HVO coal extension: The coal price that assumes Paris fails
Climate Integrity has made a supplementary submission to the NSW Independent Planning Commission on the proposed HVO North and South Open Cut Coal Continuation Projects.
In light of the response to questions posed by the Commission submitted by the projects’ proponents - a joint venture between Yancoal and Glencore - we reiterate our concerns about the treatment of Scope 3 greenhouse gas emissions from the HVO Continuation Projects.
There are two fundamental flaws in the reasoning adopted by the proponents. The first is a misinterpretation of the extent of States’ climate-related obligations under international law. The second is the proponent’s reliance on the Paris Agreement to dismiss the projects’ Scope 3 emissions while also presenting an economic case that is predicated on a failure to achieve the Paris Agreement’s goals.
Flaw 1: Misinterpretation of the climate-related obligations of States under international law
The proponent relies heavily on the climate commitments of the jurisdictions that are likely to purchase the coal produced by the HVO Continuation Projects under the Paris Agreement, particularly their NDCs. While the Paris Agreement is the most prominent international treaty relating to national obligations in relation to climate change, it is not the sole source of obligations under international law, nor do NDCs represent the full extent of obligations with respect to coal consumption.
This was a core conclusion of the International Court of Justice (ICJ) in its Advisory Opinion on the Obligations of States in respect of Climate Change: that in addition to the obligations established under the Paris Agreement, countries have duties under customary international law to prevent significant harm to the environment and to co-operate for the protection of the environment.
The ICJ stated that to discharge these duties, states must implement “regulatory mitigation mechanisms that are designed to achieve the deep, rapid, and sustained reductions of GHG emissions that are necessary for the prevention of significant harm to the climate system”.
The ICJ expressed an expectation that necessary actions include the regulation of both public and private operators. Further, the ICJ warned:
“Failure of a State to take appropriate action to protect the climate system from GHG emissions — including through fossil fuel production, fossil fuel consumption, the granting of fossil fuel exploration licences or the provision of fossil fuel subsidies — may constitute an internationally wrongful act which is attributable to that State.”
The ICJ further warns that States could become liable for breaches of their obligations to prevent significant harm to the climate system, including a requirement to cease activities contributing to that harm. It states that breaches:
“may give rise to the entire panoply of legal consequences provided for under the law of State responsibility. These include obligations of cessation and non-repetition, which are consequences that apply irrespective of the existence of harm, as well as the consequences requiring full reparation, including restitution, compensation and/or satisfaction.”
Expanding on the implications of the ICJ’s Advisory Opinion for Australian companies, a joint opinion authored by Australian barristers Ruth Higgins SC, Jennifer Robinson and Zoe Bush expresses a view that Australian companies, and their directors, should anticipate increased regulation of fossil fuel production.
The joint opinion states:
“The ICJ identified fossil fuel production, fossil fuel consumption, the granting of fossil fuel exploration licences, and the provision of fossil fuel subsidies as conduct that may breach States’ international law obligations and constitute an internationally wrongful act. Judges Bhandari and Cleveland went further, considering it “unimaginable” that States could comply with their treaty and customary obligations without a rapid and drastic reduction in – and the phasing out of – fossil fuel production and dependency.”
The ICJ Advisory Opinion raises the prospect that Australia could face future legal liabilities for its fossil fuel production. This includes the potential for decisions to approve new coal production, and the downstream emissions such production enables, to create significant compensation liabilities for Australia as a State, with flow-on implications for corporations operating in New South Wales, including the project proponent. The mere communication of NDCs by countries receiving coal from projects like the HVO Continuation Projects will not extinguish those liabilities.
Regulatory responses that constrain fossil fuel production - a foreseeable response to Australia’s duty to prevent significant harm to the climate system and potential future consequences of failures to discharge it - represent a material regulatory risk to Australian coal producers.
When considering the HVO Continuation Projects in the context of the mandatory matters for consideration under s 4.15 of the Environmental Planning and Assessment Act 1979 (NSW) and the additional considerations under cl 2.20 of the State Environmental Planning Policy (Resources and Energy) 2021, the Commission must consider the implications of Australia’s climate-related obligations under international law.
We do not ask the Commission to enforce international law or to second-guess the climate policies of sovereign States. Nor does it need to. But the Commission must consider the implications of the ICJ's Advisory Opinion for the regulatory environment and potential legal liabilities that are reasonably foreseeable over the life of these projects when considering the merits of the HVO Continuation Projects. This requires consideration of the impacts of the projects’ Scope 3 emissions.
Flaw 2: Contradictions between the proponent's Scope 3 reasoning and its economic assessment
The proponent takes a contradictory view of the impact of international climate commitments in its assessment of the potential economic impacts of the HVO Continuation Projects.
On one hand, the proponent argues that the Commission should not give weight to the impacts of the projects’ Scope 3 emissions, because the Commission should assume importing countries will fulfil their obligations under the Paris Agreement. On the other hand, the proponent has submitted an economic assessment of the HVO Continuation Projects to the Commission that is predicated on a future scenario whereby countries fail to meet their Paris Agreement obligations.
Specifically, it adopts projections for future coal prices and coal demand that are inconsistent with the goals of the Paris Agreement.
The economic analysis authored by consultancy EY assumes the price of coal received by the project will remain constant between 2027 and 2045 – assuming a fixed A$151.80 per tonne for metallurgical coal and A$119.70 per tonne for thermal coal.
An assumption that coal prices will remain flat for the next 20 years - and at elevated levels - is not supported by the analysis of authoritative international bodies, including the Intergovernmental Panel on Climate Change and the International Energy Agency (IEA). Authoritative projections of energy markets, under scenarios consistent with achieving the goals of the Paris Agreement, consistently project substantial declines in the global demand for coal (and by extension, global coal prices) as early as 2035.
The latest edition of the IEA’s World Energy Outlook projects that under its ‘Net Zero’ scenario the price of coal imported into Japan will be 62% lower than present levels by 2035 and 68% lower by 2050. Likewise, the IEA projects that the price of coal imported into China would fall by 55% by 2035 and 63% by 2050. This naturally reflects standard market dynamics - that falling demand will lead to falling prices.
Under the IEA’s Net Zero scenario, expressed in real 2024 dollar terms, Asian-region coal prices fall to between US$57 and US$59 per tonne in 2035 (A$81 and A$84, respectively), and to US$49 (A$70) by 2050. Even under conservative policy scenarios, where countries do little to ramp up the strength of their climate policies, Asian-region coal prices are still expected to fall significantly over coming decades.
EY’s adoption of a flat coal price to 2045 leads to a substantial overestimate of the proposed projects’ revenues - and their ability to generate broader economic benefits. Applying prices aligned with net zero scenarios to the proponent’s estimates for future coal production suggests project revenues could be less than half EY’s projections.
In light of the proponent’s recognition that the coal produced at the HVO Continuation Projects would be “exported primarily to countries that are signatories to the Paris Agreement”, EY’s assumption that coal prices will remain fixed at current levels through to 2045 is not credible. It is inconsistent with the global commitments to meet the goals of the Paris Agreement, is inconsistent with the decline in coal demand necessary to achieve those goals, and is likely to lead to a significant (greater than two-fold) overestimation of the HVO Continuation Projects’ economic benefits.
The proponent cannot rely on the Paris Agreement to dismiss the projects’ Scope 3 emissions while relying on a failure of countries to achieve the goals of the Paris Agreement as the basis of their economic case. On either assumption, the case for approval is materially weaker than the proponent has put to the Commission.
The Commission should give little weight to the conclusions of the economic impact assessment authored by EY.
Furthermore, the proponent states that it "does not contend that the impacts of the Scope 3 emissions of the Project are irrelevant." Yet, the economic assessment placed before the Commission assigns those emissions no value at all. The proponent's economic assessment conducted by EY excludes Scope 3 emissions entirely from its costing of climate damage, and values the climate impact of the entire project at $3.8 million. That equates to less than $0.005 for every tonne of greenhouse gas the project would generate when considering Scope 1, 2 and 3 emissions, or just $0.25 per tonne looking only at Scope 1 and 2.
That valuation sits far outside the guidance provided in NSW Treasury's Carbon emissions in the Investment Framework (TPG24-34) which attributes a cost to greenhouse gas emissions of $130 per tonne in FY25 to $350 per tonne from FY39. Applied to the projects’ Scope 1 and Scope 2 emissions alone – 15,319 kilotonnes – those values produce a cost of approximately $2.1 billion in net present terms, or about $137 per tonne: more than 500 times the proponent’s assumed carbon cost.
Using the Treasury’s own framework, if just 3.5% of the coal were burned in New South Wales rather than exported, the emissions cost alone would outweigh every benefit the proponent claims.
*Refer to submission for footnotes and citations