Markets for Solid Fuels and CO₂ Emissions

Abstract

Solid fuels are hard coal, lignite, and firewood. Their common properties are low energy densities resulting in high cost of transportation which in turn limits competition in solid fuel markets. Thanks to reduced costs of coal extraction, productivity increases in maritime transport, and reduced public subsidies, a global market for hard coal has nevertheless developed.

Due to coal’s high carbon content, coal combustion is the major source of global CO₂ emissions, amounting to about three tons of CO₂ per ton of hard coal. In addition, coal mining is associated with emission of methane (so-called pit gas ), another important greenhouse gas. Thus the economics of coal markets cannot be discussed without referring to international efforts designed to reduce global emissions of CO₂ and other greenhouse gases. In an attempt to achieve this aim, the European Union created a market for CO₂ emission allowances (EU Directive 2003/87/EC). Depending on the effectiveness of this system, CO₂ emissions may become sufficiently costly to increase the price of coal relative to that of other fuels, triggering its substitution by less harmful alternatives.

The issues addressed in this chapter are:

• What are the factors determining the development of the market for hard coal?

• What determines its price on the world market?

• Is the market for coal competitive?

• Is there a trend towards vertical integration as in the oil industry?

• What are the perspectives of solid biofuels and in particular wood as a substitute for coal?

• What determines the price of emission rights?

• How do these prices depend on the design of the market for emissions?