemicals, and to make liquid fuel for transportation.

These industrial uses of coal aren’t likely to change because coal is one of the most storable and transportable fuels, and the cost of using coal does not reflect its adverse impacts. In fact, a reduction in coal use in electricity means there is even more coal available, putting downward pressure on prices and incentivizing increased use by households and industry.

The side effects in terms of environment, health and worker safety of our reliance on coal are numerous, and require serious effort to manage. While mining is becoming safer, it still incurs a large number of casualties every year, many of which may go unreported. It pollutes ground water, leaches heavy metals in the soil, and its processing and combustion contributes to local air pollution and global climate change.

To the extent that policy initiatives to reduce pollution focus on air pollutants and carbon dioxide emissions from electric power, we’re ignoring a very big part of the problem. Instead of being sector specific, we need more comprehensive policy approaches to manage coal use and its environmental and health impacts. But this is easier said than done. The most cost-effective “ideal” approaches are not always the most politically workable approaches.

Ideally, the first step would be to add a surcharge on purchases of coal that account for adverse side effects caused by its extraction, processing, and use. The goal would not be to go to zero usage overnight, but we could expect to see levels that are more compatible with local and global sustainability objectives.

For example, if the goal is improving air quality, the question is, what ambient levels of pollutants like sulfur dioxide and nitrogen oxide are we as a society unwilling to tolerate? Working backwards, we can determine acceptable daily or hourly limits of emissions and issue permits that allow producers to trade.

Companies with opportunities to reduce coal use will do so, and they can sell their permit to firms that find it more difficult to reduce usage. Although creating a market for pollution reduction sounds workable, it may not fly politically because a price on pollution might be perceived as a tax.

Other approaches may be costlier in terms of improvements delivered, but may be politically more acceptable. For instance, we could provide subsidies or recognition to firms that meet environmental targets. Or we could subsidize alternatives to coal like clean and renewable energy, making coal less economically viable.

Most important for political acceptability may be to compensate stakeholders that are directly affected by helping them to find other jobs and opportunities. We could help coal workers develop skills that could be used in other sectors. For instance, China, which is facing some of the largest coal and heavy industry capacity cuts, set aside $23 billion to ensure that the reduction of five million to six million jobs in the coal industry do not have destabilizing effects on the economy.

Whatever changes we make, we need to focus on implementation. This means monitoring plants to ensure they meet environmental standards as well as reporting verification of coal emissions data. We need a whole new set of capabilities around data management and understanding the targets of regulations. Inspectors need to verify that rules are being followed over time and not just on one day.

These are very real challenges in countries like China and India, where there has historically been a strong economic incentive to use coal at a very low cost without necessarily considering the environment. While momentum for change is building in modern urban centers and at the top of the governing hierarchy, change across the system will be a long and incremental process.

Governments can provide support with incentives for honest reporting. As new monitoring, reporting and verification efforts get off the ground, governments could break the financial link between firms and auditors by paying inspectors with government funding. Raising awareness of the impacts of pollution among citizens in less developed urban areas will be important, as will be engaging them in efforts to identify egregious polluters. Overcoming familiarity and capacity gaps will be especially important in developing countries, where there is less history of regulating air pollution.

Decreasing coal usage is going to be harder than we think, but incremental progress will be very important. We aren’t going to squeeze coal out of the system overnight. We need to think long term and find the right combination of transformative and incremental interventions. By engaging stakeholders in the development of transition strategies, we can start moving in the right direction.

Valerie Karplus is the class of 1943 career development professor and teaches global economics at the MIT Sloan School of Management.