Adept Economics Director Gene Tunny has had an engaging and wide-ranging conversation for his Economics Explored podcast about the Net Zero by 2050 objective and the upcoming global climate change summit, COP26, with Queensland Senator Matt Canavan.
To listen to the conversation, and to check out the show notes, head to the link below:
Aussie Senator Matt Canavan – COP26 Dissenting Voices Part 2
For the transcript of the conversation, read on.
Gene Tunny 00:35
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist, based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 111, featuring Australian Senator Matt Canavan. That is part two of my two part series, COP 26 Dissenting Voices. Recall that COP 26 is the global climate change conference being held in Glasgow in late October and early November 2021. I previously discussed COP 26 and climate change policy in Episode 108 with Tony Wood of the Grattan Institute, and with my first dissenting voice, Dr Alan Moran in Episode 110.
Senator Matt Canavan is a prominent, arguably the most prominent Australian critic of the push for net zero greenhouse gas emissions by 2050. In this episode, we explore Matt’s reasoning and the evidence he sees as supportive of his view. This conversation was recorded over zoom on Friday, the 22nd of October 2021, with Matt taking the call from his office in Parliament House in Canberra, the capital of Australia. Senator Canavan has been a Liberal National Party senator for the Australian state of Queensland since 2014. From early 2016 to early 2020 with a brief break in 2017, Matt served as Australia’s Minister for Resources in Northern Australia.
US listeners should know that the Liberal National Party is a conservative party. Senator Canavan studied economics at the University of Queensland, and he worked as an economist at Australia’s Productivity Commission in Canberra in the 2000s. Matt was actually working at the commission while I was in the Treasury, and I’ve known Matt since about 2005.
If you have any questions, comments or suggestions relating to this episode, or to previous episodes, then please send them to contact@economicsexplored.com I’d love to hear from you. Before we get to the conversation, I should note that both Senator Canavan and Dr Alan Moran have given me a lot to think about and research regarding climate change policy. I’ll aim to summarise my current thinking on responding to climate change in a future episode, after I’ve had more time to consider this challenging issue. Now for my conversation with Senator Matt Canavan. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Senator Matt Canavan, welcome to the programme.
Matt Canavan 03:33
Great to be with you Gene.
Gene Tunny 03:35
Excellent. Matt, looking forward to our conversation on COP 26 and climate change. So you’re obviously involved in a big process at the moment, there’s a big debate about how Australia should respond and I’ve got an international audience. I’m interested in Australia, but I want to go broader and I know you’re in the middle of negotiations and things in Canberra. What I’d like to ask is, given you are Australia’s most prominent critic of the net zero policy, so this is reducing our greenhouse gas emissions to net zero or at least that’s how you’re portrayed in the media. Could you explain what’s your rationale for opposing Net Zero please Matt?
Matt Canavan 04:31
In some respects, you know, I actually agree here a lot with Greta Thunberg. Yeah, she gave a speech a month or two ago, accusing the Western governments of blah, blah, blah, you know, mouthing slogans. Not exactly sure if she called out net zero particularly, but yeah, net zero emissions is a slogan. It’s a buzzword, as I’ve called it, and I really don’t think it’s a credible solution. So we can go in if you’d like to [on] my views on climate change science, but I do accept that we should reduce emissions, there’s some issue there. But even if you do accept the alarmist predictions, which I don’t, I don’t accept the most alarmist predictions of climate change science. But if you do accept those, this particular policy is not going to be a solution to it.
Number one, because there haven’t really been any countries that have mapped out a credible plan to achieve net zero by 2050. And number two, because there is no chance that, in my view, China, India, Russia, or many other developing countries are going to do this. So all this will do if it is implemented, that people do actually strive to do is weaken the countries that sign up, primarily Western developed nations so far, and strengthen countries that don’t. And in particular, the case of the Chinese Communist Party, I’m worried about that. I think that’s the biggest issue in our region right now and I don’t think it’s the right time to be handicapping our own industry, while China is threatening and bullying countries in the region.
Gene Tunny 06:07
Okay, so how serious a threat Do you think China is Matt? I really don’t know. I mean, I see what News Corp is reporting and I just don’t know to what extent that’s a beat up or to what extent it’s a real threat. Do you have views on that?
Matt Canavan 06:22
I don’t know, either, of course, I can only make judgments and my judgments are partly on the external and internal issues facing China. But I suppose the most important point to make here is that our own defence officials are ringing the bell or alarm bell on this issue. The reason we ripped up a $90 billion dollar contract with the French government and have overturned three decades of policy on nuclear energy to adopt nuclear subs is explicitly because of the concerns that China is fomenting conflict in our region. None of us want to see that happen. The key imminent risk here is if China makes a decision to try and take over Taiwan. This has been explicit from Xi Jiping in the last year, and in his 100 years of use of the CCP speech called for reunification. It’s obviously a long-held goal of the Chinese government to do this, and the internal pressures in China, is what we’re increasingly worried about given the debt-fueled growth they’ve had and the unwinding of that, which may hurt a lot of Chinese investors and savers.
You know, often when governments, especially authoritarian governments are placed into those circumstances, they’ll look for a distraction. And then on top of that, you’ve got, you know, the withdrawal from Afghanistan and the debacle that was we’re not putting up a very big deterrent, I’m really worried that China has clearly breached rules in trade, health, and at least in terms of international law around the South China Sea, and we’ve paid very little consequences for these breaches.
Now, I’m not saying any of the consequences should be military, but why aren’t we putting trade sanctions on China? Why are we putting sanctions on their officials’ ability to travel and those sorts of things? Because if we’re not willing to penalise small breaches, or relatively not small to us but to some of our industries, but relatively non aggressive breaches of international law, how can we credibly signal to China that we would respond more forcefully, in the event of a real conflict? I think we’re falling into the trap of sending China a message that they can get away with anything.
Gene Tunny
Hmm, okay.
Matt Canavan
In the context of that, then let’s just play this out. If China did do that, if China did that, and decided to invade Taiwan, I don’t know what will happen next and we don’t really control exactly what will happen because it obviously depends on what the US does, right? Whether we get involved, that will come down to that relationship and that’s well outside my paygrade, my expertise, but I know one thing that absolutely will happen is that trade will be cut off, we probably will at least take the sanctions there. The trade will go. The iron ore goes, all of the agricultural exports go. It’ll be a big major hiccup and hurdle for the whole world economy. Access to manufactured goods, because not all one sided where if we sit back at the moment so China hasn’t got our coal, well we get lots of our stuff from China too. Rare earth’s, most manufactured goods, pretty much everything in Bunnings. You know, so if that happens, how are we going to look at the supply chain crises we’re seeing now? If that happens, are we in a good place to respond? And that’s where again, I’d come back to the priorities should be rebuilding Australian industry and manufacturing right now to take out some insurance against that outcome. Not taking pointless climate action, which won’t change the temperature of the globe, but just make world leaders feel good.
Gene Tunny 09:51
Okay, so I just want to go back to I mean, Matt you said so much I want to talk about.
Matt Canavan 09:56
We’ve only got half an hour right? You sure you don’t want to go to Joe Rogan.
Gene Tunny 10:00
I want to go back to your opposition to net zero. So, you accept that there is some issue with climate change. And there would there be reason for the globe as a whole, if we could somehow get that agreement and incredible commitments and follow through from the major economies if we can get that do you think that there could be justification for, say, a price on carbon or, or huge investment to really improve storage technology so we can have renewables or nuclear power? I mean, what do you see is the way to resolve this?
Matt Canavan 10:37
I don’t think carbon prices work. I’ll come back to that. But on the generic question, I mean, the short answer is yes. But I don’t see the need to go from where we are today to a net zero outcome in one leap. That also, to me, seems like a logical fallacy. That comes back to the point that this is really a lot virtue signalling, people are signalling their virtue their banks or their or their oil and gas companies who have a bad reputation and they want to stick a net zero label on or there’s zero wrapping paper over what otherwise has been a lot of unethical practices in the case of banks, for example. You know, to me, if we want to take action with your submissions, in everything in life, your best to do it incrementally, your best to look okay, let’s reduce emissions by this much and see how we go and whether that can be done and when we’ve committed to do that and on track for Australia to cut emissions by 26% by 2030. That’s not an easy thing to do and I would argue already, it’s causing some difficulties in our energy markets in particular. You know, to me, it didn’t take that step.
So why do we need in 2021 to start thinking about what we’re going to do in 2050, before we’ve even reached our 2030, we’ve got plenty of time to think about well, okay, this is let’s see how this goes. And what we should do post that, assess it, reassess it, look at whether it works or not, because I think going for these unrealistic goals will cause more damage than the effort. I understand the need to set targets and goals. But you have to set realistic ones to be successful. I mean, I could set the goal to run a marathon, I probably could do that. I just went for a run this arvo, seven or eight kilometers, probably if I put my mind to it, I could run a marathon. But if I set the goal to run a marathon under two hours, well, that’s just stupid. Not gonna happen. And I’ll probably do more damage to my body or my lifestyle, if we’re trying, and that’s where net zero comes into it. It’s just so fantastical, it’s a distraction technique around the real issues of doing something today.
Now, in terms of carbon pricing, you asked about, look, I just don’t think these schemes have worked elsewhere. And we live in democracies, you’ve got to adopt policies that are going to bring people’s support over time and if there’s one way you want to lose, if you lose popular support, put up people’s living costs. If you’re getting sick of politics, and you want to get out of it, as a member of parliament, adopt a policy to put up someone’s living costs that will usually do the trick. So it’s all well and good for economists.
And you know, I know you well Gene, and I’m an economist and that’s the ideal optimal scenario, it all works when we put this into our marginal rate of substitution curves, this is the best way to get people to substitute carbon free or lower carbon goods. You’ve gotta work in the real world. And in the real world, what will happen is if you push up people’s prices, with the idea that oh, you’ll get all these innovations and eventually come down, you’re not going to get that far.
Because in between those periods, you’ll have elections, this thing called elections, and some political party will pop up and say hey, I’ll remove that tax, and get that you know, and give you more money, and people vote for that. So it doesn’t work. And you can see it everywhere that have tried, the yellow vests in France. Obviously, what we’ve had in the past 10 years in this country. In the US, they don’t even get to the starting line. I mean, it’s still the Democrat controlled Congress, they can’t get through. It doesn’t include carbon pricing, but it still can’t get through their climate commitments. So, I don’t think the purest pursuit of carbon pricing policies is a particularly smart tactic. At least if we want to keep democracy from those who want to see a greater climate change action.
Gene Tunny 14:31
Okay. So on other countries around the world, so we really, if anything’s going to happen, it needs to be the major economies which are the US, China, Japan, EU and then I mean, India is increasingly important because of the populations getting richer and it’s the second largest country in the world and is going to be the largest. What is your assessment? How are these countries performing or will they even meet net zero? I mean, China claims it’s got a net zero by 2060. I mean, how credible do you think that is?
Matt Canavan 15:06
Well, I don’t believe them. I mean, if we can’t trust China to allow people to inspect the origins of the Coronavirus, I’m not sure how we are going to be able to trust them to have climate COPs going in and checking things. So it’s hard to judge anyway, because their commitments don’t start till after 2030. They don’t have any binding commitments until then. So you can’t judge the performance. I mean, but he just put a charter aside, have a look at more benign countries like Canada, Canada didn’t meet its Kyoto commitments. Canada’s emissions are up this century. But for COVID, last year, they had a reduction thanks to COVID. But from 2000 to 2019, Canada’s emissions grew, and New Zealand’s only dropped by a smidgen over that period of time as well. We’ve had large cuts. We would have to talk for hours about the fact that we got pretty generous counting treatment under Kyoto for our land use changes. That’s allowed us to have significant cuts in emissions, but most other countries haven’t done this.
And then the other countries that have, give Europe its due. It has met, most countries in Europe and Europe as a whole have met their climate commitments. The UK is producing emissions more than any other developed country in the world. But things aren’t working out all that well. I mean, because what’s happened there, I would argue, it’s the accounting treatment of carbon emissions which means the UK has sent a lot of its manufacturing to other countries, particularly Asia, or Eastern Europe. And it’s still consuming the cars and industrial goods, but it just doesn’t account for the carbon emissions embodied in those.
Then on top of that, it has made radical choices to shut down coal fired power stations, not expand the North Sea oil fields and ban fracking. And now they’re relying on gas from Putin who’s playing hardball over North Stream, too. And I just wonder why would you put yourself as a country in a position where you’re aligned on a dictatorial authoritarian regime and then you’ve got the situation, we’ve got lines at petrol stations, factories are closing the UK, these things are happening, then people are trying to say it is not net zero, it’s other things. It’s truck drivers. I mean, give me a break. If the UK had allowed fracking, maybe at least we don’t know, you never know before you drill in a mining game. So maybe they would have come up with nothing. But people reckon they do, they probably do have gas resources, because large coal seams have a gas at the very least, but they just haven’t allowed it to occur. So if they make those decisions, we can’t rely on other countries. And the world’s not necessarily a peaceful place. And I don’t think you’d want to put yourself in that position.
Gene Tunny 17:49
Right. Okay. Now, can I ask about the attitude of business in Australia? And so you’re talking about the cost of net zero? And, I mean, look, based on the analysis I’ve seen, and based on the modelling that was done in the treasury back when I was there by colleagues of mine, there clearly is a cost to these policies. I mean, one thing that surprised me is that we’re not doing the detailed CGE computable general equilibrium model. Yeah, we don’t appear to be and I think there’s a point you’ve made in some of your interviews.
You’ve seen that Deloitte analysis that was commissioned by the BCA haven’t you? And that’s been reported as Australia net zero Business Council tells Scott Morrison how to hit the 2050 target. And more than 130 of Australia’s biggest companies have told the federal government a strategy to reach net zero by 2050 not only makes environmental sense but could grow jobs in the economy in the process, and they’ve got some really big numbers there. What are your thoughts on that analysis Matt?
Matt Canavan 19:00
Look, I must say, I haven’t looked at their modelling in detail when they released that week ago, or their net zero strategy a week ago, but the actual report, I did read that report, it only had a box on half a page devoted to the Deloitte modelling. Apparently, there is a report someone told me this week from earlier in the year that Deloitte released but I couldn’t find it. I just haven’t had the time to sit through and go through it all. But yeah, you know, you and I have both done this stuff. You can get whatever answer you want from a model, depending on the assumptions it would appear.
I think Judith had a good column on the Deloitte modelling the other day, she went through it and seemed to indicate what they’ve done is look at, look at the cost of not acting, if you like, and presumably high capital costs in this country, associated with apparently banks not lending to us, possibly some stuff around natural disasters and stuff. And then said, well if we do act things will be down and that but I haven’t a chance to get through all the details. I mean, I think you don’t need a computable general equilibrium model, to say, getting rid of all fossil fuels of all energy types, is going to come at a significant cost. Now, that cost might be in the resources applied to develop the technologies. You know, not necessarily carbon price or things like that. But you and I know, that’s still a resource cost, because those resources could be applied elsewhere, they still spit out a shadow price in the model, if you do that.
Whereas it seems to me that a lot of the modelling we’ve commissioned, at least the questions I’ve asked of Angus Taylor, a very good economist, knows this stuff. Seems to be what we’ve done is the old economist trick of assuming a can opener. And hydrogen in particular, comes down like manna from heaven, right? Where we sort of don’t need to invest resources to invent this thing. It just sort of pops up. And you know, we’re happy days. Now, in some respects it is, you know, like in growth accounting models, and that’s often what they do, they just can’t explain how growth can occur. So they just chuck in, can’t remember the Greek letter that’s used in the Solow Model. But you know, that’s what demand is, it just takes all the growth effect. Yeah, we’ll explain it’s exogenous.
But in the real world, you’re not going to get hydrogen and these things develop without significant resources being applied. That comes at a resource cost, it costs if they’re public funds, their public resources applied, that obviously comes to the deadweight loss associated with taxation. And I give the UK Treasury credit, they made that point in their report which I did look at a little bit this week. They made the point that the resources needed to invent technologies to offset the tax revenue, you need to offset lower income of fossil fuel generating activities which will come at a cost of extra taxation, and cost the economy, although they still do not publish an overall cost to the UK economy, that a shadow carbon price of $2.95 Australian dollars a tonne, which is very consistent with other modelling and CSIRO had it I think, at $2.30 Australian dollars to get to net zero that was a couple of years ago.
But that is a significant cost, obviously through our economy. And look, I don’t put too much weight on these things mate. I mean, it’s trying to predict something in 30 years with technologies we don’t even know. Is it $2.30 or is it $2.95? Mate we really don’t know. Yeah, all I’d say is that it’s a significant cost. And the issue for me is, it is delivered that we see benefit to Australia, and you come back to our other countries acting, are they going to take advantage of us acting and them not acting. That is a much more political strategic discussion, and one that can be answered by a CGE model.
Gene Tunny 22:48
Okay. Now this point about, would you call it a capital strike? Well, there’s this view that if we don’t act on climate change, if Australia doesn’t go to Glasgow with a net zero, commitment or a credible commitment, then international investors won’t invest in Australia. Now this strikes me as somewhat implausible given that I think, ultimately investors are going to be more motivated by returns where they can earn returns, risk adjusted. So, I just wonder about this story. But this is a story that’s been told by the Australian Treasurer, Josh Frydenberg and also, I think, by the Reserve Bank, by I think one of their assistant governors. How credible do you think this story is Matt?
Matt Canavan 23:35
Look, it’s hard to find any evidence of it right now. I mean, we are often lambasted as being the worst in the world and bottom of the list in terms of climate action, say, think if there was a capital strike occurring, we would be somewhat feeling the effects of it today. But interest rates are at record lows. There’s been no identifiable change in our interest rates relative to those in the rest of the world in the last few years or so when this issue has become more apparent. So yeah, that’s really hard. I don’t see it. Could it happen in the future? Well, again, yeah, you would come back to a normal asset pricing model, which would say if there’s alphas around, someone’s gonna want to pick that up, right.
Yes, companies want to be ESG, woke and all those things today. But there are a lot of people in the world who still just want to make money. And there’s not particularly a shortage of capital, at least not today. So yeah, I find it a bit hard to believe there’s no doubt that finance and insurance is drying up for coal and to a lesser degree gas.
In Australia that’s happening. But I would argue there you’ve got a situation where for some financial products, you’ve got quite an oligopolistic market. So for insurance there are not that many insurance companies around the world that insure big, large big resource projects, and with the activist shareholder pressure, most of them have succumbed and therefore you’ve got a gap in the market now. Will that gap be filled over time? Or is someone else coming in? Maybe, but then you’ve got issues of scale and efficiency? And can those new entrants provide as low cost insurance as the ones before? Look, I think it’s a bit too early to say. There’s a lot of people down here talking about providing the resources sector a degree of government backed support. I think it’s something to think about if these corporations are making these decisions for non-commercial reasons.
And I mean, the real issue here, though, what we’re talking about is net zero. So while I would say the only capital strike that you see occurring right now is that coal, gas, those things, signing up to net zero is not going to change that. Those companies are doing that not because we are not, well not yet formally, net zero, they’re doing it because they act to the shareholders which don’t want them to invest in coal or gas, that’s still going to be there, whether we commit to zero, or otherwise. So that doesn’t deal with that problem.
And look, finally, I have made the point to be strongly criticised for but I’ve made the point that look, even if this were true, I don’t accept it. But even if it were true, I will at least want us to reflect and think, should we really decide the laws and policies of this country based on the interests of large financial institutions overseas? I’m uncomfortable with that idea. I mean, I’ve used the example that if we want low interest rates, and we want low cost of capital, if that’s the goal, well, we could sign up to the Belt and Road initiative, that would help deliver that. We’d get all this capital from China, to build ports and roads and rail lines all around the country and that would lower the cost of capital in Australia. But rightly, we’ve said no, we’re not doing that. We’re not going to be beholden to the strategic interests of another country and likewise, I don’t really want to be beholden to the strategic interests of overseas based banks.
Gene Tunny 27:08
I was just going to say that we did have a state premier here who signed up or had a memorandum of understanding with China on the Belt and Road Initiative didn’t we? Dan Andrews.
Matt Canavan 27:18
But I think look, I’ve never been that critical of him. Because I think this has evolved over time. I mean, when I first became the Resources Minister in Northern Australia, I held a trade investment conference in Cairns, and the head of the National Reform Development Commission, which is the major government financing body in China and coordinates lots of different people. I met with him. And at this stage, we had declined to formally establish the Belt and Road or agreed to a Belt and Road Type package we were happy to discuss with China investments they would make. And so look, you know, you’ve got to remember I think, I’m not sure when Dan Andrew signed it, but it probably wasn’t that long after the trade agreement we signed as well. This was after my discussions with this gentleman, just after that. So you know, the relationship has deteriorated very quickly, when you think that the trade agreement was signed about five, six years ago now.
When I got this position, I think it was the right one. We said we’re happy to consider investments from China into Australia, we’ve got a proud history of largely agreeing or supporting overseas investment. But we also asked systems to always do it on a case by case basis. And we always reserve the right to say, look, no, that particular investment is not in our national interest, sorry, or yes, but here are the conditions that you’ve got to adhere to, to do this. And they weren’t that keen on that. They wanted us to effectively sign an agreement, which would say, look, we’re going to support all this stuff we’ve pre approved so we didn’t do that. And I mean, there were lots of other things obviously, that caused a rift in the relationship. But I’d still think we’ve made the right call. It has come at a cost to the country, but not the Armageddon type costs that some were predicting.
Gene Tunny 29:00
Because we’ve been able to sell into other markets. Is this what you’re saying with our coal, we’ll be able to sell?
Matt Canavan 29:05
Well look obviously there’s a whole lot of things that have happened. Yeah, there’s been a shortage now as fossil fuels, that has meant that prices are through the roof everywhere, regardless of where we’re selling. But that was always the case. And this was discussed within the government when we’re considering these issues that the denial of one market will lead to secondary effects that will somewhat ameliorate the loss of that market, the coal market, for example. China still needs coal, they will buy more from Indonesia, from South Africa and that will free up the customers that South Africa and Indonesia used to sell to for us.
Now presumably, you know, ceteris paribus all other things equal, you would expect that our price for our coal will fall a little bit because we will probably be selling to the best market we could. And we’ve lost that, we’ve lost the Chinese market. So at the margin, we’ll probably get a lower price because of our stance to protect our independence. But you don’t lose the value of the whole coal, right? You don’t? Yeah, we’ve got very efficient, very high quality coal mines. So we’re always probably going to find a buyer, or it’s gonna find a buyer above the marginal cost of production for most of those mines. But obviously, we’d love to have more of a margin than otherwise. But yeah, we think are right to make decisions in our own sovereign interest, the same effects in markets like barley and grains, generally, you know, we have been able to find other markets, the ones that are different things like wine and coral trout, high valued goods, where there’s not really a deep liquid commodity market. And a lot of the sale of those goods are based on relationships, you know, people you need to build a relationship with supermarkets with people, particularly in a country. You can’t just wish that overnight. So they have been heard. There’s no doubt about that. But again, I think we don’t want to sell out to another country.
Gene Tunny 31:01
Okay. I’ll ask one more question Matt. You’re a Senator for Queensland, and you’re based in? Well, you’re in Canberra at the moment. You’re stuck in Canberra.
Matt Canavan 31:11
Stuck here. Thanks to Anastasia.
Gene Tunny 31:17
Yeah.
Matt Canavan 31:22
You have done very good work on that. Common sense is starting to reemerge. Yes.
Gene Tunny 31:29
Yes, that’s correct. Now, you’re in Rockhampton which is a major centre in regional Queensland for beef and also coal and other mineral resources in the region there. Now, what do you see is the future for coal because coal has been such an important part of many of our regional economies and it’s been a very strong contributor to the Treasury here in Queensland. But we’ve got these forecasts, some forecasts and Tony Wood from Gratton when I spoke with him the other week, he was talking about how the demand for coal, some people are forecasting that it will fall off a cliff, do you have any views on what’s going to happen with coal?
Matt Canavan 32:11
So it’s really important with these types of exercises to define the markets, right? I think a lot of people who talk about coal don’t understand that, in the words of John Laws, coal ain’t coals. There’s not one type of coal. There’s lots of different types of coal. And so for the purposes of summarising this, it’s important at least to distinguish between the global market for coal and the market for Australian coal. So yes, many people think that the global market for coal will face a precipitous decline. I think most of those forecasts are a little over aggressive. The International Energy Agency publishes different scenarios, and if their current policies scenario, which means people keep doing what they’re already doing in terms of climate, or use of coal in the Asia Pacific region actually grows over the next 20 or 30 years. Other than that scenario, if countries obviously adopted more, not just adopt net zero, then it starts to fall considerably.
I’m more in the former camp, I don’t think countries are going to do what they say they haven’t done before and haven’t done so far. So I think that demand will still remain robust across the world, and that will be good for our coal. However, even if, let’s assume Tony was right, there’s a precipitous drop in demand for coal across the world. This is where I think the critics really missed the boat and to give you a bit of a scoop, our modelling, the modelling on net zero I asked Angus Taylor this, it hasn’t been released yet despite my best efforts in the Senate this week to support motions from the labour and other sides.
But our modelling does not have different demand curves for different types of coal. Which means that any prediction that comes out of it, I think, is pretty rubbish. Because this is something a lot of people don’t understand. Australia’s coal is only about 5% of world demand. We are not the major producer of coal. We’re I think fifth. China, India, US, Russia are all above us. We’re fifth in terms of size, and Indonesia is about the same as us. So even if coal demand were to drop by 50%, I don’t think that’s going to happen over two or three decades. But even if it halves, all we have to do is increase our market share from 5% to 10%. That will work and we’ll still sell exactly the same amount of coal.
That’s perfectly achievable given the high quality coal I mentioned before that we’ve got. It’s going to be the last coal mine in the world if there is going to be a move away from coal. People will continue to use Newcastle coal given its high quality. Now I haven’t even gone in. We haven’t got time to go into steelmaking coal, thermal coal, etc. And obviously the steel market, which is now you know, most of the coal that comes into Queensland goes to making steel. Again, there’s no, there’s no alternative right now. And maybe hydrogen will come along. But as a big question mark, I still think there’s going to be significant demand for coking coal for the generations to come.
Gene Tunny 35:21
Yeah, exactly.
Matt Canavan 35:23
I make one more point too. The other points you make about energy markets. You know, there’s people who pursue 100% renewable energy and stuff. There’s been no time in history, where the world has used one type of energy. So yes, it was a coal era and a gas era and briefly, a nuclear era didn’t really kick in, an oil era. But each of those era’s showed that the percentage of coal or oil or gas didn’t get above 50%. In terms of energy, it was always below that.
There’s always a plurality of different sources and I don’t see that changing. I just do not see that changing. It’ll continue to have a multitude of uses for different things. People also underestimate how much coal is used. It’s not just electricity, it’s not just steel. You know, the gloves, the rubber gloves that people use that comes from coal. A lot of the medical equipment you see or pharmaceutical equipment, toiletry products, a lot of coal goes into those things because of the gases and other things that come off cars, and what are the byproducts of coal. We say hydrogen, if we invent hydrogen, it may replace use of some things. It’s just a bit hard to say replacing the use of petrochemicals, coal, in everything. That’s massive.
Gene Tunny 36:44
Yeah, I mean, at this stage, China and India are still building coal fired power stations. Is that right?
Matt Canavan 36:50
So China, according to I think this is the best estimate, comes from a website called coal plant tracker, you can Google that. Okay, there are a bunch of greenies, but they actually get through the good, good good on them and they go through the media reports and find out what actually is best as you can tell what’s happening in China, the official estimates can’t be trusted. Of course, China is building 95 coal fired power stations at the moment according to them. They have about 1100 coal fired power stations. And India is building 20 something.
Gene Tunny 37:22
I can look it up.
Matt Canavan 37:23
You can look at my Facebook feed Twitter, I’ve got that on there. Got those figures. Make sure you subscribe. Yes, I’ve got lots of friends on Twitter.
Gene Tunny 37:32
Can imagine. I was just thinking now as you were talking about, like, what you think could happen with coal and I think that’s very plausible. That could be that. I mean, we just, you know, we don’t see that big drop in demand. That’s very plausible, particularly if we go through another decade. And I mean, I’m sceptical about what’s going to come out of COP 26 because I mean, even if Joe Biden goes and makes a big commitment, and other countries make big commitments, do they actually have the mechanisms internally to follow through and deliver those?
Matt Canavan 38:04
Okay, I mean America doesn’t today. It’s pretty hard to see how Joe Manchin sorry, a bit technical, somebody that listeners wouldn’t know Joe Manchin is a Democrat Senator from West Virginia. He said this week, coal mines will not close. Yeah, he’s the Joel Fitzgibbon if you’re an Australian listener or from the US, he comes from a left leaning party that represents coal mining districts. You know, it’s hard to see how that will happen. And another thing that really surprises me here is that there’s been this, there’s been this argument that well, we need to sign up to net zero because Joe Biden was elected last year. But this is a commitment to do something until 2050. I’m not commenting about the President’s health, but I don’t think he’ll still be the president in 2050. There are seven US presidential elections between now and 2050.
The big problem the advocates of net zero have is whatever the political debate here is, and wherever that gets resolved, I don’t think there’s any chance in hell that the Republican Party is going to adopt net zero anytime soon. It is almost absolutely certain. So put aside Trump, DeSantis, whoever is the Republican nominee, whoever is the next Republican president, he is not going to deliver on a net zero commitment that is not where their party is at or their people or supporters are at. So how do you, you know, get to this target over a political cycle for such a long period. It to me, again, goes back to his point that carbon prices, all these signals that don’t provide the certainty that the economists think they do, because you live in a dynamic democratic world. What we do need to do is invest in technologies and I’m all for that. But also do so in a way that’s realistic, understanding that technology may not work. It’s a risky venture.
Gene Tunny 39:49
Okay, so I mean, what do you think if you’ve got time, what do you think are the major, the most promising areas of technology so you were a bit dismissive of hydrogen before?
Matt Canavan 39:57
No, I mean, I’ve well I just might not have said this. I’ve done a lot of media this week. So maybe I said it somewhere else. When I was resources Minister, I developed the first national hydrogen strategy. Okay, got Alan Finkel to do that he was the chief scientist at the time. And Alan and I don’t agree on all of these things, but he’s a very, very intelligent forward thinking Australian, he did a great piece of work. Been to multiple hydrogen conferences around the world.
I think we should invest in this and see what happens, but do so in a way that’s realistic, you can google and find a clip of Joh Bjelke-Petersen launching the first hydrogen car, which was an old, old modified ford XD fairmont, I think, with the media, the news report, at the time said that there was a nuclear fusion reactor in the engine that generated this hydrogen cars, it’s, it’s such a good piece of Queensland history, you’ve got to go and look at it, I’ll send it to you Gene. Joe was pouring water into the engine, the media wasn’t allowed to look at the boot of the car. And on the initial day, the press conference was initially done and they couldn’t find the keys so they had to come back the next day to start the car. Anyway, obviously, that didn’t go anywhere. And Joe was a big backer of hydrogen, it wasn’t just one a one off event. So that’s the old physics joke that hydrogen is 20 years away. It’s just always been 20 years away. It might be different this time. Let’s go for it. But look, there’s a lot of challenges with hydrogen storage, transport. It’s very, very explosive, at the moment and very costly. So there’s a lot to do.
I mean, this comes back to something we haven’t discussed. I mean, he got this thing called nuclear sitting there. I mean, it does work. Yeah, it is a bit costly. You know, that’s my concern with it. I’m not concerned about the safety or any of these things. But it is costly compared to fossil fuels. But look, if what we want to do is get rid of emissions. Why don’t we just do that? And that we’ve, I’ve tried to keep this discussion largely about economics. But on the political front of this, I sometimes do really ask, is this really about climate change? Or is it about political change? Because if it was about climate change, why aren’t and if they’re predicting of all the alarmists, they’re right that the world’s gonna be exaggerated but blow up, why don’t we just build nuclear power stations? I mean, they’re there maybe a bit more expensive, but it’s a moderate cost, it’s affordable. And they provide reliable power. They have very little land use impact. Very compact, there’s no fuel shortages of uranium, the uranium price is very low. Go for it, just do it. But the fact that so many activists sell against nuclear energy indicates to me that there is at least another agenda here. It’s not only about climate change, because that doesn’t matter. It doesn’t really make sense. If it was about climate change, just build nuclear power?
Gene Tunny 42:55
Well, I think a lot of people have an emotional approach to this issue, rather than a rational approach.
Matt Canavan 43:03
It’s not just this issue Gene, it’s every issue. Yeah, but you’re right, that’s, that’s what’s caused, that’s what’s created a problem for nuclear. Over the years, I do think it’s time to reconsider that. You know, you there’s, there’s, it’s pretty much the safest form of power generation around the world. It’s not far off, renewables, sort of people fall off the roofs and solar panels, and all these things. It’s a very, very safe technology, we’ve got a lot of uranium ourselves, so it doesn’t hurt our energy independence. And as I say, the technology is off the shelf. Now there’s these new things, small modular reactors and Gen four reactors. But you could just use the existing technologies and as I say, maybe a slightly higher cost but wouldn’t bankrupt you. I mean, that’s where it’s interesting to see that’s where the UK is going.
I don’t know if you’ve followed this but a few months ago, nuclear couldn’t get a standard top 26. There’s a big controversy that the UK bureaucrats had denied the World Nuclear Association denied them having a booth, I suppose or a stand. And then, just in the last week, or two, a bunch of European countries have signed an agreement to progress nuclear, and it’s getting a big spot at COP 26 and this is all a result of the energy crisis we’re seeing in Europe and the UK at the moment. They’ve woken up to the fact that wind and solar ain’t gonna do it. Yeah. And they’re not particularly keen on continuing this supplicant relationship with Russia.
Gene Tunny 44:36
I’ll look that up. That’s fascinating. I’ll just finally because I know you’ve got important stuff to do, Negotiations in Canberra. Yeah, I mean, I always enjoy watching you. You always have something interesting to say. So I really appreciate that. Now, what about CCS, this carbon capture storage. Is it the case that we tried? We tried some experiments with commercialising it in Australia 10 years ago or something. I think that was part of the Rudd government’s agenda. But it didn’t, it just didn’t work or it didn’t stack up. Is that right?
Matt Canavan 45:14
There’s more of the latter than the former. It does work. You can do it. Yeah, I’ve been to the Petra Nova facility in Texas. They’ve got another one up in Canada, Boundary Dam I think it’s called. I haven’t been to that one. But look it works, just the price of it’s very expensive. Yeah, it’s still coming in. When I looked at this a few years ago, it’s sort of $80 a tonne abatement costs. And look, you can bring that down if you can get some gas recovery. So in Texas, they were reinserting and re-injecting the carbon dioxide into former oil fields that would repressurize the field and allow them to extract more of the oil. You don’t get all the of out of an oil well, because the pressure drops. Yeah, you take the oil out. So repressurize and a lot more oil. And that gave an income stream. But it still required a significant government subsidy. In any case, in the last few weeks, Petra Nova has closed. And I think it’s going to be I think, actually sorry, I think it was closed a while back. And I think that decision to just completely dismantle it now. So look, it hasn’t, it hasn’t really worked out as a technology, when the International Energy Agency still sort of stresses that it’s something that’s needed to solve this.
And going back to the point that I just don’t think you’re not going to get rid of all fossil fuel use. I mean, if you find something for transport, even if you find something for electricity, it’s still used in plastics and all these other things that just can’t see the modern world completely getting rid of. And so CCS then does become perhaps important, but I suppose that will depend on us willing to come back and we’re going to pay a carbon price, a shadow carbon price of $80 a tonne. If you believe that UK Treasury modelling we’ll end up with governments and societies that are willing to pay a price, a cost of $2.95 a tonne. CCS probably worked where it could. Keep in mind CCS only works in some places so you’ve got to have a geological storage site. It’s not leaking. So it doesn’t work in the Bowen Basin. There are no known sites in the Bowen Basin. There’s some in the Surat Basin, some in the Latrobe Valley and offshore down there in the Bass Strait, the old oil fields there. But in a hunter in the Bowen Basin there’s nothing. So what do you do there? We just don’t see a solution there.
Gene Tunny 47:33
One other thing I was thinking of, particularly if you’re talking about willingness to pay high carbon prices like that or costs of abatement, you’d be looking at geo engineering solutions or just sucking the Co2.
Matt Canavan 47:48
I don’t know the cost of those. There’s a mob I saw doing that I think in Finland or a Scandinavian country. Yeah, I don’t know the abatement cost of that technology. But yeah, that’s but this goes back to my point like I don’t know if you’re going to politically be able to withstand it go like, think about the analogy after a natural disaster. If you’re if you’re a purist, heartless economist, you’ll say, look, what we need after a cyclone goes through Townsville, is we need the price of water, the price of food to skyrocket up so they will encourage more people to bring the supply of food and relief to Townsville. Yeah, that’s not, that’s not gonna fly. You just gotta go buy the goods. And likewise here. So yeah, we need to make poor people suffer with higher living costs, so they can encourage technological developments. This might take 5-10 years before costs come back down. That’s not they’re not going to put up with that. It’s not going to happen.
Gene Tunny 48:42
Yep, okay. Senator Matt Canavan, I really appreciate your time. I found that very informative and thought provoking. So really appreciate your time today on this programme.
Matt Canavan 48:55
Thanks. Thanks so much, Gene. And good, keep going with the podcast and the blog. I keep up with it all the time. Well done.
Gene Tunny 49:00
Good on you. Thank you, Matt. Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
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