Lignite and climate change: The high cost of low grade coal

09 December 2010

Commissioner’s overview

Thirty-two years ago, my interest in the oil price shocks of the 1970s took me to the University of California at Berkeley to study energy. That same year the Liquid Fuels Trust Board was established in New Zealand. The Board clearly saw lignite as the country’s future source of transport fuel. However, because lignite is poor quality coal, extracting energy from it creates particularly high emissions of carbon dioxide. My concern about this is not new. Twenty years ago I co-authored a report called Transport fuels in New Zealand after Maui – lignite on the back burner.

It now looks as if lignite is making its way to the front burner. Two companies, state owned enterprise Solid Energy and the L&M Group, are proposing to mine lignite in Otago and Southland and convert it to diesel. In addition, Solid Energy is proposing to make two more products from lignite: the nitrogen fertiliser urea, and briquettes (made by drying out lignite into a better form of coal) primarily for export. Using lignite for generating electricity is another possibility.

The foundation of this report is a set of carbon footprint calculations for these four uses of lignite – diesel, urea, briquettes, and electricity. These calculations are presented in as open and transparent a manner as possible. I ask those who may question these calculations to be equally transparent.

The standard technology for turning lignite into diesel is well-established. The Fischer-Tropsch process was developed in the 1920s and has been used in South Africa for many years to make diesel from coal. In greenhouse gas terms, such diesel is almost twice as bad as the diesel we use now.

It may be that this can be mitigated by carbon capture and storage, that is, trapping the carbon dioxide emitted from an industrial process and storing it underground. But carbon capture and storage is very much a technology under development.

On the other hand, no technological development is required to use trees for sequestering carbon. But a forest stops removing carbon dioxide from the atmosphere when it is mature, so over a long period of time a continually expanding permanent forest would be required.

At the Copenhagen Conference in 2009, New Zealand took responsibility for reducing our annual greenhouse gas emissions to between 10% and 20% below the 1990 level by 2020. Even with the current Emissions Trading Scheme (ETS) and other measures in place, our greenhouse gas emissions are on track to be 30% above the 1990 level by 2020.

This is a huge gap. Certainly, because our commitment is to a ‘responsibility target’, we can purchase carbon credits offshore. However relying only on this for closing the gap would be at odds with the clean green image that we use to differentiate ourselves in the international marketplace. Indeed for some of our trading partners, lignite is best known as the brown coal that powered East Germany with dire results for their environment.

The production of diesel from lignite on the scale contemplated would increase New Zealand’s greenhouse gas emissions significantly. Just one of the two proposed lignite to-diesel plants would increase the gap between the international climate change commitment we have made and where our greenhouse gas emissions are headed by 20%. If both proposed lignite-to-diesel plants were to be built, the gap would increase by 50%. The production of urea and briquettes from lignite would have a much smaller impact, but still do nothing to close the gap.

For good reasons the Resource Management Act does not give regional councils the ability to regulate greenhouse gas emissions. This means that the ETS is the only significant mechanism currently available for curbing the growth in the country’s greenhouse gas emissions.

In its current form the ETS exposes the Government – and therefore the taxpayer – to potentially enormous financial risk. This is because of the rules governing the allocation of free carbon credits. For ‘free carbon credits’, read ‘taxpayer subsidy’. New lignite developments may well qualify for significant subsidies under the scheme. The subsidy for one lignite-to-diesel plant would be likely to be billions of dollars over its lifetime. It makes no sense for taxpayers to subsidise new investment in carbon-intensive technology. This is the opposite of what the ETS is intended to achieve. The review of the scheme in 2011 provides an opportunity to address this and other serious shortcomings.

Lower prices, security of supply, and employment opportunities are all being spoken of as benefits of lignite developments. But diesel, urea, and briquettes are all traded internationally and so would be sold at world prices. As for supply security, it is many years since national self-sufficiency has been Government policy. If employment is to be subsidised indefinitely, there is no case for favouring carbon-intensive jobs in a region with relatively low unemployment.

If the ETS were to be revised so that new carbon-intensive industries were not eligible for any free carbon credits, some may still be commercially viable. A business case may well be made for converting lignite to diesel. The South Island lignite is generally more accessible than other coal in New Zealand, so while it is a poor resource it is a cheap resource.

However, there are wider matters to consider. For instance, the risk of such a long-term investment of billions of dollars must be very great, given the difficulty of predicting both oil prices and carbon prices. This is a risk that should not be underwritten in any way by the Government.

The value of our clean green image in the international marketplace can never be accurately measured. But the marketing strategies of the two biggest sectors of our economy – tourism and dairying – rest on it, along with those of many small innovative companies. If New Zealand can be said to have a brand, ‘clean green’ is it. Using lignite on a large scale is not consistent with that brand.

For all of these reasons, New Zealand’s lignite should remain in the ground, at least until subsidies for its large scale exploitation are ruled out and mitigation options are proven sufficient and reliable. But even if these requirements were met, increasing the amount of lignite mined in this country by a hundredfold or more would not be the right thing to do because it would take the country in the wrong direction.

We face a carbon-constrained future and one way or another we will be paying the price for our greenhouse gas emissions. A decision to lock us into low grade coal would make that a very high price indeed.

Dr Jan Wright

Parliamentary Commissioner for the Environment

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Appendix: Lignite and climate change

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Carbon Price Forecasts Covec

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